<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 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
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 November 9, 2000 there were 50,897,621 shares of the registrant's Common
Stock, par value $.01 per share, 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,
2000 1999
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $ 473,239 $ 102,238
Short-term investments, held-to-maturity...................................... 24,890 -
Restricted cash............................................................... 216,548 -
Accounts receivable, net of allowance for doubtful accounts of $5,609 and $835 102,587 11,530
Inventories................................................................... 101,934 7,556
Deferred income taxes and taxes receivable.................................... 27,533 8,056
Prepaid expenses and other current assets..................................... 11,250 1,017
------------------ ------------------
Total current assets........................................................ 957,981 130,397
Property, plant and equipment, net............................................... 164,075 21,678
Goodwill and other purchased intangibles, net.................................... 1,547,093 4,139
Deferred income taxes............................................................ 11,168 117
Other assets..................................................................... 54,763 445
------------------ ------------------
Total assets................................................................ $ 2,735,080 $ 156,776
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank......................................................... $ 2,512 $ 850
Current portion of long-term obligations...................................... 828 6,300
Accounts payable.............................................................. 27,213 4,266
Accrued liabilities........................................................... 78,336 5,252
Pension liabilities........................................................... 3,753 -
Deferred credits and reserves................................................. 5,806 -
Cash and common stock payable to shareholders................................. 1,784,842 -
Income taxes.................................................................. 163,519 1,680
------------------ ------------------
Total current liabilities................................................... 2,066,809 18,348
Long-term obligations............................................................ 11,091 7,324
Deferred credits and reserves.................................................... 20,411 -
Deferred income taxes............................................................ 253,384 439
5.5% Convertible subordinated notes due March 1, 2007............................ 172,500 -
------------------ ------------------
Total liabilities........................................................... 2,524,195 26,111
------------------ ------------------
Minority interest................................................................ 4,850 -
------------------ ------------------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock; 6,405,884 shares authorized; no shares issued or outstanding.. - -
Common Stock; $0.01 par value, 125,000,000 shares authorized;
23,956,150 and 22,470,009 shares issued and outstanding....................... 240 225
Additional paid-in-capital..................................................... 202,328 121,924
Deferred compensation.......................................................... (7,685) (746)
Accumulated other comprehensive income (loss).................................. 4,104 (439)
Retained earnings.............................................................. 7,048 9,701
------------------ ------------------
Total stockholders' equity.................................................. 206,035 130,665
------------------ ------------------
Total liabilities and stockholders' equity.................................. $ 2,735,080 $ 156,776
================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................................... $ 47,989 $ 23,807 $ 102,972 $ 69,050
Cost of revenues....................................................... 23,818 8,811 41,803 25,312
--------- --------- --------- ---------
Gross margin........................................................ 24,171 14,996 61,169 43,738
Operating Expenses:
Sales and marketing.................................................. 8,727 4,070 19,017 12,237
General and administrative........................................... 4,872 2,768 11,868 8,851
Research and development............................................. 5,244 3,729 12,578 11,329
Deferred compensation amortization................................... 415 56 505 248
Goodwill and other purchased intangibles amortization................ 11,761 4 11,777 12
Merger related costs................................................. 385 3,895 6,965 3,895
--------- --------- --------- ---------
Total operating expenses.......................................... 31,404 14,522 62,710 36,572
--------- --------- --------- ---------
Income (loss) from operations.......................................... (7,233) 474 (1,541) 7,166
--------- --------- --------- ---------
Other Income (Expense), net:
Gain (loss) on foreign currency transactions......................... (370) 106 (358) (104)
Interest and other expense........................................... (2,683) (386) (6,369) (763)
Interest and other income............................................ 5,428 480 11,567 1,155
--------- --------- --------- ---------
Total other income, net.......................................... 2,375 200 4,840 288
--------- --------- --------- ---------
Income (loss) before provision for income taxes and minority interest.. (4,858) 674 3,299 7,454
Provision for income taxes............................................. 694 273 5,892 2,782
Minority interest...................................................... 60 - 60 -
--------- --------- --------- ---------
Net income (loss)...................................................... (5,612) 401 (2,653) 4,672
Less: Preferred stock dividends....................................... - - - (163)
Accretion of non-voting redeemable common stock............. - - - (74)
Adjustment to beneficial conversion feature related to
convertible preferred stock............................... - - - 985
--------- --------- --------- ---------
Income (loss) available to common stockholders......................... $ (5,612) $ 401 $ (2,653) $ 5,420
========= ========= ========== =========
Earnings (loss) per common share:
Basic $ (0.24) $ 0.02 $ (0.11) $ 0.29
=========== ========== ========== =========
Diluted.............................................................. $ (0.24) $ 0.02 $ (0.11) $ 0.26
=========== ========== ========== =========
Weighted average shares used in per share calculation:
Basic................................................................ 23,828 19,406 23,459 18,498
Diluted.............................................................. 23,828 22,136 23,459 21,045
</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,
--------------------------------
2000 1999
---------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................................... $ (2,653) $ 4,672
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation........................................................................ 4,114 2,758
Amortization of intangible assets................................................... 12,320 191
Amortization of deferred compensation............................................... 506 276
Deferred income taxes............................................................... 7,564 (8)
Merger related costs................................................................ 2,390 1,820
Minority interest................................................................... 60 -
Other non-cash adjustments.......................................................... 4,615 (44)
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable................................................................. (4,491) (2,930)
Inventories......................................................................... (1,776) (816)
Prepaid expenses and other current assets........................................... 826 (1,863)
Other assets........................................................................ (27) 419
Accounts payable.................................................................... (6,659) (1,222)
Accrued expenses and other current liabilities...................................... 3,715 3,853
Income taxes........................................................................ (796) 25
---------- ---------
Net cash provided by operating activities........................................ 19,708 7,131
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired from business combinations......................................... 223,024 -
Purchases of short-term investments, held-to-maturity................................ (99,523) -
Sales of short-term investments, available-for-sale.................................. 69,633 -
Maturities of short-term investments, held-to-maturity............................... 5,000 -
Net payments received on note receivables............................................ 159 -
Purchases of property and equipment.................................................. (11,413) (3,795)
Payments for intangible assets....................................................... (1,226) (1,525)
---------- ---------
Net cash provided by (used in) investing activities.............................. 185,654 (5,320)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from (payments on) line-of-credit, net...................................... (1,417) 604
Proceeds from long-term obligations.................................................. 166,999 -
Principal payments on long-term obligations.......................................... (10,778) (1,922)
Redemption of preferred and common stock and payment of accrued dividends............ - (17,507)
Proceeds from sale of common stock................................................... 7,178 49,596
--------- ---------
Net cash provided by financing activities........................................ 161,982 30,771
Effect of exchange rate changes on cash.............................................. 3,657 (14)
--------- ----------
Net increase in cash and cash equivalents............................................ 371,001 32,568
Cash and cash equivalents, beginning of period....................................... 102,238 6,559
--------- ---------
Cash and cash equivalents, end of period............................................. $ 473,239 $ 39,127
========= =========
</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
(UNAUDITED)
GENERAL
The consolidated financial statements include the accounts of Invitrogen
Corporation and its majority owned or controlled subsidiaries (collectively the
"Company" or "Invitrogen"). 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 accounting principles generally accepted in the
United States 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.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in our Registration
Statement on Form S-4, filed with the Securities and Exchange Commission on
August 14, 2000.
The Company intends to reorganize into two lines of business, a Molecular
Biology division and a Cell Culture division. Due to the ongoing integration of
Life Technologies into Invitrogen, which is not expected to be complete until
December 2000, segment reporting is expected to begin in the first quarter of
2001.
Certain reclassifications have been made to conform prior period financial
information to the current presentation. These reclassifications had no effect
on reported income or losses.
