<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8731 16-1362385
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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)
------------------------
STUART L. MELTON
SENIOR VICE PRESIDENT,
COMMERCIAL AND LEGAL AFFAIRS
GENENCOR INTERNATIONAL, INC.
925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 846-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
CHRISTOPHER KAUFMAN, ESQ. MICHAEL R. MCEVOY, ESQ. PETER J. LOUGHRAN, ESQ.
CYNTHIA ROTELL, ESQ. SUSAN M. BRANDT, ESQ. DEBEVOISE & PLIMPTON
LATHAM & WATKINS HARTER, SECREST & EMERY LLP 875 THIRD AVENUE
633 W. FIFTH STREET, SUITE 4000 700 MIDTOWN TOWER NEW YORK, NY 10022
LOS ANGELES, CA 90071 ROCHESTER, NY 14604 (212) 909-6000
(213) 485-1234 (716) 232-6500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value............................ $150,000,000 $39,600
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase solely to
cover over-allotments, if any. Estimated solely for the purpose of computing
the amount of the registration fee in accordance with Rule 457(o)
promulgated under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's common
stock and one to be used in a concurrent international offering of the common
stock. The international prospectus will be identical to the U.S. prospectus
except that it will have a different front cover page, underwriting section and
back cover page. The U.S. prospectus is included herein and is followed by the
alternate front cover page, underwriting section and back cover page to be used
in the international prospectus, which each have been labeled "Alternative Page
for International Prospectus."
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT
SOLICITING OFFERS TO BUY SECURITIES, IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 8, 2000
PROSPECTUS
SHARES
[LOGO]
GENENCOR INTERNATIONAL, INC.
COMMON STOCK
----------------------
This is Genencor International, Inc.'s initial public offering of common
stock. Genencor is selling all of the shares. The U.S. underwriters are offering
shares in the U.S. and Canada and the international managers are
offering shares outside the U.S. and Canada.
We estimate the public offering price to be between $ and
$ per share. Currently, no public market exists for the shares. After
pricing of the offering, we expect that the shares will be quoted on the Nasdaq
National Market under the symbol "GCOR."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Genencor...................... $ $
</TABLE>
The underwriters may also purchase up to an additional shares
from Genencor at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. The
international managers may similarly purchase up to an additional
shares from Genencor.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
----------------------
The date of this prospectus is , 2000.
<PAGE> 4
[INSIDE FRONT COVER/INSIDE BACK COVER -- ARTWORK DESCRIPTION].
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Note Regarding Forward-Looking Statements................... 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 29
Management.................................................. 45
Principal Stockholders...................................... 55
Certain Transactions........................................ 56
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 62
United States Federal Tax Considerations For Non-United
States Holders............................................ 63
Underwriting................................................ 66
Legal Matters............................................... 69
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
DesignPath, Enzoguard, Fermenzyme, Genencor, i-biotech, i-mune, Indiage,
Multifect, MutatorTechnology, Optidex, Optimax, Properase, Puradax, Purafect,
Purastar, Spezyme and our logo are pending or registered trademarks of Genencor.
All other trademarks or trade names referred to in this prospectus are the
property of their respective owners.
CONVENTIONS WHICH APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus reflects
the following:
- the filing of a restated certificate of incorporation with the
Secretary of State of the State of Delaware prior to the closing of
this offering; and
- no exercise by the underwriters of their over-allotment options to
purchase up to additional shares of common stock.
Unless the context otherwise requires, all references to "Genencor,"
"we," "us" and "our" refer to Genencor International, Inc. and its subsidiaries.
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. To understand this offering fully, you should read the entire
prospectus carefully, including the risk factors and the financial statements
and related notes, before you decide whether to invest in our common stock.
GENENCOR
OVERVIEW
We are a global leader in the development of genetically based
biotechnology products using our integrated suite of technology platforms,
including gene discovery and functional genomics, molecular evolution and
design, and human immunology. Over our 18-year operating history, we have built
an intellectual property portfolio of approximately 3,000 owned and licensed
patents and patent applications. We deliver over 250 products to customers in
over 80 countries and generated over $300 million in 1999 revenues. We currently
market high performance, genetically optimized enzymes for the industrial
chemicals and agriculture markets. We intend to capitalize on our proven and
proprietary technology platforms to take advantage of large opportunities in the
health care and agriculture markets. As an example, we believe that our
technologies may be utilized to design and develop vaccines, protein-based
pharmaceuticals and foods with enhanced nutritional value.
