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================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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 000-31167
GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 16-1362385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 846-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS
YES [X] NO [ ]
------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS NUMBER OF SHARES OUTSTANDING
AT NOVEMBER 10, 2000
COMMON STOCK, PAR VALUE $.01 PER SHARE 59,906,500
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.........................................................................................
Condensed Consolidated Unaudited Balance Sheets as of September 30, 2000 and December 31, 1999............... 3
Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended
September 30, 2000 and 1999................................................................................ 4
Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999................................................................................ 5
Notes to Condensed Consolidated Unaudited Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................ 17
Item 2. Changes in Securities and Use of Proceeds.................................................................... 17
Item 3 Defaults Upon Senior Securities.............................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 17
Item 5. Other Information............................................................................................ 17
Item 6. Exhibits and Reports on Form 8-K............................................................................. 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 193,561 $ 39,331
Trade accounts receivable, net ................................................ 47,407 48,081
Inventories.................................................................... 44,896 50,716
Other current assets........................................................... 14,133 20,370
----------- -----------
Total current assets...................................................... 299,997 158,498
Property, plant and equipment, net............................................... 204,028 215,218
Intangible assets, net........................................................... 70,322 80,448
Other assets..................................................................... 47,637 45,136
----------- -----------
Total assets.............................................................. $ 621,984 $ 499,300
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................................. $ 4,325 $ 5,774
Current maturities of long-term debt........................................... -- 10,000
Accounts payable and accrued expenses.......................................... 43,553 43,506
Other current liabilities...................................................... 15,299 16,804
----------- -----------
Total current liabilities................................................. 63,177 76,084
Long-term debt................................................................... 144,737 142,486
Other long-term liabilities...................................................... 23,813 27,669
----------- -----------
Total liabilities......................................................... 231,727 246,239
----------- -----------
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par value, authorized
1,000 shares, 970 shares issued and outstanding............................. 153,382 147,925
Shareholders' equity:
Common stock, par value $0.01 per share, 200,000,000
Shares authorized, 59,906,500 and 50,000,000 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively................................................................ 599 500
Additional paid-in capital..................................................... 344,148 186,326
Deferred stock-based compensation.............................................. (6,153) --
Notes receivable for common stock.............................................. (18,008) --
Accumulated deficit............................................................ (27,570) (48,100)
Accumulated other comprehensive loss........................................... (56,141) (33,590)
----------- ----------
Total shareholders' equity................................................ 236,875 105,136
----------- ----------
Total liabilities, redeemable preferred stock and shareholders' equity.... $ 621,984 $ 499,300
=========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated unaudited financial statements.
3
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product revenue ................................. $ 77,359 $ 74,211 $ 227,625 $ 222,252
Fees and royalty revenues ....................... 3,369 4,501 12,493 8,874
------------ ------------ ------------ ------------
Total revenues ............................. 80,728 78,712 240,118 231,126
Operating expenses:
Cost of product sold ............................ 44,495 44,244 129,756 131,900
Research and development ........................ 13,762 11,118 38,347 32,909
Sales, marketing and business
Development .................................. 8,521 6,250 21,367 18,152
General and administrative ...................... 6,959 5,642 19,347 17,045
Amortization of intangible assets ............... 2,615 2,695 7,900 7,467
Restructuring and related charges ............... -- 6,579 -- 6,579
Other (income)/expense .......................... (956) (184) (937) (77)
------------ ------------ ------------ ------------
Total operating expenses ................... 75,396 76,344 215,780 213,975
------------ ------------ ------------ ------------
Operating income .................................. 5,332 2,368 24,338 17,151
Non operating (income)/expenses:
Investment income ............................... -- -- (16,577) --
Interest expense ................................ 2,608 2,828 7,878 7,854
Interest income ................................. (2,712) (175) (4,056) (490)
------------ ------------ ------------ ------------
Total non operating (income)/expenses ...... (104) 2,653 (12,755) 7,364
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes ... 5,436 (285) 37,093 9,787
Provision for income taxes ........................ 683 8 11,109 2,452
------------ ------------ ------------ ------------
Net income (loss) ................................. $ 4,753 $ (293) $ 25,984 $ 7,335
============ ============ ============ ============
Net income (loss) available to holders of
common stock $ 2,934 $ (2,112) $ 20,527 $ 1,878
============ ============ ============ ============
Earnings per common share:
Basic ........................................ $ 0.05 $ (0.04) $ 0.39 $ 0.04
============ ============ ============ ============
Diluted ...................................... $ 0.05 $ (0.04) $ 0.37 $ 0.04
============ ============ ============ ============
Weighted average common shares:
Basic ........................................ 56,873,167 50,000,000 52,703,611 50,000,000
============ ============ ============ ============
Diluted ...................................... 59,501,875 50,000,000 54,964,499 50,000,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
4
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
--------------- ---------------
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Cash flows from operating activities:
Net income ....................................... $ 25,984 $ 7,335
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization ................ 26,550 26,699
Amortization of deferred stock-based
compensation .............................. 962 --
Loss on disposition of property, plant and
equipment ................................. 197 469
Gain on sale of marketable securities ........ (16,577) --
(Increase) decrease in operating assets:
Trade accounts receivable ................. (2,356) (1,602)
Inventories ............................... 2,576 8,128
Other assets .............................. (6,298) (1,699)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ..... 1,844 (425)
Other liabilities ......................... 15 (8,273)
--------- ---------
Net cash provided by operating activities.. 32,897 30,632
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ....... (16,516) (10,898)
Proceeds from the sale of marketable securities .. 17,568 --
Sale-leaseback of facility ....................... -- 4,194
Reimbursement of purchase price................... -- 1,331
Acquisition of business, net of cash acquired .... -- (3,293)
Payment to acquire equity interest in affiliate .. -- (1,500)
--------- ---------
Net cash provided by (used in) investing
activities ............................... 1,052 (10,166)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ....... 132,801 --
Net payments on revolving credit facilities ...... -- (8,000)
Net proceeds (payments) on notes payable of
Chinese affiliate ............................ 966 (1,661)
Payment of long-term debt ........................ (10,000) --
Other ............................................ (86) --
--------- ---------
Net cash provided by (used in)
financing activities ..................... 123,681 (9,661)
--------- ---------
Effect of exchange rate changes on cash ............ (3,400) (861)
--------- ---------
Net increase in cash and cash equivalents .......... 154,230 9,944
Cash and cash equivalents-- beginning of period .... 39,331 12,792
--------- ---------
Cash and cash equivalents-- end of period .......... $ 193,561 $ 22,736
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
5
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- BASIS OF PRESENTATION
The condensed consolidated unaudited financial statements for the three and
nine month periods ended September 30, 2000 and 1999 should be read in
conjunction with the Company's consolidated financial statements and related
footnotes for the year ended December 31, 1999, as included in the Company's
Registration Statement on Form S-1, as amended, dated July 27, 2000. Such
interim financial statements have been prepared in conformity with the rules and
regulations of the U.S. Securities and Exchange Commission. Certain disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations pertaining to interim financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary for fair presentation have been included. The results of operations of
any interim period are not necessarily indicative of the results of operations
for the full year.
2 -- EARNINGS PER SHARE
In 1999, the Company adopted SFAS No. 128, "Earnings per Share," which
requires the disclosure of basic and diluted earnings per share. Basic earnings
per share is computed based on the weighted average number of common shares
outstanding during the period. In arriving at income available to common
shareholders, undeclared and unpaid dividends on redeemable preferred stock of
$1,819 were deducted for each quarter presented.
Diluted earnings per share reflects the potential dilution that could occur
if dilutive securities and other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. As there were no dilutive securities
in 1999, there is no effect on the numerator or denominator between the
computations of basic and diluted earnings per common share in the 1999 periods
presented.
As a result of stock options outstanding under the Company's Stock Option
and Stock Appreciation Right Plan, there were dilutive securities for the three
and nine months ended September 30, 2000. The weighted-average impact of these
has been reflected in the calculation of diluted earnings per share for the
respective periods presented.
3 -- INVENTORIES
Inventories consist of the following:
SEPTEMBER 30 DECEMBER 31,
2000 1999
---------- ---------
Raw materials........................ $ 6,674 $ 5,730
Work-in-progress..................... 6,907 8,024
Finished goods....................... 31,315 36,962
---------- ---------
Inventories........................ $ 44,896 $ 50,716
========== =========
6
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4 -- SHAREHOLDERS' EQUITY
Accumulated other comprehensive loss consists of the following:
<TABLE>
<CAPTION>
FOREIGN MARKETABLE ACCUMULATED
CURRENCY SECURITIES OTHER
TRANSLATION VALUATION COMPREHENSIVE
ADJUSTMENT ADJUSTMENT LOSS
----------- ---------- -------------
<S> <C> <C> <C>
Balances, December 31, 1999............... $ (38,061) $ 4,471 $ (33,590)
Current period change................... (18,748) (3,803) (22,551)
---------- ---------- ----------
Balances, September 30, 2000.............. $ (56,809) $ 668 $ (56,141)
========== ========== ==========
</TABLE>
The change in the marketable securities valuation adjustment for the nine
months ended September 30, 2000 includes a $5,888 ($9,589 pre-tax) reduction of
accumulated other comprehensive loss related to realized gains from the sale of
marketable equity securities. The remaining $2,085 ($3,491 pre-tax) relates to
unrealized holding gains on the Company's available-for-sale securities.
Restated Certificate of Incorporation
On July 25, 2000, the Company increased the authorized number of shares of
common stock to 200,000,000 with a par value of $0.01 per share.
Stock Split
On July 25, 2000, the Company effected a one-for-two reverse stock split of
its common stock. All references to share and per share amounts in these
financial statements have been restated retroactively to reflect this split.
Initial Public Offering
The Company completed its initial public offering of 8,050,000 shares of
common stock at $18.00 per share, including 7,000,000 shares of common stock
issued July 28, 2000 in the initial offering and 1,050,000 shares of common
stock issued August 25, 2000 pursuant to the underwriters' exercise of the
over-allotment option. The combined net proceeds raised by the Company from the
initial offering and the over-allotment option were $132,801.