1. BUSINESS COMBINATIONS
RESEARCH GENETICS MERGER
On February 2, 2000, the Company completed a merger with Research Genetics,
Inc. (Research Genetics), a privately-held U.S. company that supplies products
and services for functional genomics and gene-based drug discovery research. The
Company issued 3.2 million shares of common stock for all of the outstanding
common stock of Research Genetics. The merger has been accounted for as a
pooling of interests and is intended to qualify as a tax-free exchange. Costs
incurred as a result of the merger and related integration are estimated at $6.4
million. These costs were expensed in February 2000 upon completion of the
merger. As of September 30, 2000, the Company had $0.3 million remaining in
accrued merger related costs.
ETHROG MERGER
On June 21, 2000, the Company completed a merger with Ethrog
Biotechnologies, Ltd. (Ethrog), a privately-held company headquartered in Israel
that has developed and patented a novel, fully enclosed system for the
electrophoretic separation of macromolecules. The Company issued 198,869 shares
of its common stock for all of the capital stock of Ethrog in a transaction that
has been accounted for as a pooling of interests. Costs incurred as a result of
the merger were $0.2 million. These costs were expensed in June 2000 upon
completion of the merger. As of September 30, 2000, the Company had $0.1 million
remaining in accrued merger related costs.
The consolidated financial information is presented to show the combined
results of operations of Invitrogen, Research Genetics, and Ethrog as if the
mergers had occurred at the beginning of the periods presented in accordance
with the accounting method for pooling of interests business combinations.
NAP ACQUISITION
On June 30, 2000, the Company acquired Nucleic Acid Purification, Inc.
(NAP), a privately-held U.S. biotechnology company. The Company issued 17,778
shares of its common stock for all of the capital stock of NAP in a transaction
that has been accounted for under the purchase method of accounting. Costs
incurred as a result of the acquisition were $55,000, and were treated as part
of the purchase price. The excess of purchase price over acquired assets was
$1.4 million, and based on the life of the acquired technology is being
amortized over 3 years.
LIFE TECHNOLOGIES AND DEXTER MERGERS
On September 14, 2000, the Company completed a merger with both Life
Technologies, Inc. (Life Technologies), a supplier of molecular biology and cell
culture products for the life science industry, and Dexter Corporation (Dexter),
which owned approximately 75% of Life Technologies' outstanding common stock
prior to the completed merger. Under the terms of the agreements, the Company
acquired all of the outstanding common stock of Dexter for $62.50 per share and
all of the outstanding common stock of Life Technologies, other than the shares
held by Dexter, for $60.00 per share. The Company
5
<PAGE>
expects to issue approximately 6 million shares of Invitrogen common stock (at
an exchange ratio of 1.0) and cash totaling approximately $365.3 million for all
of the outstanding common stock of Life Technologies, other than the shares
owned by Dexter. The Company also expects to issue approximately 21.4 million
shares of Invitrogen common stock (at an exchange ratio of 1.0417) and cash
totaling approximately $1.4 billion for all of the outstanding common stock of
Dexter. The exchange ratio for determining the number of shares of Invitrogen
common stock was based on the average closing price of Invitrogen common stock
during the 20 consecutive trading days ending on the third day prior to the Life
Technologies and Dexter special shareholders' meetings which occurred on
September 14, 2000.
The election period for the Life Technologies and Dexter shareholders ended
on October 5, 2000, and as those shareholders tender their Life Technologies and
Dexter certificates and/or election forms, they will receive their respective
election in cash or common stock or a combination thereof. At September 30,
2000, $1.8 billion was included in other current liabilities as cash and common
stock payable to shareholders related to this transaction and $202.3 million was
included in restricted cash as the estimated cash expected to be paid to satisfy
the cash portion of the elections. The majority of the cash and common stock was
disbursed during October, 2000. As of October 31, 2000, approximately 27.0
million shares of Invitrogen common stock were issued and $194.6 million was
paid to shareholders of Life Technologies and Dexter, with approximately $35.2
million remaining in cash and common stock payable to shareholders.
Substantially all of the businesses and operations of Dexter were sold
prior to the closing of the mergers. Both transactions have been accounted for
as purchases, and, accordingly, the results of operations have been included in
the accompanying financial statements from the date of acquisition. The cost of
the mergers is estimated at $1.9 billion and includes direct costs incurred as a
result of the acquisitions which totaled approximately $22.9 million and a fair
value adjustment under purchase accounting of $30.8 million for unvested stock
options of Life Technologies that were assumed by the Company. As of September
30, 2000, the Company had $22.1 million remaining in accrued merger related
costs which is included in accrued liabilities in the consolidated balance
sheets. The excess of purchase price over acquired net assets was $950.4 million
and, based on the life of the acquired assets, is being amortized over a
weighted average life of 5.5 years. The financial statements reflect the
preliminary allocation of the purchase price which is subject to change should
the estimated direct costs of the merger change and pending completion of the
Company's integration plan which is expected to be completed in December 2000.
Upon completion of the integration plan, goodwill and merger related costs are
expected to increase. Costs associated with the restructuring of existing
Invitrogen operations and costs necessary to integrate the businesses of
Invitrogen and Life Technologies that are expected to benefit future operations
are estimated to range from $5 million to $10 million. These estimated costs
will be expensed as restructuring costs after management has completed and
approved the restructuring plans and associated costs. As of September 30, 2000,
$0.6 million of these costs have been incurred and recognized as expense in
merger costs in the interim consolidated statements of operations.
The following unaudited pro forma information assumes that the mergers
occurred on January 1, 2000 and 1999, respectively. The pro forma information
also excludes the businesses and operations of Dexter that were sold prior to
the merger. These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have actually resulted had the combinations been in effect on
January 1, 1999, or of future results of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................. $ 423,006 $ 382,788
Net loss............................................. $ (130,838) $ (133,509)
Net loss available to common stockholders............ $ (130,838) $ (132,761)
Loss per common share - basic and diluted............ $ (2.61) $ (2.88)
Weighted average shares used in per share
calculation - basic and diluted..................... 50,211 46,069
</TABLE>
2. SHORT-TERM INVESTMENTS
The Company's short-term investments are held-to-maturity, and consist of
corporate debt securities of $24.9 million at September 30, 2000. These
securities mature on various dates, with the last security maturing on November
15, 2000.
During the quarter ended September 30, 2000, the Company converted some of
its held-to-maturity debt securities to available-for-sale securities to provide
liquidity to fund the merger consideration necessary for the Dexter and Life
Technologies mergers. These debt securities were sold for $69.6 million.
3. INVENTORIES
6
<PAGE>
Inventories include material, labor and overhead costs and consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2000 1999
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Raw materials and components......................... $ 18,198 $ 2,002
Work in process...................................... 25,068 1,082
Finished goods....................................... 58,668 4,472
------------------ ------------------
$ 101,934 $ 7,556
================== ==================
</TABLE>
4. ACCUMULATED DEPRECIATION AND AMORTIZATION
Accumulated depreciation and amortization of property, plant and equipment
was $17.8 million and $13.8 million at September 30, 2000 and December 31, 1999,
respectively. Accumulated amortization of intangible assets was $13.1 million
and $0.9 million at September 30, 2000 and December 31, 1999, respectively.
5. ISSUANCE OF CONVERTIBLE SUBORDINATED DEBT
In March 2000, the Company issued $172.5 million principal amount of 5.5%
convertible subordinated notes (the "Convertible Notes") due March 1, 2007 to
certain qualified institutional buyers. After expenses, the Company received net
proceeds of $167.0 million. Interest on the Convertible Notes is payable
semi-annually on March 1st and September 1st. The Convertible Notes were issued
at 100% of principal value, and are convertible into 2,024,648 shares of common
stock at the option of the holder at any time at a price of $85.20 per share.
The Convertible Notes may be redeemed, in whole or in part, at the Company's
option on or after March 1, 2003 at a premium of 103.143% of principal value
which declines annually to par value at maturity date.
Costs incurred to issue the debt totaled $5.7 million and have been
deferred and included in other assets in the consolidated balance sheet. These
costs are being amortized over the term of the related debt using the effective
interest method.