A key part of our strategy has been and will continue to be forming
strategic alliances with industry leaders in our target markets. We have
long-standing relationships with strategic partners such as The Procter & Gamble
Company, E.I. du Pont de Nemours and Company and Eastman Chemical Company. We
are currently working on programs with these partners for the creation of novel
bio-engineered products with broad market potential.
OUR i-BIOTECH APPROACH
The discovery and commercialization of novel biologically derived
materials, or biomaterials, is a complex and lengthy process. We have developed
a unique integrated gene-based approach which we are using to address this
complexity and to exploit new opportunities in the health care, agriculture and
industrial chemicals markets. We refer to this approach as our i-biotech
approach. i-biotech integrates several related technology platforms that we
apply to the discovery, optimization, production and delivery of biomaterials.
We believe that our integrated approach results in faster, more efficient
and more successful discovery and production of biomaterials. Using our
i-biotech approach, we have taken an enzyme derived from an organism living in
an extreme alkaline, high temperature environment from gene discovery to
commercial production in less than 12 months. We are also using our i-biotech
approach to develop a proprietary agent for the treatment of human papilloma
virus and a novel process for the conversion of biomass to ethanol.
OUR STRATEGY
Our strategy is to strengthen our position in the markets we currently
serve and employ our i-biotech approach to address new opportunities in health
care, agriculture and industrial chemicals. We plan to capitalize on our proven
track record for innovating, developing and delivering products to market
through our global manufacturing, sales and distribution infrastructure to
capture new opportunities in our target markets. We intend to increase our
investment in research and development to enhance our existing technology
platforms and build new competencies. We expect to structure strategic alliances
with industry leaders in our target markets with a combination of up-front
payments, research and development funding, milestone payments and royalties. In
these alliances, we intend to continue to retain a proprietary interest in the
products and technology that we develop with our partners, as well as the
related manufacturing rights. Additionally, we will explore acquisitions of
strategic businesses and technologies.
1
<PAGE> 7
OUR TECHNOLOGY PLATFORMS
Using our i-biotech approach, we discover genes whose encoded proteins
can be produced in our host production organisms, modify the genes to produce an
optimized protein and reduce the protein's potential to cause a human allergic
response. Our i-biotech approach includes the following technology platforms:
- Gene Discovery and Functional Genomics. We use a network of
internationally respected scientists to gather and preserve materials
from ecosystems as extreme and diverse as Antarctica and the high
mountain, soda lakes of Kenya. We use state-of-the-art screening
techniques to identify genes from organisms living in these diverse
environments whose genes are compatible with our proven host production
organisms. Through our process we eliminate leads that cannot be
produced. Our gene discovery and functional genomics platform has
yielded sizeable libraries of diverse genes from which we can develop
product leads.
- Biomaterial Production Systems. We use patented fungal or bacterial
host organisms that have been adapted to accept genes from other
organisms to produce the proteins encoded by the genes we have
discovered. We grow, or ferment, our host organisms under controlled
conditions using proprietary fermentation processes, allowing them to
grow, divide and efficiently produce these proteins.
- Molecular Evolution and Design. When the desired biomaterial is a
protein, we use molecular evolution techniques to accelerate the
natural evolutionary process in order to engineer, or optimize, gene
products for an identified customer need. When the desired biomaterial
is a small molecule or chemical, we use our MutatorTechnology to
simultaneously modify hundreds of genes in a host production organism.
- Human Immunology. We use a high throughput assay that is predictive of
human immune response to identify and modify proteins that may cause an
immune response. We are also developing a transgenic mouse model of the
human immune system to test products for their allergenic potential.
This platform, a direct outgrowth of our development of protease
enzymes for cleaning applications in the industrial chemicals markets,
has enabled us to begin developing reduced allergenicity proteases for
consumer health care products.
- Metabolic Pathway Engineering. We modify our host production organisms
by changing or creating biological pathways to more efficiently produce
small molecules and chemicals such as amino acids and vitamins.
- Formulation Delivery Systems. We formulate our biomaterials in a manner
customized for the intended use. These formulations can protect
biomaterials against harsh chemical and environmental conditions.