5 -- STOCK OPTION AND STOCK APPRECIATION RIGHT PLAN
Between July 1 and July 31, 2000, the Company issued an additional 333,425
stock options at a weighted average exercise price of $13.90 per share. The
Company determined that the estimated market value of its common stock exceeded
the exercise price at the time of grant. As a result, the Company recorded
deferred stock-based compensation of $1,822 in conjunction with the option
grants. Stock-compensation expense will be recognized over the vesting period of
three years beginning in July 2000.
7
<PAGE> 8
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6 -- FOREIGN CURRENCY TRANSACTION (LOSSES) / GAINS
Foreign currency transaction net gains/(losses) are included in other
operating income/expenses. Total foreign currency transaction net gains for the
three months and nine months ended September 30, 2000 were $1.1 million and $1.5
million, respectively.
7 -- INVESTMENT INCOME
During the nine months ended September 30, 2000, the Company realized a
gain on the sale of marketable securities in the amount of $16,577. This amount
is included in investment income as part of total non-operating income for the
period.
8 -- INCOME TAXES
The Company's effective income tax rate for the three months ended
September 30, 2000 of 13% reflects the year-to-date impact of the Company's most
recent assessment of its annual effective income tax rate. This assessment
included the Company's reevaluation of its ability to utilize certain deferred
tax assets which will result in the release of valuation allowances,
approximately $1.5 million of which will increase the Company's annual net
income.
The Company's effective income tax rate for the nine months ended September
30, 2000 of 30% includes the effect of $16.6 million pre-tax income resulting
from the gain on the sale of marketable equity securities in the United States
which was tax-effected at a marginal rate of 38.6%.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included in our Registration
Statement on Form S-1, dated July 27, 2000, as amended, and the unaudited
interim consolidated financial statements included elsewhere in this report.
This discussion may contain forward-looking statements that involve certain
risks and uncertainties. Our actual results could differ materially from those
anticipated by forward-looking information due to many factors, including those
identified below and in our Registration Statement on Form S-1, dated July 27,
2000, as amended.
OVERVIEW
We are engaged in the discovery, development, manufacturing and marketing
of biotechnology products for the industrial chemicals, agriculture and health
care markets. Our current revenues result primarily from the sale of novel
enzymes to the cleaning, grain processing and textile industries, with the
remainder from research funding and technology fees and royalties. We intend to
apply our proven and proprietary technologies and manufacturing capabilities to
expand sales in our existing markets and address new opportunities in the health
care, agriculture and industrial chemicals markets. We have formed, and plan to
continue to form, strategic alliances with market leaders to collaborate with us
to develop and launch products.
We manufacture our products through our eight manufacturing facilities
located in the United States, Finland, Belgium, China and Argentina. We conduct
our sales and marketing activities through our direct sales organizations in the
United States, the Netherlands, Singapore, Japan and Argentina. In 1999, we
derived approximately 60% of our revenues from our foreign operations. For the
nine months ended September 30, 2000, we have derived approximately 49% of our
revenues from our foreign operations.
SUMMARY OF RESULTS
For the three months ended September 30, 2000, net income available for
common shareholders increased to $2.9 million, or $0.05 per diluted share, from
a loss of $2.1 million, or $0.04 per diluted share for the three months ended
September 30, 1999. For the nine months ended September 30, 2000, net income
available for common shareholders increased to $20.5 million, or $0.37 per
diluted share, from $1.9 million, or $0.04 per diluted share, for the nine
months ended September 30, 1999. Net income for the nine months ended September
30, 2000 was favorably impacted by a gain from the sale of marketable equity
securities. The after-tax impact to net income for this one-time gain was $10.2
million for the nine months ended September 30, 2000. Additionally, net income
for the 1999 period was impacted by a $6.6 million restructuring charge
associated with our manufacturing facility in Belgium.
RECENT DEVELOPMENTS
During the third quarter of 2000, we completed an initial public offering
of 8,050,000 shares of common stock at $18.00 per share. This included 7,000,000
shares of common stock issued July 28, 2000 in the initial offering and
1,050,000 shares of common stock issued August 25, 2000 pursuant to the
underwriters' exercise of the over-allotment option. The combined net proceeds
from the initial offering and the over-allotment option exercise were
approximately $132.8 million. We anticipate using the net proceeds from the
offering for research and development activities, capital expenditures,
financing possible acquisitions, working capital and other general corporate
purposes.
In August 2000, we expanded licenses from Medarex, Inc. and licensed a key
patent family from Pharming Group NV. Both developments are important for
advancing our transgenic mouse program. The licenses from Medarex include rights
to develop, generate and use mice with transplanted human cells for research,
development and commercialization of non-antibody therapeutic products. The
licensed Pharming patents cover the insertion of greater than 50 kb DNA into a
mammalian cell or animal. We believe that our i-mune (TM) transgenic mouse model
will provide an important tool for the modeling of human infectious diseases and
autoimmune disorders, as well as other diseases affecting the immune system, and
facilitate the development of new products for the consumer and health care
markets.
In September 2000, we expanded our research collaboration with Xgene
Corporation, with whom we began working in May 1999, to develop human skin
models and in-vitro based assays useful for pharmaceutical and personal care
applications. We have agreed to collaborate for an additional two years to
develop tools to test compounds for activity against the human papilloma virus
(HPV) and test the efficacy of compounds for the treatment of human skin
inflammation. We believe that combining Xgene's
9
<PAGE> 10
expertise in the development of artificial skin and assays with our ability to
develop products for the treatment of HPV and other human skin disorders will
help to efficiently deliver these novel products to the health care and personal
care markets.