The Convertible Notes are subordinate to substantially all of the current
and future outstanding debt of Invitrogen, including all of its secured debt and
all debts and liabilities of our subsidiaries. The Convertible Notes are not
subordinate to amounts the Company owes for employee compensation, goods or
services purchased or to amounts the Company may owe to its subsidiaries.
6. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is calculated as follows:
<TABLE>
<CAPTION>
INCOME (LOSS) SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
------------------- ------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Basic and Diluted Loss Per Common Share:
Loss applicable to common stockholders................... $ (5,612) 23,828 $ (0.24)
========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 1999
Basic Earnings Per Common Share:
Income available to common stockholders.................. $ 401 19,406 $ 0.02
==========
Diluted Earnings Per Common Share:
Stock options............................................ - 2,730
---------- ----------
Income available to common stockholders plus assumed
conversions............................................ $ 401 22,136 $ 0.02
========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Basic and Diluted Loss Per Common Share:
Loss applicable to common stockholders................... $ (2,653) 23,459 $ (0.11)
========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Basic Earnings Per Common Share:
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C>
Income available to common stockholders.................. $ 5,420 18,498 $ 0.29
==========
Diluted Earnings Per Common Share:
Stock options............................................ - 2,547
---------- ----------
Income available to common stockholders plus assumed
conversions............................................ $ 5,420 21,045 $ 0.26
========== ========== ==========
</TABLE>
For the three months and nine months ended September 30, 2000, the effect of
outstanding stock options and the 5.5% Convertible Subordinated Notes were
excluded from the computation of diluted loss per common share since their
inclusion would be antidilutive.
7. COMPREHENSIVE INCOME
Total comprehensive income is determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 2000 1999
--------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) ..................................................... $ (5,612) $ 401 $ (2,653) $ 5,420
Foreign currency translation adjustments............................... 4,555 38 4,543 (85)
--------- --------- --------- ----------
Total comprehensive income........................................... $ (1,057) $ 439 $ 1,890 $ 5,335
=========== ========= ========= =========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company had outstanding letters of credit at September 30, 2000,
totaling $7.4 million to support liabilities associated with the Company's
self-insurance program, which are already reflected in long-term obligations in
the consolidated balance sheet at September 30, 2000.
In September 1999, Life Technologies, Inc., which has now been merged into
Invitrogen, submitted a report in connection with a voluntary disclosure to the
Department of Veterans Affairs ("VA") regarding matters involving the management
of Life Technologies' Federal Supply Schedule contract with the VA that had been
in effect since April 1992. As part of the disclosure, Life Technologies offered
to provide a refund to the government in the amount of $3.9 million. Life
Technologies expensed this amount in September 1999. Life Technologies has made
a cash payment of $1.1 million to the VA and the Company assumed an accrued
liability of $2.8 million at September 30, 2000, which is included in the
accompanying consolidated balance sheets. There can be no assurance that the
government will agree with Life Technologies' assessment of this matter or
accept the offered refund amount. Consequently, it is possible the final
resolution of this matter could materially differ from Life Technologies
proposal and could have a material adverse effect on Invitrogen's consolidated
financial position, operating results or cash flows when resolved in a future
reporting period.
On December 31, 1996, Life Technologies sued Clontech Laboratories, Inc. in
the U.S. District Court for the District of Maryland, Civil Action No.
AW-96-4080, alleging patent infringement of Life Technologies' patents covering
H minus reverse transcriptase. The court issued a decision on July 16, 1999,
that two of Life Technologies' patents were unenforceable and followed this
decision on May 24, 2000, with a ruling that would have required Life
Technologies to pay $1.64 million in legal fees, plus costs, to Clontech. Life
Technologies appealed both the District Court's decision of July 16, 1999 and
the May 24, 2000 ruling to the Court of Appeals for the Federal Circuit. On
September 21, 2000, the Court of Appeals reversed the July 16, 1999, decision of
the District Court, thus reinstating Life Technologies' patent position in the
area of RNase H minus reverse transcriptases. We understand that the ruling
regarding legal fees and costs will be vacated and are awaiting an order from
the District Court to that effect.
Apart from the matters above, the Company is subject to other potential
liabilities under government regulations and various claims and legal actions
which are pending or may be asserted. These matters have arisen in the ordinary
course and conduct of the Company's pending business and some are expected to be
covered, at least partly, by insurance. Estimated amounts for claims that are
probable and can be reasonably estimated are reflected as liabilities of the
Company. The ultimate resolution of these matters is subject to many
uncertainties. It is reasonably possible that some of the matters which are
pending or may be asserted could be decided unfavorably to the Company. Although
the amount of liability at September 30, 2000 with respect to these matters can
not be ascertained, the Company believes that any resulting liability should not
materially affect the Company's consolidated financial statements.
9. SUPPLEMENTAL CASH FLOW INFORMATION
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................... $ 4,902 $ 96
=========== =========
Cash paid for income taxes........................................................... $ 3,425 $ 2,188
=========== =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for business combinations............................................... $ 15,079 $ -
=========== =========
Stock issued for merger costs........................................................ $ 2,208 $ -
=========== =========
Deferred compensation................................................................ $ 7,633 $ 164
=========== =========
Conversion of Convertible Redeemable Preferred Stock to Redeemable Preferred Stock... $ - $ 14,015
=========== =========
Conversion of Redeemable Preferred Stock to Common Stock............................. $ - $ 751
=========== =========
Property acquired with debt.......................................................... $ - $ 3,500
=========== =========
Note issued for patent rights........................................................ $ - $ 1,000
=========== =========
Preferred dividends declared......................................................... $ - $ 163
=========== =========
Contribution of common stock to ESOP................................................. $ - $ 100
=========== =========
Accretion of redemption value for Redeemable Common Stock............................ $ - $ 74
=========== =========
DETAIL OF BUSINESS COMBINATIONS:
Fair value of shares issued in exchange.............................................. $ 1,596,262
Fair value of unvested stock options assumed......................................... 30,838
Fair value of net assets acquired, other than cash................................... (1,404,076)
-----------
Net cash acquired from business combinations......................................... $ 223,024
===========
</TABLE>
10. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to be effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133 requires that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value and that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. Management has not yet quantified the effect
of adoption of SFAS No. 133 on it's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133." SFAS No. 138 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for specified
transactions. SFAS No. 138 is effective concurrently with SFAS No. 133 which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Management has not yet quantified the effect of adoption of SFAS No. 138
on it's financial statements.
The Financial Accounting Standards Board has issued FIN No. 44, Accounting
for Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25. FIN 44 affects awards and modifications made after December 15,
1998. Management believes that their accounting policies comply with the
applicable provisions of FIN 44.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONS REGARDING FORWARD-LOOKING STATMENTS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on
August 14, 2000.
ANY STATEMENTS IN THIS QUARTERLY REPORT CONCERNING THE COMPANY'S BUSINESS
OUTLOOK OR FUTURE ECONOMIC PERFORMANCE; ANTICIPATED PROFITABILITY, REVENUES,
EXPENSES OR OTHER FINANCIAL ITEMS; TOGETHER WITH OTHER STATEMENTS THAT ARE NOT
HISTORICAL FACTS, ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS DEFINED UNDER
THE FEDERAL SECURITIES LAWS. 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 TYPES OF WORDS CAREFULLY. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND OTHER FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR
IMPLIED IN 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
DISCUSSED BELOW UNDER "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND
ELSEWHERE IN THIS QUARTERLY REPORT AS WELL AS OTHER RISKS AND UNCERTAINTIES
DETAILED IN OUR REGISTRATION STATEMENT ON FORM S-4, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION ON AUGUST 14, 2000. THE COMPANY DOES NOT UNDERTAKE ANY
OBLIGATIONS TO RELEASE PUBLICLY ANY REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS
TO REFLECT EVENTS OR UNCERTAINTIES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture, and market more than 10,000 products for the life
sciences markets. Our products are principally research tools in reagent and kit
form, biochemicals, sera, media and other products and services we sell to
corporate, academic, and government entities. We focus our business on two
principal segments:
- Cell and Molecular Biology Products. We are a leading supplier of
research kits that simplify and improve gene cloning, gene expression,
and gene analysis techniques. We also supply a full range of related
molecular biology products including enzymes, nucleic acids and other
biochemicals and reagents.