OUR PRODUCTS
We currently sell products in a broad range of markets. Some examples of
our products include:
- Puradax, Purafect and Purastar for the removal of stains from laundry
and dishware;
- Optimax and Spezyme for the production of sweeteners; and
- Multifect and Optidex for the baking and brewing processes.
CORPORATE INFORMATION
Our principal offices are located at 925 Page Mill Road, Palo Alto,
California 94304. Our telephone number is (650) 846-7500. Our web site address
is www.genencor.com. The information contained in our web site is not part of
this prospectus.
2
<PAGE> 8
THE OFFERING
Common stock offered:
U.S. offering...................... shares
International offering............. shares
Total......................... shares
Shares outstanding after the offering... shares
Use of proceeds......................... We estimate that our net proceeds
from this offering without exercise
of the underwriters' over-allotment
options will be approximately
$ million. We intend to use the
net proceeds of this offering for
research and development
activities, for capital
expenditures, to finance possible
acquisitions and for working
capital and other general corporate
purposes.
Risk factors............................ See "Risk Factors" and other
information included in this
prospectus for a discussion of
factors you should carefully
consider before deciding to invest
in shares of our common stock.
Proposed Nasdaq National Market
symbol.................................. GCOR
The number of shares of common stock that will be outstanding after the
offering is based on the number of shares of common stock outstanding as of
, 2000, and excludes shares of common stock issuable upon exercise of
outstanding employee stock options and shares reserved for issuance under our
stock option plan.
3
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following table presents our summary consolidated financial data. You
should read this information together with our consolidated financial statements
and the notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1999 MARCH 31,
------------------------------------------------------------------------ ---------------------------
1995 1996 1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues......... $ 215,113 $ 259,992 $ 310,342 $ 289,111 $ 316,602 $ 74,866 $ 79,699
Gross profit........... 64,846 70,601 114,531 111,888 128,881 29,102 31,642
Operating income....... 17,306 14,077 41,826 26,038 32,938 9,354 12,618
Net income............. 3,797 133 24,433 15,021 17,907 5,396 16,864
Net income available to
holders of common
stock................ (3,478) (7,142) 17,158 7,746 10,632 3,577 15,045
Earnings per common
share:
Basic................ $ (0.03) $ (0.07) $ 0.17 $ 0.08 $ 0.11 $ 0.04 $ 0.15
Diluted.............. $ (0.03) $ (0.07) $ 0.17 $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============ ============ ============ ============
Weighted average shares
outstanding:
Basic................ 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000
============ ============ ============ ============ ============ ============ ============
Diluted.............. 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 102,695,294
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------
AS ADJUSTED
ACTUAL FOR OFFERING
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 53,863
Working capital............................................. 98,959
Total assets................................................ 509,422
Total long-term debt and capital leases..................... 147,060
Total liabilities........................................... 236,297
Redeemable preferred stock.................................. 149,744
Total shareholders' equity.................................. 123,381
</TABLE>
4
<PAGE> 10
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below and all of the
other information contained in this prospectus before deciding whether to invest
in shares of our common stock. If any of the following risks actually occurs,
our business, financial condition, and/or results of operations could be harmed.
In such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
WE MAY FAIL TO IMPLEMENT OUR BUSINESS STRATEGY OF LEVERAGING OUR TECHNOLOGY TO
DEVELOP PRODUCTS FOR THE HEALTH CARE AND AGRICULTURE MARKETS.
A key element of our business strategy is to utilize our technologies for
the development and delivery of products to the health care market and segments
of the agriculture market in which we do not compete. We intend to devote
significant resources to the development of products for these markets. We have
not produced any products for these markets. We cannot assure you that we will
ever realize product revenues in these markets. Our failure to utilize our
technology for the commercialization of products in these markets would
adversely impact our growth strategy.
WE INTEND TO SIGNIFICANTLY INCREASE OUR INVESTMENT IN RESEARCH AND DEVELOPMENT
AND WE MAY NOT ACHIEVE A RETURN ON OUR INVESTMENT.
One component of our strategy is to significantly increase investment in
research and development to develop new products, in particular in those
segments of the health care market that we are targeting. The successful
development of a product is highly uncertain and is dependent on numerous
factors, many of which are beyond our control, and may include the following:
- The product may be found to be ineffective or to have undesirable side
effects in preliminary and commercial testing or, specifically in the
health care area, in preclinical and clinical trials;
- The product may fail to receive necessary governmental and regulatory
approvals, or regulatory approvals may be delayed significantly;
- The product may not be economically viable because of manufacturing
costs or other factors; or
- We may be precluded from commercializing the product by the proprietary
rights of others or by competing products or technologies for the same
application.