Also during the quarter, we successfully commercialized our first
high-performance protease offering skin care benefits to consumers. The enzyme,
developed exclusively for The Procter & Gamble Company and used in premium
liquid dish detergent, delivers novel skin softening benefits to consumers.
Procter & Gamble's product, Dawn Special Care(TM), was rolled out to a national
consumer market in the United States during the summer of 2000.
During the third quarter of 2000, we continued to strengthen our
intellectual portfolio, with the issuance of eight new U.S. patents and 19 new
patent applications filed.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2000 and 1999
Revenues. Total revenues for the three months ended September 30, 2000
increased $2.0 million, or 3%, to $80.7 million from the three months ended
September 30, 1999, primarily due to an increase in product revenues.
Product Revenues. Product revenues for the three months ended September 30,
2000 increased $3.2 million, or 4%, to $77.4 million from the three months ended
September 30, 1999. In the three months ended September 30, 2000, volume/mix
grew 12%, partially offset by a decrease in average prices of approximately 2%
and the continued negative impact of foreign currency, primarily the strength of
the U.S. dollar against the Euro. Volume increased primarily due to increased
protease enzyme sales to our largest customer, sales of a new enzyme based
automatic dishwasher cleaning product, and continued business expansion with our
grain processing and textiles customers.
For the three months ended September 30, 2000, product revenues in North
America showed a $5.2 million, or 16%, increase to $37.0 million over the three
months ended September 30, 1999 due primarily to increased protease sales to our
largest customer. In total, product revenues in Asia decreased $0.5 million, or
6%, to $8.5 million in the three months ended September 30, 2000. Europe showed
a decrease in product revenues of $3.0 million, or 10%, to $26.4 million for the
three months ended September 30, 2000 primarily driven by the impact of the
stronger U.S. dollar against the Euro and decreased volume with cleaning
customers. Latin American product revenues increased by $1.4 million, or 34%, to
$5.5 million due to improving economic conditions impacting our customers in
Brazil.
Approximately 30% of our product revenues are denominated in Euros, and the
fluctuations in the currency exchange rate against the U.S. dollar can have a
significant impact on our reported product revenues. In the three months ended
September 30, 2000, the strengthening of the U.S. dollar caused a reduction in
our product revenues of $4.1 million, or 6% from the three months ended
September 30, 1999. However, because we incur most of the costs associated with
our Euro revenues in Euros, the impact on net income is minimized.
Fees and Royalty Revenues. Our fees and royalty revenues consist primarily
of funded research. Revenues generated from research funding result from
collaborative agreements with various parties, including the U.S. Government,
under which we perform research activities and receive fee based revenues that
partially reimburse us for expenses incurred. Under such agreements we retain a
proprietary interest in the products and technology developed. Overall, funded
research revenues for the three months ended September 30, 2000 decreased $1.2
million, or 27%, to $3.3 million from the three months ended September 30, 1999
due mainly to a $2.0 million milestone payment received in 1999 under our
collaborative research and development agreement with E.I. du Pont de Nemours
and Company to develop and commercialize a biologically derived intermediate for
the production of a new type of polyester. Partially offsetting this overall
decrease, our funded research revenue as it relates to U.S. Government
collaborations increased $1.7 million, or 283%, to $2.3 million from the three
months ended September 30, 1999 primarily due to a new collaboration with the
National Renewable Energy Laboratory for the development of improved enzymatic
processes to convert biomass to bioethanol.
Operating Expenses
Cost of Product Sold. Cost of product sold increased $0.3 million, or 1%,
to $44.5 million in the three months ended September 30, 2000 from the three
months ended September 30, 1999.
10
<PAGE> 11
Gross Profit and Margins from Product Sold. Gross profit from product sold
for the three months ended September 30, 2000 increased $2.9 million, or 10%, to
$32.9 million from the three months ended September 30, 1999. This increase was
caused by the significant product revenue related factors of a 12% increase due
to volume/mix and a 2% decrease in average prices, while cost of product sold
remained relatively constant from quarter to quarter. The increase in gross
profit for the three months ended September 30, 2000 was partially offset by a
$1.7 million reduction in gross profit due to the impact of the stronger U.S.
dollar against foreign currencies, primarily the Euro. As a result of these
factors, gross margin on product revenue increased to 42% in the three months
ended September 30, 2000 from 40% in the three months ended September 30, 1999.
Research and Development. Research and development expenses primarily
consist of the personnel related, consulting, and facilities costs incurred in
connection with our research activities conducted in Palo Alto, California, and
Leiden, the Netherlands. These expenses increased $2.7 million, or 24%, to $13.8
million in the three months ended September 30, 2000 from the three months ended
September 30, 1999 primarily due to increases of $0.6 million in salaries and
benefits and of $1.4 million in third-party services and supplies as we hired
additional internal staff and established additional outside collaborations to
support our health care and other initiatives. This increase was partially
offset by a $0.5 million reduction in short-term incentive compensation in the
three months ended September 30, 2000 from the three months ended September 30,
1999. As a part of total research and development expenses, estimated expenses
related to research collaborations partially funded by customers decreased
approximately $2.4 million, or 57% to $1.8 million in the three months ended
September 30, 2000 from the three months ended September 30, 1999. We currently
anticipate that our research and development expenditures as a percentage of
revenues will grow in the near future, as well as other business expenses
related to research and development activities in conjunction with our growth.