- Cell Culture Products. We are also a leading supplier of sera, cell and
tissue culture media and reagents used in both life sciences research
and in processes to grow cells in the laboratory and to produce
pharmaceuticals and other materials made by cultured cells.
Our Cell and Molecular Biology Products are used for research purposes,
and, with several exceptions in a limited portion of our product line, their use
by our customers is not regulated by the United States Food and Drug
Administration (FDA) or by any comparable international organization. We expect
that the number of such customers regulated by the FDA and the number of Cell
and Molecular Biology products affected by such regulation will increase in the
future. Some of our Cell Culture Products and manufacturing sites are subject to
FDA regulation and oversight and are required to comply with the Quality System
Regulations (GMPs) described in 21 CFR part 820. Additionally some of these same
sites and products are intended to comply with certain voluntary quality
programs such as ISO 9001.
We manufacture the majority of our products in our manufacturing facilities
in Carlsbad and San Diego, California; Frederick, Maryland; Grand Island, New
York; and Inchinnan, Scotland. In addition, we purchase products from
third-party manufacturers for resale. We also have manufacturing facilities in
Germany, New Zealand, Japan, Brazil, and Israel.
We sell our products throughout the world via subsidiaries and
distributors in a number of foreign countries. The majority of our sales
activities are conducted through a dedicated direct sales organization located
in the United States and a number of foreign countries. We also conduct
marketing and distribution activities through our subsidiaries. Additionally we
sell through international distributors who resell Invitrogen kits and products.
These distributors are located primarily in selected territories in Europe, the
Middle East, South America and Asia. We may choose in the future to establish a
direct sales organization in these and additional territories.
We conduct research activities in the United States, New Zealand, and
France and business development activities around the world. As part of these
activities we actively seek to license intellectual property from academic,
government, and commercial institutions.
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Our revenues, excluding Life Technologies, have increased significantly
since our inception and from 1995 to 1999 we have experienced compound annual
revenue growth of 29%. The increase in our revenues has been due to several
factors, including the continued growth of the market for gene identification,
cloning, expression, and analysis kits, other products and related services;
increasing market acceptance of these kits and products; our introduction of new
research kits and products for gene identification, 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 do not currently have 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. We use these patent rights as a basis for
the development of many of our research kits and other products. In the past, we
have paid royalties to such third parties relating to sales of these research
kits, other products and selected services. Royalty expense is recognized as a
cost of revenue as the related royalties are incurred.
On February 2, 2000, and June 21, 2000, we completed our mergers with
Research Genetics and Ethrog, respectively. Both transactions have been
accounted for as pooling of interests and the consolidated financial statements
have been restated for all periods prior to the mergers to reflect the combined
financial and operating results of Invitrogen, Research Genetics and Ethrog.
On September 14, 2000, we completed our mergers with Life Technologies,
Inc., and Dexter Corporation. Substantially all of the businesses and operations
of Dexter were sold prior to the closing of the mergers. Both transactions have
been accounted for as purchases and, accordingly, the results of operations have
been included in the accompanying financial statements from the date of
acquisition, which significantly affects the comparability of the financial
information presented.
We intend to reorganize into two lines of business, a Molecular Biology
division and a Cell Culture division. Due to the ongoing integration, which is
not expected to be completed until December 2000, full segment reporting will
begin in 2001. However, we intend to provide pro forma revenues and growth rates
for these two lines of business in our fourth quarter results.
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 those discussed under "Risk Factors
That May Affect Future Results." 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, we cannot assure you that we will be able to 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.
RESULTS OF OPERATIONS
REVENUES. Revenues for the three months ended September 30 increased $24.2
million, or 102%, from $23.8 million in 1999 to $48.0 million for 2000. For the
nine months ended September 30, revenues increased $33.9 million, or 49%, from
$69.1 million in 1999 to $103.0 million in 2000. The acquisition of Life
Technologies accounted for $20.4 million of the increase in revenues for both
the three month and nine month periods and reflects revenues earned by Life
Technologies subsequent to September 14, 2000, the date of acquisition.
REVENUES EXCLUDING LIFE TECHNOLOGIES. Excluding Life Technologies, revenues
for the three month period increased $3.8 million, or 16%, from $23.8 million in
1999 to $27.6 million in 2000. The overall increase in revenues was primarily
attributable to continued market growth and increased market penetration for DNA
microarrays, sequence-verified gene clones and gene cloning, expression and
analysis kits. Worldwide revenues, when reported in U.S. Dollars, were adversely
affected by changes in currency rates. The change in currency rates accounted
for a decrease in U.S. Dollar denominated revenues of $1.1 million, or 4.4%.
Holding currency conversion rates constant with those in 1999, worldwide
revenues increased 20%.
For the nine months ended September 30, revenues, excluding Life
Technologies, increased $13.5 million, or 20%, from $69.1 million in 1999 to
$82.6 million in 2000. Holding currency conversion rates constant with those in
1999 worldwide revenues increased 23%.
We expect that future revenues will be affected by the acquisition and
integration of Life Technologies in addition to new product introductions,
competitive conditions, customer research budgets, the rate of expansion of our
customer base, and foreign currency rates.
GROSS MARGIN. Gross margin as a percentage of revenues for the three months
ended September 30, 2000 decreased to 50% from 63% for the same period in 1999.
For the nine months ended September 30, gross margins decreased to 59% in 2000
from
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63% in 1999. Excluding the non-cash amortization of $4.3 million for the mark-up
on inventory associated with Life Technologies purchase accounting, gross
margins were 59% and 64%, for the three and nine months, respectively. Excluding
Life Technologies, whose margins are historically lower than gross margins on
Invitrogen's other businesses, gross margins increased from 63% in 1999 to 66%
in 2000 for the three month period and from 63% in 1999 to 67% for the nine
month period. The gross margin improvements during both periods were primarily a
result of increased sales of higher-margin products, and manufacturing and
operational efficiencies.
We believe that gross margins for future periods will be affected by the
acquisition and integration of Life Technologies in addition to sale volumes,
competitive conditions, royalty payments on licensed technologies, and foreign
currency rates.
The functional currency of our foreign subsidiaries is generally the
dominate currency in the respective country of residence of the subsidiary. The
translation from the functional currency 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 reported revenues, revenue growth rates, gross margins, and
reported income or losses. Certain subsidiaries also conduct their business in
the currencies of their significant customers. Exchange gains or losses arising
from transactions denominated in these currencies are recorded in the statements
of operations using the actual exchange differences on the date of the
transaction. Large increases or decreases in these currency fluctuations could
also impact reported revenues, revenue growth rates, gross margins and reported
income or losses.
SALES AND MARKETING. Sales and marketing expenses increased $4.6 million
from $4.1 million for the three months ended September 30, 1999 to $8.7 million
for the same period in 2000. As a percentage of revenues, sales and marketing
expenses increased from 17% to 18% for these periods.
For the nine months ended September 30, 2000, sales and marketing expenses
increased $6.8 million from $12.2 million in 1999 to $19.0 million in 2000. As a
percentage of revenues, sales and marketing expenses increased from 18% to 19%
in 2000.
The addition of Life Technologies accounted for $3.4 million of the absolute
increase for both the three and nine month periods. Apart from the increase
related to Life Technologies, the increase in sales and marketing expenses as a
percentage of revenues occurred as we increased our sales forces both in Europe
and North America and implemented a new brand recognition program. Excluding
Life Technologies, the number of sales personnel doubled from September 30, 1999
to September 30, 2000, with two-thirds of the new hires occurring in the first
six months of this year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30 increased $2.1 million from $2.8 million in 1999
to $4.9 million in 2000. As a percentage of revenues for the same periods,
general and administrative expenses decreased from 12% to 10%.