We have in the past, and may in the future, terminate research efforts in
a particular area after having made substantial expenditures. Any failure to
translate research and development expenditures into successful new products
could have an adverse effect on our business.
THE SUCCESSFUL IMPLEMENTATION OF OUR BUSINESS STRATEGY DEPENDS ON OUR ABILITY TO
ESTABLISH AND MAINTAIN STRATEGIC ALLIANCES WITH INDUSTRY LEADERS IN OUR TARGET
MARKETS.
We do not currently possess the resources necessary to independently
develop and commercialize products for all of the market opportunities that may
result from our technologies. We intend to form strategic alliances with
industry leaders in our target markets to gain access to funding for research
and development, expertise in areas we lack and distribution channels. We may
fail to enter into these necessary strategic alliances. In addition, if we
develop the strategic alliances, we will have limited or no control over the
resources that any strategic partner may devote to the alliance or the products
resulting from the alliance. Our strategic alliance partners may not
commercialize products arising out of these alliances or devote sufficient
capital, personnel or other resources to the alliance. Strategic alliances we
enter into could be harmed if:
- We fail to meet our agreed upon research and development objectives;
- We disagree with our strategic partners over material terms of the
alliances, such as intellectual property or manufacturing rights; or
5
<PAGE> 11
- Our strategic partners become competitors of ours or enter into
agreements with our competitors.
In addition, the new strategic alliances that we enter into, if any, may
conflict with the business objectives of our current strategic partners and
negatively impact existing relationships. This may harm our financial results.
OUR SUCCESS DEPENDS ON THE TIMELY INTRODUCTION OF NEW PRODUCTS AND THE
ACCEPTANCE OF THESE NEW PRODUCTS IN THE MARKETPLACE.
Technological advances and new product introductions are typical for the
markets we serve and intend to serve. Our success will depend on continuous,
timely development and introduction of new products. To the extent that we fail
to introduce new and innovative products, we may lose market share to our
competitors and this may be difficult to regain. Our inability to successfully
develop and introduce new products would materially negatively impact our
business.
We have experienced delays in the development and introduction of
products in the past. We cannot assure you that we will keep pace with the
changing technology in our business, or that our new products will adequately
meet the requirements of the marketplace or achieve market acceptance. Some of
the factors affecting the timely introduction of products and acceptance of new
products include:
- Availability, quality and price relative to competitive products;
- The timing of introduction of the product relative to competitive
products;
- Acceptance of the product for the desired application; and
- General market trends in the markets and geographic regions that we
serve.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH OR RAISING CAPITAL TO PURSUE
OUR MARKET OPPORTUNITIES.
We expect that our future growth will be driven by our development of
products, independently as well as through strategic alliances. This anticipated
growth, if realized, could place a strain on our personnel and financial
resources. Our ability to achieve our expansion objectives and to manage our
growth effectively depends upon a variety of factors, including our ability to:
- Attract and retain sufficient numbers of talented employees;
- Continue to develop products through strategic alliances;
- Internally develop products; and
- Continue to improve our operational, financial and management controls,
reporting systems and procedures.
If we are unable to manage our growth effectively, there could be a
material adverse effect on our business, financial condition and results of
operations.
In addition, capitalizing on the market opportunities we have identified
may require us to seek additional capital, either through private or public
offerings of debt or equity securities. We cannot assure you that we will be
able to raise additional capital on acceptable terms or conditions, if at all.
OUR CURRENT AND TARGET MARKETS ARE EXTREMELY COMPETITIVE AND IF WE FAIL TO
COMPETE EFFECTIVELY OUR BUSINESS WILL SUFFER.
Our current and target markets are highly competitive. Some of our
competitors in our current markets have superior technology, greater financial,
operational, sales and marketing, and research and development resources than we
do. Many of our competitors in our target markets, particularly health care, are
more established, have strong brand name recognition and have greater research
and
6
<PAGE> 12
development, financial, operational and sales and marketing resources than we
do. Our competitors in all of our markets may have developed or could in the
future develop products that could render our products obsolete or
noncompetitive. Competition in our target markets is driven by:
- The ability to establish and maintain long-term customer relationships;
- The ability to develop, maintain and protect proprietary products and
technologies;
- Technology advances that lead to better products;
- Product performance, price, features and reliability;
- Timing of product introductions;
- Manufacturing, sales and distribution capabilities;
- Technical support and service; and
- Breadth of product line.