Sales, Marketing and Business Development. Sales, marketing and business
development expenses primarily consist of the personnel related and marketing
costs incurred by our global sales force. Total expenses increased $2.2 million,
or 35%, to $8.5 million in the three months ended September 30, 2000 from the
three months ended September 30, 1999 due mainly to increases in third party
services of approximately $1.1 million, in long-term incentive compensation of
approximately $0.8 million, in salaries and benefits of $0.2 million, and an
increase in the allowance for doubtful accounts at our Chinese affiliate of
approximately $0.3 million. These increases were partially offset by a $0.3
million reduction in short-term incentive compensation. The overall increase for
the three months ended September 30, 2000 was primarily a result of our efforts
to prioritize our health care initiatives and the addition of personnel in our
health care business.
General and Administrative. General and administrative expenses include the
costs of our corporate executive, finance, information technology, legal, human
resources, and communications functions. In total, these expenses increased $1.4
million, or 25%, to $7.0 million in the three months ended September 30, 2000
from the three months ended September 30, 1999 due primarily to increases in
third party services of approximately $0.6 million, in salaries and benefits of
$0.3 million, in long-term incentive compensation of $0.2 million, and an
increase of approximately $0.2 million related to new office space in Rochester,
New York.
Amortization of Intangible Assets. We amortize our intangible assets,
consisting of patents, licenses, technology and goodwill, on a straight-line
basis over their estimated useful lives, with a weighted average life of 14
years.
Restructuring and related charges. Operating expenses in the third quarter
of 1999 were impacted by a $6.6 million charge associated with the restructuring
of our manufacturing facility in Belgium. We implemented the plan in July of
1999 due primarily to a production overcapacity in the enzyme market and
operating costs at our Belgian plant that were considerably higher than in any
of our other plants.
Other Expense and Income. Other expense and income relates primarily to
foreign currency exchange gains and losses on transactions denominated in other
than our functional currency. Other income increased $0.8 million, to $1.0
million, in the three months ended September 30, 2000 from the three months
ended September 30, 1999 due mainly to an increase in foreign currency exchange
gains.
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Deferred Compensation. We determine deferred compensation for options
granted to employees as the difference between the grant price and the fair
value of our common stock, as estimated for financial reporting purposes, on the
date we granted the options. In connection with the grant of stock options
during the three months ended September 30, 2000, we recorded deferred
compensation expense of approximately $1.8 million. We recorded this amount as a
component of shareholders' equity and will amortize it as a charge to operations
over the vesting period of the options. In total, amortization of deferred
compensation expense for the three months ended September 30, 2000 was $0.6
million. We included this amount in cost of product sold, research and
development, sales, marketing and business development, and general and
administrative expenses for the periods presented as follows:
Cost of product sold................................... $ 0.0
Research and development............................... 0.2
Sales, marketing and business development.............. 0.2
General and administrative............................. 0.2
----------
Total amortization of deferred compensation expense $ 0.6
==========
Non Operating Expenses and Income
Interest Income. Interest income increased $2.5 million, to $2.7 million,
for the three months ended September 30, 2000 from the three months ended
September 30, 1999 due mainly to earnings on proceeds from our initial public
offering discussed in the Recent Developments section above, as well as earnings
from increased cash investments resulting from the sale of marketable equity
securities.
Income Taxes. Our effective income tax rate of 13% for the three months
ended September 30, 2000 includes the year-to-date impact of our most recent
assessment of our annual effective income tax rate. This assessment included our
reevaluation of our ability to utilize certain deferred tax assets, which will
result in the release of valuation allowances, approximately $1.5 million of
which will increase our annual net income.
Comparison of the Nine Months Ended September 30, 2000 and 1999
Revenues. Total revenues for the nine months ended September 30, 2000
increased $9.0 million, or 4%, to $240.1 million from 1999, due to increases in
both product revenue and fees and royalty revenues.
Product Revenues. Product revenues in the nine months ended September 30,
2000 increased $5.3 million, or 2%, to $227.6 million from 1999. Without the
impact of the stronger U.S. dollar against the Euro in 2000 versus 1999, product
revenues in the nine months ended September 30, 2000 would have increased by 7%.
In the nine months ended September 30, 2000, unit volume/mix grew 9%, while
average prices fell 2%. Volume increased primarily due to increased protease
enzyme sales to our largest customer and increased sales volume with our grain
processing customers.
Regionally, North American product revenues increased $12.1 million, or
12%, to $109.2 million driven primarily by sales to our cleaning customers, but
European product revenues declined $13.3 million, or 15%, to $77.5 million due
primarily to lower cleaning sales and the impact of currency exchange rates. In
the nine months ended September 30, 2000 our product revenues in Latin America
increased $3.0 million, or 24%, to $15.4 million from 1999 due primarily to the
increased sales to our largest Latin American customer. Product revenues in Asia
for the same period increased $3.6 million, or 16%, to $25.6 million from 1999
to 2000 due mainly to the acquisition of an 80% ownership interest in Genencor
(Wuxi) Bio-Products.