For the nine months ended September 30, 2000, general and administrative
expenses increased $3.0 million from $8.9 million, or 13% of revenues, in 1999
to $11.9 million, or 12% of revenues in 2000.
The absolute increase resulted from the addition of Life Technologies along
with continued expansion of administrative resources to support our growth and
requirements as a newly public company. 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.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.5
million from $3.7 million for the three months ended September 30, 1999, to $5.2
million for the same period in 2000. As a percentage of revenues, research and
development expenses decreased from 16% in 1999 to 11% in 2000.
For the nine months ended September 30, 2000, research and development
expenses increased $1.3 million to $12.6 million, or 12% of revenues, from $11.3
million for the same period in 1999, or 16% of revenues.
The absolute increase in research and development expenses resulted
primarily from the addition of Life Technologies, new collaborative research and
development projects and expanded research and development facilities. The
decline as a percentage of revenues also reflects the impact of Life
Technologies, whose historical percentage has averaged 5% to 6% of revenues over
the last year.
DEFERRED COMPENSATION. Deferred compensation resulted from the assumption of
unvested stock options and restricted stock associated with the acquisitions of
Life Technologies and Dexter. It is anticipated that deferred compensation
expense will approximate $1.6 million for each of the next four quarters and
that the deferred balance of $7.7 million at September 30, 2000 will be fully
amortized by March 2002.
GOODWILL AND OTHER PURCHASED INTANGIBLES AMORTIZATION. The increase in the
amortization of intangible assets is due to the intangible assets acquired with
Life Technologies, which are amortized using the straight-line method primarily
over periods ranging from five to thirteen years.
MERGER COSTS. Merger costs represent costs associated with the Research
Genetics and Ethrog mergers that are expensed under the pooling method of
accounting. Merger costs also include costs associated with the restructuring
and integration of the
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operations of Life Technologies and Invitrogen that are not part of the purchase
price of the acquisition since the costs incurred benefit future operations of
the combined companies. These costs are expected to range from $5 million to $10
million during the next year.
OTHER INCOME, NET. Other income, net, increased by $2.2 million from $0.2
million for the three months ended September 30, 1999, to $2.4 million for the
same period in 2000. For the nine months ended September 30, other income, net,
increased $4.5 million from $0.3 million in 1999 to $4.8 million in 2000. The
increases for both periods were mainly attributable to larger balances of cash
and short-term investments during the period, offset by interest accruing on the
5.5% Convertible Subordinated Notes that were issued in March 2000.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended September 30, 2000 was 179% of pre-tax income due to certain merger
related costs and amortization expense of certain purchased intangibles that are
not deductible for tax purposes. Excluding the impact of non-deductible merger
related costs and amortization expense, net of tax, our effective tax rate
increased from 33.7% for 1999 to 36% for 2000. The increase in the effective tax
rate in 2000 compared to 1999 is attributable to a greater proportion of taxable
income arising in countries outside the U.S. that have, on average, statutory
tax rates higher than the U.S. rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities generated $19.7 million during the first
nine months of 2000. Net cash generated from investing activities generated
$185.7 million and includes $223.0 million in cash acquired from business
combinations, net of cash paid for the acquisitions. Other investing activities
included purchases in excess of sales and maturities of short-term investments
which netted $24.9 million, and capital expenditures and payments for intangible
assets during the first nine months of 2000 which totaled $11.4 million and $1.2
million, respectively. Net cash generated from financing activities totaled
$162.0 million, and reflects $167.0 million in net proceeds from the issuance of
the 5.5% Convertible Subordinated Notes, $7.2 million in net proceeds from stock
issued under employee stock plans, reduced by $10.8 million that was used to
extinguish debt, including $9.4 million of debt acquired in the Research
Genetics merger.
On September 14, 2000, we completed our mergers with Life Technologies and
Dexter. As consideration for the merger we expect to issue a total of
approximately 27.4 million shares of Invitrogen common stock and $207.5 million
in cash. The election period for the Life Technologies and Dexter shareholders
ended on October 5, 2000 and as those shareholders tender their Life
Technologies and Dexter certificates and/or election forms, they will receive
their respective election in cash or stock or a combination thereof. At
September 30, 2000, $1.8 billion was included in other current liabilities as
cash and common stock payable to shareholders related to this transaction and
$202.3 million was included in restricted cash as the estimated remaining cash
expected to be paid to satisfy the cash portion of the elections. The majority
of the cash and common stock was paid during October, 2000, and, as of October
31, 2000, approximately 27.0 million shares of Invitrogen common stock were
issued and $194.6 million was paid to shareholders of Life Technologies and
Dexter, with approximately $35.2 million remaining in cash and common stock
payable to shareholders. Certain costs associated with the restructuring of
existing Invitrogen operations and costs necessary to integrate the businesses
of Invitrogen and Life Technologies that are expected to benefit future
operations are estimated to range from $5.0 million to $10.0 million during the
next year.
The Company also expects to pay approximately $140 million in income taxes
in December 2000 related to the gains on the sales of the Dexter businesses that
were sold prior to the merger of the Company and Dexter.
During the first nine months of 2000, we recorded a current deferred tax
asset of $12.4 million representing amounts deductible for income tax purposes
for non-qualified stock option exercises and disqualifying dispositions of our
common stock by employees during the quarter. This benefit is reflected as
additional paid-in-capital in the September 30, 2000, consolidated balance
sheet.
On February 2, 2000, we completed our merger with Research Genetics. As
consideration for the merger, we issued 3,200,000 shares of our common stock for
all of the outstanding common stock of Research Genetics. Costs incurred as a
result of the merger and related integration are anticipated to be $6.4 million,
which includes $2.2 million paid by a Research Genetics shareholder. These costs
were expensed in February 2000, after the merger was completed.
In March 2000, we issued $172.5 million in 5.5% Convertible Subordinated
Notes due 2007. The Notes were priced on February 24, 2000 at 100% of their
principal amount and are convertible into 2,024,648 shares of Invitrogen's
common stock. Interest is payable semiannually on March 1 and September 1. The
Notes may be redeemed, in whole or in part, at the option of Invitrogen on or
after March 1, 2003.
On June 21, 2000, we completed our merger with Ethrog. As consideration for
the merger, we issued 198,869 shares of our common stock for all of the
outstanding common stock of Ethrog. Costs incurred as a result of the merger
were $.2 million. These costs were expensed in June 2000, after the merger was
completed.
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On June 30, 2000, we completed our acquisition of NAP. As consideration for
the acquisition, we issued 17,778 shares of our common stock for all of the
outstanding common stock of NAP. Costs incurred as a result of the merger were
$55,000 and have been included in the purchase price of the transaction.
As of September 30, 2000, we had cash, cash equivalents and short-term
investments held-to-maturity totaling $498.1 million and working capital of
$459.5 million, excluding restricted cash and the cash and common stock payable
to shareholders. Our funds are currently invested in overnight money market
accounts and corporate debt securities. Due to our sufficient cash balances we
terminated our $3.0 million bank line of credit facility in March 2000. In
February 2000, we assumed Research Genetics' bank line of credit facility
totaling $1.5 million. In March 2000, we fully paid the outstanding balance on
this line and terminated the facility. As of September 30, 2000, foreign
subsidiaries in France, Japan, New Zealand and Australia had available bank
lines of credit denominated in local currency to meet short-term working capital
requirements. The U.S. Dollar equivalent of these facilities total approximately
$6.2 million, of which $2.5 million was outstanding at September 30, 2000. There
are no parent company guarantees associated with these facilities.
We expect that our current cash and cash equivalents, funds from operations
and interest income earned thereon will be sufficient to fund our current
operations for at least 12 months. Our future capital requirements and the
adequacy of our available funds will depend on many factors, including future
business acquisitions, 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 and competing
technological and market developments.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to be effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133 requires that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value and that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. Management has not yet quantified the effect
of adoption of SFAS No. 133 on it's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133." SFAS No. 138 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for specified
transactions. SFAS No. 138 is effective concurrently with SFAS No. 133 which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Management has not yet quantified the effect of adoption of SFAS No. 138
on it's financial statements.
The Financial Accounting Standards Board has issued FIN No. 44, Accounting
for Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25. FIN 44 affects awards and modifications made after December 15,
1998. Management believes that their accounting policies comply with the
applicable provisions of FIN 44.
CURRENCY HEDGING AND FOREIGN CURRENCY TRANSLATION
The Company is exposed to market risk related to changes in foreign
currency exchange rates, commodity prices, and interest rates, and selectively
uses financial instruments to manage these risks. The Company does not enter
into financial instruments for speculation or trading purposes.
The Company enters into forward foreign currency contracts and options to
mitigate the risks of doing business in foreign currencies. The Company hedges
currency exposures of firm commitments and specific assets and liabilities
denominated in non-functional currencies to protect against the possibility of
diminished cash flow and adverse impact on earnings. The Company's currency
exposures vary, but are primarily concentrated in the Euro, British Pound
Sterling, Australian Dollar and Japanese Yen. At September 30, 2000, the Company
had $1.7 million in financial instruments outstanding as hedges of currency risk
which expire on various dates through December 2000. The Company's exposure to
commodity price changes relates to certain manufacturing operations that utilize
certain commodities as raw materials. The Company manages its exposure to
changes in those prices primarily through its procurement and sales practices.
These financial exposures are monitored and managed by the Company as an
integral part of the Company's overall risk management program, which recognizes
the unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the Company's results.
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ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION
On January 1, 1999, certain member states of the European Economic
Community (EEC) 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 Euro and the existing national
currency, such as the Netherlands Guilder, French Franc or Deutsche Mark.
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. It has been determined that the current version of financial and
order processing systems at Life Technologies are not Euro compliant. A project
plan has been established to upgrade the software to a Euro compliant version by
mid-year 2001. Approximately 18% of Life Technologies' revenues are from EEC
member states. The estimated cost to upgrade the software is $0.3 million. We
have tested the internal systems for the existing Invitrogen systems and are
able to process orders and invoices in the Euro as well as the local currency
for the members of the monetary union. To date we have spent immaterial amounts
to comply with these statutory requirements. These assessments have not been
independently verified. However, we have not determined the costs related to any
problems that may arise in the future due to the inability of any of our
customers or vendors to comply with the statutory requirements. Any such
problems may materially adversely affect our business, operating results and
financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk. Our investment portfolio is
maintained in accordance with our investment policy which defines allowable
investments, specifies credit quality standards and limits the credit exposure
of any single issuer. We do not utilize any form of interest rate swap
agreements to manage our exposure to fluctuations in earnings due to changes in
interest rates. As of September 30, 2000, cash and cash equivalents are invested
primarily in securities with maturities of less than 90 days. Since the fair
value of Invitrogen's cash and cash equivalents approximated carrying value due
to the short-term nature of the investments, any increase in interest rates
would not have a material impact on the ending value of our cash equivalents. We
would, however, be at risk for lower earnings should interest rates decline
dramatically.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
IN ADDITION TO THE OTHER INFORMATION INCLUDED OR INCORPORATED BY
REFERENCE IN THIS REPORT AND IN OTHER DOCUMENTS WE FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION, YOU SHOULD CONSIDER THE FOLLOWING IN EVALUATING OUR
OPERATIONS AND FINANCIAL CONDITION. THE OPERATIONS OF INVITROGEN ARE SUBJECT TO
A NUMBER OF RISKS AND HAZARDS, SOME INHERENT TO THE LIFE SCIENCES INDUSTRY,
WHICH MAY MATERIALLY AND ADVERSELY AFFECT INVITROGEN'S FINANCIAL CONDITION OR
RESULTS OF OPERATIONS. THE FOLLOWING LIST OUTLINES SOME, BUT NOT ALL, OF THESE
RISKS AND HAZARDS.
FAILURE TO INTEGRATE SUCCESSFULLY LIFE TECHNOLOGIES AND OTHER COMPANIES INTO OUR
OPERATIONS COULD REDUCE OUR REVENUES AND PROFITS.
We completed our merger with Life Technologies on September 14, 2000. In
addition, over the past year Invitrogen has acquired Dexter Corporation, NOVEX,
Research Genetics, Inc. and Ethrog Biotechnologies, Inc. Our integration of the
operations of Life Technologies and these previously-acquired companies 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 these acquired companies. At present, a
small number of Life Technologies employees have left the Company or have been
terminated, and others may leave or be terminated because of the merger. Under
the terms of the Change-In-Control Agreements of certain of these former
employees, the Company will be required to make significant lump sum cash
payments and will be required to maintain certain benefits for a two-year
period. Additional employee terminations or resignations or facility closures
may require us to make additional severance or other payments and may result in
litigation.
Life Technologies' headquarters is located in Rockville, Maryland with
other U.S. operations in Frederick, Maryland and Grand Island, New York.
Research Genetics is located in Huntsville, Alabama and Ethrog is located in
Israel, while Invitrogen's U.S. headquarters and the bulk of our other
operations are located in Carlsbad, California. This physical separation of
facilities could make it difficult for us to communicate effectively with,
manage and integrate these companies' staffs and operations with the rest of
Invitrogen. Such difficulties could significantly hurt our operations and
consequently our financial results.
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Management may have its attention diverted while trying to integrate Life
Technologies and these other 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 integrate the operations of all these companies
successfully, our expectations of future results of operations may not be met.
Factors which will affect the success of the mergers include:
- changes in the favorable market reaction to the combined companies'
significant products;
- competitive factors, including technological advances attained by
competitors and patents granted to, or contested by competitors, which
would result in increased efficiency in their ability to compete
against us;
- the ability of the combined company to increase sales of all such
companies' products; and
- the ability of the combined company to operate efficiently and achieve
cost savings.
Even if the companies are able to integrate operations, we cannot assure
you that synergies will be achieved. The failure to achieve 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 $55.3
million in 1997 to $92.9 million in 1999. During that same period we
significantly expanded our operations in the United States and in Europe. The
number of our employees has increased from approximately 272 at December 31,
1996 to approximately 713 at July 31, 2000. As a result of the merger with Life
Technologies, the Company has approximately 3,000 employees and approximately
$516 million in pro forma 1999 revenues.
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 offer products and services successfully and to implement
our business plan in a rapidly evolving market requires an effective planning,
reporting 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 workforce worldwide. We will also need to continue
to manufacture our products efficiently and to control or adjust the expenses
related to research and development, marketing, sales and general and
administrative activities in response to changes in revenues. If we are not
successful in managing such expenses there could be an adverse impact on our
earnings.
Our mergers with Life Technologies and Dexter will require additional
investments in operations, product research and development, administration and
sales and marketing. These are significant expenses. Failure to manage
successfully and coordinate the growth of the combined company could adversely
impact our revenues and profits.
REDUCTION IN RESEARCH AND DEVELOPMENT BUDGETS AND GOVERNMENT FUNDING MAY AFFECT
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, mergers of pharmaceutical and biotechnology companies, 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. Additional 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
(NIH) and similar domestic and international agencies. Although the 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
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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. In the past, grants
have 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 and related projects requires us to develop a wide spectrum
of products. To generate broad product lines it is advantageous sometimes to
license technologies from the scientific community at large rather than
depending exclusively on the inventions of 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. A significant
portion of our current 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 and their agents
or assignees 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, 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 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 indemnification from a licensor against third-party claims of
intellectual property infringement in the practice of the licensed technology.
OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE.