Fees and Royalty Revenues. Overall, funded research revenues in the nine
months ended September 30, 2000 of $8.6 million were consistent with the same
period in 1999. For this period, our funded research revenue as it relates to
U.S. Government collaborations increased $2.5 million, or 156%, to $4.1 million
from 1999 to 2000 primarily due to funding provided by the National Renewable
Energy Laboratory to develop an enzymatic process to convert biomass into
bioethanol. For the same period, funded research revenues provided by customers
decreased $2.5 million, or 35%, to $4.6 million from 1999 to 2000 primarily due
to a $2.0 million milestone payment received in 1999 under our collaborative
research and development agreement with E.I. du Pont de Nemours and Company to
develop and commercialize a biologically derived intermediate for the production
of a new type of polyester.
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Royalties increased $3.7 million, or 97%, in the nine months ended
September 30, 2000 from the same period in 1999 due primarily to the successful
resolution of a patent infringement issue with a customer, for which one-time
royalties of $3.5 million were received during the first quarter of 2000. These
one-time royalties pertain to previous sales, using patented technology, made by
the customer to third parties. The related intellectual property agreement
provides for future royalties.
Operating Expenses
Cost of Product Sold. Cost of product sold decreased $2.1 million, or 2%,
to $129.8 million in the nine months ended September 30, 2000 from 1999 even
though our expanded sales volume/mix increased costs $4.9 million. This was
driven primarily by reductions due to the impact of the stronger U.S. dollar
against foreign currencies of $6.6 million, of approximately $3.3 million due
mainly to the sale of lower cost inventories, and a decrease in long-term
incentive compensation expense of $1.1 million. These reductions were partially
offset by increases in our distribution costs of $2.6 million and in other costs
of approximately $1.3 million.
Gross Profit and Margins from Product Sold. Gross profit from product sold
in the nine months ended September 30, 2000 increased $7.5 million, or 8%, to
$97.8 million from 1999. This increase was caused by significant product revenue
related factors including a 9% increase in volume/mix and an average price
decline of 2%. These product revenue related factors were combined with a
decrease of 2% in cost of product sold due to the favorable impacts of the
stronger U.S. dollar against foreign currencies, primarily the Euro, and other
reductions in our manufacturing costs offset by increases in our distribution
costs. This net increase in gross profit was partially offset by a $3.9 million
decrease due to the impact of the stronger U.S. dollar against foreign
currencies, primarily the Euro. As a result of these factors, gross margin on
product revenue increased to 43% in the nine months ended September 30, 2000
from 41% in 1999.
Research and Development. These expenses increased $5.4 million, or 16%, to
$38.3 million in the nine months ended September 30, 2000 from 1999 as we
increased our investment in technology platforms and enzyme discovery for new
markets, hired additional internal staff, and established additional outside
collaborations to support our health care and other initiatives. The increase
from 1999 was partially offset by a decrease in long-term incentive compensation
expense of $0.6 million. As a part of total research and development expenses,
estimated expenses related to research collaborations partially funded by
customers decreased approximately $2.6 million, or 22%, to $9.2 million in the
nine months ended September 30, 2000 from 1999.
Sales, Marketing and Business Development. Total expenses increased $3.2
million, or 18%, to $21.4 million in the nine months ended September 30, 2000
from 1999, primarily due to increases in outside consulting services of $1.2
million, in salaries and benefits of $0.6 million, in long-term incentive
compensation of $0.4 million, and an increase in the allowance for doubtful
accounts at our Chinese affiliate of $0.5 million.
General and Administrative. These expenses increased $2.3 million, or 14%,
to $19.3 million in the nine months ended September 30, 2000 from 1999 due
primarily to increased salaries and benefits of $0.7 million, increased
third party services of $1.0 million, and increased costs related to new office
space in Rochester, New York of approximately $0.5 million. These increases were
partially offset by decreased long and short-term incentive compensation expense
of approximately $0.6 million.
Amortization of Intangible Assets. Amortization expense increased $0.4
million, or 5%, to $7.9 million in the nine months ended September 30, 2000 from
1999 due primarily to amortization of goodwill resulting from the acquisition of
an 80% interest in Genencor (Wuxi) Bio-Products Company, Ltd.
Other Expense and Income. Other expense and income relates primarily to
foreign currency exchange gains and losses on transactions denominated in other
than our functional currency. Other income increased by $0.8 million to $0.9
million in the nine months ended September 30, 2000 from the nine months ended
September 30, 1999 due mainly to an increase in foreign currency exchange gains.
Deferred Compensation. We determine deferred compensation for options
granted to employees as the difference between the grant price and the fair
value of our common stock, as estimated for financial reporting purposes, on the
date we granted the options. In connection with the grant of stock options to
employees during the nine months ended September 30, 2000, we recorded deferred
compensation expense of approximately $7.1 million. We recorded this amount as a
component of shareholders' equity and will amortize it as a charge to operations
over the vesting period of the options. In total, amortization of deferred
compensation expense for the nine months ended September 30, 2000 was $1.0
million. We included these amounts in cost of product sold and research and
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development, sales, marketing and business development, and general and
administrative expenses for the periods presented as follows:
Cost of product sold................................... $ 0.1
Research and development............................... 0.2
Sales, marketing and business development.............. 0.3
General and administrative............................. 0.4
-------
Total amortization of deferred compensation expense $ 1.0
=======
Non Operating Expense and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities for the nine months ended September 30, 2000.
Investment income increased $16.6 million, or 100%, from the same period in 1999
due to the sale of marketable equity securities.
Interest Income. Interest income increased $3.6 million to $4.1 million in
the nine months ended September 30, 2000 from the nine months ended September
30, 1999 due mainly to earnings on proceeds from our initial public offering
discussed in the Recent Developments section above, as well as earnings from
increased cash investments resulting from the sale of marketable equity
securities.
Income Taxes. Several factors affect our effective income tax rate in 2000,
including the statutory income tax rate in foreign jurisdictions, amortization
of intangible assets and other items which are not deductible for tax purposes,
and research and experimentation tax credits. For the nine months ended
September 30, the effective income tax rate for 2000 was 30% compared with 25%
in 1999. The effective rate for the nine month period ended September 30, 2000
includes the effect of the $16.6 million pre-tax income resulting from the sale
of marketable equity securities in the United States, which was tax effected at
a marginal rate of 38.6%. The effective rate for the nine months ended September
30, 2000 also includes the year-to-date impact of our most recent assessment of
our annual effective income tax rate. This assessment included our reevaluation
of our ability to utilize certain deferred tax assets, which will result in the
anticipated release of valuation allowances, approximately $1.5 million of which
will increase our annual net income.
LIQUIDITY AND CAPITAL RESOURCES
Our funding needs consist primarily of capital expenditures, research and
development activities, sales and marketing expenses, and general corporate
purposes. We have financed our operations primarily through cash from the sale
of products, research and development funding from partners, government grants,
and short-term and long-term borrowings.
We believe that our current cash balances plus funds to be provided from
our current year operating activities will satisfy our funding needs over the
next twelve months. We believe that the proceeds from our initial public
offering in July 2000, including those received from the underwriters' exercise
of their over-allotment option in August 2000, plus funds to be provided from
our operating activities will adequately fund our anticipated long-term needs
thereafter. Factors that could negatively impact our cash position include, but
are not limited to, future levels of product, fees and royalty revenues, expense
levels, capital expenditures, acquisitions, and foreign currency exchange rate
fluctuations.
As of September 30, 2000, cash and cash equivalents totaled $193.6 million,
which we invested in short-term instruments including commercial paper,
institutional money market funds and bank deposits. The net proceeds from our
initial public offering of $132.8 million, including $17.6 million from the
exercise of the underwriters' over-allotment option in August 2000, are also
invested in short-term instruments.
Cash provided by operations was $32.9 million and $30.6 million for the
first nine months of 2000 and 1999, respectively. The increase of $2.3 million
in the first nine months of 2000 from the first nine months of 1999 was
generated principally by operating earnings, net of non-cash items such as
depreciation and amortization, and changes in operating assets and liabilities.
Cash provided by investing activities was $1.1 million in the first nine
months of 2000 compared to a use of $10.2 million in cash during the first nine
months of 1999. This difference of $11.3 million was driven by proceeds from the
sale of marketable
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<PAGE> 15
securities in 2000, offset by one-time events that occurred during 1999, such as
completion of a sale/leaseback transaction, the acquisition of Genencor (Wuxi)
Bio-Products, and an equity investment of $1.5 million in Prodigene, Inc.
Capital expenditures totaled $16.5 million in 2000 compared with $10.9 million
in 1999. A significant portion of this spending included process improvement
projects at our manufacturing and research and development facilities and
information technology enhancements.
Cash provided by financing activities of $123.7 million during the first
nine months of 2000 resulted primarily from the initial public offering of our
common stock, partially offset by the payment of a long-term note to
Gist-Brocades (G-b) related to the 1995 acquisition of the G-b industrial enzyme
business. Cash used by financing activities was $9.7 million in 1999, driven
primarily by payments against our outstanding borrowings on our revolving credit
facilities. There were no dividends paid to common shareholders for the first
nine months of 2000 and 1999. We currently intend to retain future earnings to
finance the expansion of our business. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, results of operations, capital requirements,
general business conditions and other factors that the board of directors may
deem relevant, including covenants in our debt instruments that may limit our
ability to declare and pay cash dividends on our capital stock. Covenants in our
senior note agreement restrict the payment of dividends or other distributions
in cash or other property to the extent the payment puts us in default of these
covenants. Such covenants include, but are not limited to, maintaining a debt to
total capitalization of at least 55% and a maximum ratio of debt to EBITDA of
3.5:1.
We currently have a $30.0 million line of credit with a commercial bank,
which is available for general corporate purposes. At September 30, 2000 there
were no borrowings under the agreement. The line of credit matures on the
earlier of December 15, 2000, or when we execute a new revolving credit
agreement. Before the existing line of credit matures, we intend to execute a
new agreement. Our long-term debt consists primarily of $140.0 million in senior
notes issued in 1996 to certain institutional investors. These notes bear
interest at 6.82% and are payable in annual installments of $28.0 million
commencing in March 2002. We are currently in compliance with all of the
financial covenants included in the senior note agreement.