The market for certain of 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 that 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
develop successfully and introduce new products could reduce our growth rate or
otherwise damage our business.
Invitrogen has 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 Invitrogen has experienced, and is 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
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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, financial condition and results of operations.
VIOLATION OF GOVERNMENT REGULATIONS OR VOLUNTARY QUALITY PROGRAMS COULD RESULT
IN LOSS OF SALES AND CUSTOMERS.
Certain cell culture products are labeled for in vitro diagnostic use and
as such are regulated by the U.S. Food and Drug Administration ("FDA") as
medical devices. The sites manufacturing these products must register with FDA
as medical device manufacturers and are required to comply with 21 CFR Part 820,
the Quality System Regulation (GMP). Being a registered medical device
manufacturer also requires compliance with other regulations in 21 CFR such as
regulations relating to Medical Device Reporting and Labeling. Failure to comply
with these regulations can lead to sanctions by the FDA such as observations
made following inspections (Form 483), warning letters, product recalls, fines,
product seizures and consent decrees. Such actions by the FDA would be available
to the public and could affect the sale of products labeled for in vitro
diagnostic use and the sale of products to industrial customers engaged in the
manufacture of pharmaceuticals using the Company's products.
Additionally, some of our customers use our products in the manufacturing
process for their drug and medical device products, and such end products are
regulated by the FDA under cGMP. Although the customer is ultimately responsible
for cGMP compliance for their products, it is also the customers' expectation
that the materials sold to them will meet the cGMP requirements.
ISO 9001 is an internationally recognized voluntary quality standard with
which the Life Technologies operations of the Company chose to comply with at
virtually all of its manufacturing facilities. It requires compliance with a
variety of quality requirements somewhat similar to GMPs. Failure to comply with
this voluntary standard can lead to observations of non-compliance or even
suspension of ISO certification by the certifying unit. Loss of ISO
certification could cause some customers to purchase products from other
suppliers.
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.
COMPETITION IN THE LIFE SCIENCES MARKET COULD REDUCE SALES.
The markets for our products are very competitive and price sensitive. Many
other life science product suppliers have significant financial, operational,
sales and marketing resources, and experience in research and development. 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.
Certain of our products, such as, for example, our electrophoresis
products, custom oligonucleotides, amplification products, and fetal bovine
serum, are subject to specific competitive risks. These products are subject to
significant price competition. 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 may suffer.
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LOSS OF DISTRIBUTORS MAY HURT OUR SALES, AND DISTRIBUTORS MAY FORCE US TO USE
MORE EXPENSIVE MARKETING AND DISTRIBUTION CHANNELS.
As a result of the merger with Life Technologies, the Company now has
overlapping distributorship arrangements in some countries. As the Company goes
through the process of closing out its relationship with certain distributors,
the attention given by such distributors to sales of our products may be
diminished and the level of sales of the Company's products in the affected
countries may be reduced.
Certain of our customers have developed purchasing initiatives to reduce
the number of vendors from which they purchase 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 U.S. 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 electrophoresis products, custom oligonucleotides,
amplification products, and fetal bovine serum, which could have an adverse
impact on our business, financial condition and results of operations. For a
limited number of customers we have made sales, at the customer's request,
through third-party Internet vendors. Although Internet sales through third
parties have not had a significant impact to date, it is possible that this
method of distribution could have a negative impact on our gross margins,
because any 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 pre-cast electrophoresis 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.
Using subsidiaries and distributors, we currently market our products in
more than 60 countries throughout the world. Our international revenues, which
include revenues from our non-U.S. subsidiaries and export sales, represented
31% of our product revenues in 1999 and 1998, and 26% in 1997. We expect that
international revenues will continue to account for a significant percentage of
our revenues for the foreseeable future.
There are a number of risks arising from our international business,
including:
- general economic and political conditions in the markets in which we
operate, including fluctuations in significant currency exchange rates;
- potential increased costs associated with overlapping tax structures;
- potential trade restrictions and exchange controls;
- more limited protection for intellectual property rights in some
countries;
- 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 until 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.
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The Asia/Pacific region in the past has 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.
INABILITY TO PROTECT INVITROGEN'S TECHNOLOGIES COULD AFFECT OUR ABILITY TO
COMPETE.
Invitrogen's 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 generally for research purposes
only. We cannot assure you that we would be aware of an unauthorized use of our
products in violation of such licenses. The Life Technologies division has
incurred substantial costs in enforcing its intellectual property rights in the
past, and the combined, post-merger Company expects to incur such costs in the
future.
DISCLOSURE OF TRADE SECRETS COULD AID OUR COMPETITORS.
We attempt to protect our trade secrets by entering into confidentiality
agreements with third parties, our 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.
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.
The Life Technologies division is currently involved in patent litigation,
and in the event of additional intellectual property disputes we may be involved
in further litigation. Such litigation could involve proceedings before the U.S.
Patent and Trademark Office or the International Trade Commission, as well as
proceedings brought by affected third parties or by the Company. 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.
In particular, in acquiring Dexter Corporation, we assumed certain of
Dexter's liabilities, ongoing disputes and litigation. These include personal
injury, workers' compensation, automobile, environmental and product liabilities
claims, among others. While we believe that Dexter has adequately reserved
and/or has insurance for the cost of such liabilities, we anticipate purchasing
additional insurance to safeguard the Company's assets. Unexpected costs could
exceed stated reserves and insurance, however, requiring us to allocate
additional funds and other resources to address Dexter's liabilities. See also
the discussion below under "Accidents related to hazardous materials could
adversely affect our business."
THE MARKET PRICE OF INVITROGEN STOCK COULD BE VOLATILE, WHICH MAY IMPAIR YOUR
INVESTMENT.
The market price of Invitrogen common stock has been subject to volatility
and, in the future, the market price of Invitrogen's common stock may fluctuate
substantially due to a variety of factors, including:
- quarterly fluctuations in our operating and earnings per share results;
- technological innovations or new product introductions by us or our
competitors;
- economic conditions;
- disputes concerning patents or proprietary rights;
20
<PAGE>
- changes in earnings estimates by market research analysts;
- sales of common stock by existing holders;
- loss of key personnel; and
- securities class action lawsuits or other litigation.
The market price for Invitrogen common stock may also be affected by our
ability to meet analysts' expectations. Any failure to meet such expectations,
even slightly, could have an adverse effect on the market price of Invitrogen
common stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. If similar
litigation were instituted against us, it could result in substantial costs and
a diversion of our management's attention and resources, which could have an
adverse effect on our business, results of operations and financial condition.
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Our operating results have, in the
past, been, and will continue to be, subject to quarterly fluctuations as a
result of a number of factors. These factors include, but are not limited to:
- The integration of people, operations and products from acquired
businesses and technologies;
- Our ability to introduce new products successfully;
- Market acceptance of existing or new products;
- Competitive product introductions;
- Currency rate fluctuations;
- Changes in customer research budgets which are influenced by the timing
of their research and commercialization efforts and their receipt of
government grants;
- Our ability to manufacture our products efficiently;
- Our ability to control or adjust research and development, marketing,
sales and general and administrative expenses in response to changes in
revenues; and
- The timing of orders from distributors and mix of sales among
distributors and our direct sales force.
OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS AND MAY
DEPRESS INVITROGEN'S STOCK PRICE.
Certain provisions of our certificate of incorporation, by-laws and
Delaware law could be used by our incumbent management to make it substantially
more difficult for a third party to acquire control of Invitrogen. These
provisions include the following:
- we may issue preferred stock with rights senior to those of our common
stock;
- we have a classified board of directors; o our by-laws prohibit action
by written consent by stockholders;
- the Board of Directors of the Company has the exclusive right to fill
vacancies and set the number of directors;
- cumulative voting is not allowed; and
- we require advance notice for nomination of directors and for
stockholder proposals.
The Board of Directors of the Company could also decide to adopt other
anti-takeover defenses, including, but not limited to, a stock purchase rights
plan (a so-called "poison pill"). These provisions could discourage potential
takeover attempts and could adversely affect the market price of Invitrogen
common stock.