MARKET RISK
Foreign currency risk and interest rate risk are the primary sources of our
market risk. Foreign operations, mainly denominated in Euros, account for
approximately 49% of our 2000 revenues. We believe that we mitigate our risk due
to foreign currency exchange rate fluctuation by our strategy of locating our
manufacturing facilities so that the costs are denominated in the same currency
as our product revenues. We manage the foreign currency exposures that remain
through the use of foreign currency forward contracts and currency options. We
do not use these instruments for speculative purposes.
As of September 30, 2000, cash and short-term investments totaled $193.6
million. Of this amount, $22.9 million was denominated in Euros. Our short-term
debt outstanding was not significant as of September 30, 2000. To the extent
U.S. dollar and Euro interest rates decline, the return on the cash investments
would also decline. To the extent such deposits remain outstanding, we will be
subject to risks associated with future foreign exchange fluctuations. If we
were to borrow from our line of credit, our cost of short-term debt would be
sensitive to changes in the general level of interest rates in the United
States.
Our subsidiary based in the Netherlands, which adopted the Euro as its
functional currency, has average annual U.S. Dollar and Japanese Yen denominated
revenues of approximately $40.0 million and $4.0 million, respectively. We use
forward currency contracts to hedge these anticipated revenues. At September 30,
2000, we had total Japanese Yen denominated forward contracts of approximately
$0.7 million. We had U.S. dollar denominated option contracts with a principal
value of approximately $35.2 million. All of these contracts mature between
October 15 and December 15, 2000.
Interest Rates
Our interest income is sensitive to changes in the general level of
interest rates primarily in the United States and Europe. In this regard,
changes in the U.S. dollar and Euro currency rates affect the interest earned on
our cash equivalents, short-term investments, and long-term investments.
Foreign Currency Exposure
We conduct business throughout the world. To date, we have derived
approximately 50% of our 2000 revenues and approximately 60% of our 2000
operating income from foreign operations. Economic conditions in countries where
we conduct
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business and changing foreign currency exchange rates affect our financial
position and results of operations. We are exposed to changes in exchange rates
in Europe, Latin America and Asia. The Euro presents our most significant
foreign currency exchange risk. Changes in foreign currency exchange rates,
especially the strengthening of the U.S. dollar, may have an adverse effect on
our financial position and results of operations as they are expressed in U.S.
dollars.
Management monitors foreign currency exposures and may in the ordinary
course of business enter into foreign currency forward contracts or options
contracts related to specific foreign currency transactions or anticipated cash
flows. These contracts are generally for periods of less than nine months and
are not material. We do not hedge the translation of financial statements of
consolidated subsidiaries that maintain their local books and records in foreign
currencies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in Item 2 of Part I of this Report on Form 10-Q
under the heading "Market Risk" is hereby incorporated by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The information presented in Item 2 of Part I of this Report on Form 10-Q
under the heading "Liquidity and Capital Resources" is hereby incorporated by
reference. The Company's Registration Statement on Form S-1 (Registration No.
333-36452) was effective as of July 27, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
SEE INDEX TO EXHIBITS
B. REPORTS ON FORM 8-K
NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENENCOR INTERNATIONAL, INC.
November 14, 2000 By: /s/ Raymond J. Land
------------------------- -------------------------------------
Date
Raymond J. Land
Senior Vice President and
Chief Financial Officer
November 14, 2000 By: /s/ Darryl L. Canfield
------------------------- -------------------------------------
Date
Darryl L. Canfield
Vice President and Corporate Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (i) Form of Restated Certificate of Incorporation is incorporated herein
by reference to Exhibit 3.3 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452)
filed on July 24, 2000.
(ii) Form of Amended and Restated Bylaws is incorporated herein by
reference to Exhibit 3.4 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452)
filed on July 24, 2000.
(4) Instruments defining the rights of securities holders, including
indentures
(a) The documents listed under (3) are incorporated herein by reference.
(b) Form of Specimen Common Stock Certificate is incorporated herein by
reference to Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452) filed
on July 24, 2000.
(c) Note Agreement for the $140,000,000 6.82% Senior Notes due 2006
between the Company and the purchasers identified therein, dated March
28, 1996 is incorporated herein by reference to Exhibit 4.2 to
Amendment No. 1 to the Company's Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26, 2000.
(d) Line of Credit Offering Letter for a $30,000,000 Line of Credit
between the Company and The Chase Manhattan Bank, dated May 4, 2000 is
incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to
the Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000.
(e) $10 million Promissory Note by the Company in favor of Gist-Brocades
International B.V., dated June 2, 1995 is incorporated herein by
reference to Exhibit 4.4 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452) filed
on June 26, 2000.
(10) Material Contracts
Not applicable.
(11) Statement re computation of per share earnings
Unaudited Statement Regarding Computation of Per Share Earnings is
included herein as Exhibit 11.
(15) Letter re unaudited interim financial information
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(19) Report furnished to security holders
Not applicable.
(22) Published report regarding matters submitted to a vote of security holders
Not applicable.
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(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(27) Financial Data Schedule
The Financial Data Schedule is included herein as Exhibit 27.
(99) Additional Exhibits
Not applicable.
20