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.
We generate waste that must be transported to approved landfills. The
transportation and disposal of such waste are required to meet applicable state
and federal statutes and regulations. The disposal of such waste potentially
exposes the Company to
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environmental liability if, in the future, such transportation and disposal is
deemed to have violated such statutes and/or regulations or if the landfills
leak and are proved to have damaged the environment.
Furthermore, in acquiring Dexter, the Company assumed certain of Dexter's
environmental liabilities, including clean-up of several hazardous waste sites.
While we believe that Dexter has adequately reserved and/or has insurance for
the cost of such liabilities, we anticipate purchasing additional insurance to
safeguard the Company's assets. However, unexpected costs could exceed stated
reserves and insurance. This may require us to allocate additional funds and
other resources to address Dexter's environmental liabilities.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
We face a potential risk of liability claims based on our products and
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.
ABSENCE OF DIVIDENDS COULD REDUCE INVITROGEN'S ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends, particularly in market
downturns. We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for funding growth and,
therefore, we do not currently anticipate paying cash dividends on our common
stock in the foreseeable future.
THERE ARE OTHER RISKS RELATED TO LIFE TECHNOLOGIES' AND DEXTER'S ONGOING
OPERATIONS.
There are additional risks related to the ongoing operation of Life
Technologies and Dexter that differ in some respects from the risks we have
faced previously. These risks include:
- changes in pricing or availability of fetal bovine serum;
- the possibility of adverse rulings by or adverse developments in
negotiations with the government;
- litigation risks;
- potential environmental liabilities; and
- other risks detailed in the filings by Dexter and Life Technologies
with the Securities and Exchange Commission.
We cannot assure you that we will be able to manage these risks in such a
manner as will not adversely affect our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under Currency Hedging and Foreign Currency Translation and
Quantitative and Qualitative Disclosures about Market Risk in Management's
Discussion and Analysis of Financial Condition and Results of Operations for
quantitative and qualitative disclosures about market risk.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 31, 1996, Life Technologies sued Clontech Laboratories, Inc. in
the U.S. District Court for the District of Maryland, Civil Action No.
AW-96-4080, alleging patent infringement of Life Technologies' patents covering
RNase H minus reverse transcriptase. The court issued a decision on July 16,
1999, that two of Life Technologies' patents were unenforceable and followed
this decision on May 24, 2000, with a ruling that would have required Life
Technologies to pay $1.64 million in legal fees, plus costs, to Clontech. Life
Technologies appealed both the District Court's decision of July 16, 1999 and
the May 24, 2000 ruling to the Court of Appeals for the Federal Circuit. On
September 21, 2000, the Court of Appeals reversed the July 16, 1999, decision of
the District Court, thus reinstating Life Technologies' patent position in the
area of RNase H minus reverse transcriptases. We understand that the ruling
regarding legal fees and costs will be vacated and are awaiting an order from
the District Court to that effect.
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 September 14, 2000.
(b) Not applicable.
(c) PROPOSAL I. The proposal to approve and adopt each of the Agreement and
Plan of Merger, dated as of July 7, 2000, between Invitrogen and Life
Technologies, and the Agreement and Plan of Merger, dated as of July 7,
2000, between Invitrogen and Dexter Corporation was approved, with
16,570,975 affirmative votes, 934,131 negative votes and 12,295
abstentions.
PROPOSAL II. The proposal to amend Invitrogen Corporation's Restated
Certificate of Incorporation to increase the authorized capital stock
to 131,405,884 shares, consisting of 6,405,884 shares of preferred
stock and 125,000,000 shares of common stock was approved, with
16,473,774 affirmative votes, 1,030,702 negative votes and 12,925
abstentions.
PROPOSAL III. The proposal to increase by 3,000,000 the number of
shares Invitrogen may issue under Invitrogen's 1997 Stock Option Plan
to 8,485,479 shares was approved, with 11,765,458 affirmative votes,
5,717,530 negative votes and 34,413 abstentions.
PROPOSAL IV. The proposal to increase by 200,000 the number of shares
of Invitrogen common stock that Invitrogen may issue under Invitrogen's
1998 Employee Stock Purchase Plan to 550,000 shares was approved, with
16,544,610 affirmative votes, 939,283 negative votes and 33,508
abstentions.
(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:
2.1 Agreement and Plan of Merger between Invitrogen Corporation and Life
Technologies, Inc. dated as of July 7, 2000 (1)
2.2 Agreement and Plan of Merger between Invitrogen Corporation and
Dexter Corporation dated as of July 7, 2000 (2)
3.1 Restated Certificate of Incorporation of the Company, as amended
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10.1 Invitrogen Corporation 1997 Stock Option Plan, as amended
10.2 Invitrogen Corporation 1998 Employee Stock Purchase Plan, as amended
10.3 Change in Control Agreement between J. Stark Thompson, Ph.D. and
Life Technologies, iNc. dated the 13th day of February 1997, as
assumed by Invitrogen Corporation.
10.4 Change in Control Agreement between C. Eric Winzer and Life
Technologies, Inc. dated the 13th day of February 1997, as assumed by
Invitrogen Corporation.
27.01 Financial Data Schedule
------------
(1) Incorporated by reference to Exhibit 2.1 of the Company's Current Report
on Form 8-K filed on July 11, 2000
(2) Incorporated by reference to Exhibit 2.2 of the Company's Current Report
on Form 8-K filed on July 11, 2000
(b) The following reports on Forms 8-K were filed during the quarter ended
September 30, 2000:
1) A Form 8-K dated September 14, 2000 was filed on September 29, 2000 to
report the completion on September 14, 2000 of the mergers pursuant to
which both Life Technologies, Inc. and Dexter Corporation merged into
Invitrogen Corporation and to report the following financial
statements:
- The audited financial statements for Dexter for the fiscal year
ended December 31, 1999;
- The unaudited financial statements for Dexter for the quarter ended
June 30, 2000;
- The audited financial statements for Life Technologies for the
fiscal year ended December 31, 1999;
- The unaudited financial statements for Life Technologies for the
quarter ended June 30, 2000, and
- The unaudited consolidated pro forma condensed balance sheet as of
June 30, 2000 and unaudited consolidated pro forma condensed income
statements for the year ended December 31, 1999 and the six months
ended June 30, 2000 for Invitrogen Corporation.
2) A Form 8-K dated July 9, 2000, was filed on July 11, 2000 to report the
signing of definitive merger agreements between Invitrogen Corporation
and, respectively, Life Technologies, Inc. and Dexter Corporation.
24
<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: NOVEMBER 13, 2000 By: /s/ JAMES R. GLYNN
-------------------- --------------------------
James R. Glynn
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Authorized Signatory)
25
<PAGE>
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger between Invitrogen Corporation and Life
Technologies, Inc. dated as of July 7, 2000, previously filed as
Exhibit 2.1 of the Company's Current Report on Form 8-K filed on July
11, 2000, which is incorporated herein by reference.
2.2 Agreement and Plan of Merger between Invitrogen Corporation and
Dexter Corporation dated as of July 7, 2000, previously filed as
Exhibit 2.2 of the Company's Current Report on Form 8-K filed on July
11, 2000, which is incorporated herein by reference.
3.1 Restated Certificate of Incorporation of the Company, as amended
10.1 Invitrogen Corporation 1997 Stock Option Plan, as amended
10.2 Invitrogen Corporation 1998 Employee Stock Purchase Plan, as amended
10.3 Change in Control Agreement between J. Stark Thompson, Ph.D. and
Life Technologies, iNc. dated the 13th day of February 1997, as
assumed by Invitrogen Corporation.
10.4 Change in Control Agreement between C. Eric Winzer and Life
Technologies, Inc. dated the 13th day of February 1997, as assumed by
Invitrogen Corporation.
27.01 Financial Data Schedule
26