Our competitors have in the past and may in the future compete by
lowering prices. We may respond by lowering our prices, which could reduce
revenues and profits.
STRINGENT LAWS AND REQUIRED GOVERNMENT APPROVALS AND CHANGES IN THE APPROVAL
PROCESS COULD DELAY OUR INTRODUCTION OF PRODUCTS.
All phases of our product development and commercialization are subject
to federal, state, local and foreign government regulation. Some of our
potential products, and particularly products for the health care and
agriculture markets, will be subject to significantly greater oversight and
longer approval processes than our current products. Regulatory agencies,
including the Food and Drug Administration, the Environmental Protection Agency,
the U.S. Department of Agriculture and their foreign counterparts, may not allow
us to conduct research, produce and market our products in a timely manner or
under technically or commercially feasible conditions, or at all. This could
adversely affect our business.
OUR RESULTS OF OPERATIONS HAVE BEEN SIGNIFICANTLY INFLUENCED BY A CONCENTRATION
OF BUSINESS WITH MAJOR CUSTOMERS AND THE LOSS OF SOME OR ALL OF THIS BUSINESS
WOULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Our five largest customers collectively accounted for approximately 55%
of our 1999 revenues, with our largest customer, The Procter & Gamble Company,
accounting for approximately 30% of such revenues. There is no guarantee that
any one of these customers will maintain their level of business with us. Should
our largest customer or any mix of our other large customers decide to reduce or
terminate its business with us, our financial results would be significantly
harmed.
OUR RESULTS OF OPERATIONS ARE SIGNIFICANTLY INFLUENCED BY A CONCENTRATION OF
BUSINESS IN OUR PROTEIN DEGRADING ENZYMES UTILIZED IN CLEANING PRODUCTS.
Our largest selling family of products, protein degrading enzymes, or
proteases, utilized in cleaning products accounted for approximately 39% of our
1999 revenue. If the demand for proteases as an ingredient in cleaning products
declines or alternative proteases render our products noncompetitive, our
financial results would be significantly harmed.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our success depends to a significant degree upon the continued
contributions of our executive officers, management, technology and business
personnel and our ability to attract and retain highly qualified personnel in
these areas. At this time, competition for such individuals is intense. In
particular, our product development programs depend on our ability to attract
and retain highly skilled researchers. If
7
<PAGE> 13
we are unable to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will adversely affect
our ability to meet the demands of our customers or to support our internal
research and development.
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK MAY PREVENT OTHER STOCKHOLDERS
FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Upon completion of this offering, Eastman Chemical Company and affiliates
of Danisco A/S, referred to as our majority stockholders, will each own
approximately % of our outstanding common stock. They will therefore have the
ability, acting together, to control fundamental corporate transactions
requiring stockholder approval, including the election of a majority of our
directors, approval of merger transactions involving us and the sale of all or
substantially all of our assets or other business combination transactions.
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK MAY INHIBIT OR PREVENT A TAKEOVER
OR A CHANGE IN MANAGEMENT AND DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
The concentration of ownership of our common stock may have the effect of
delaying or preventing a change in our control otherwise favored by our other
stockholders. This concentration also may simplify a change of control
transaction with a third party that our majority stockholders favor. If a change
of control or change in management is delayed or prevented or our stockholders
enter into an unfavorable third party transaction, the market price of our
common stock could decline or stockholders might not receive a change of control
premium over the then-current market price of the common stock.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS WHICH COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
Provisions of our restated certificate of incorporation, bylaws,
standstill and registration rights agreement and Delaware law could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions could discourage potential takeover
attempts and could adversely affect the market price of our common stock.
Because of these provisions, you might not be able to receive a premium on your
investment. See "Certain Transactions -- Agreements with Stockholders" and
"Description of Capital Stock."
OUR MAJORITY STOCKHOLDERS MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS.
Our majority stockholders' control over our management and affairs could
create conflicts of interest if they are faced with decisions that could have
implications for them and for us and the other stockholders. Our majority
stockholders, acting together, could cause us to enter into contracts with
another entity against our interests or cause us to decline a transaction that
is in our best interest. Our majority stockholders may engage in other
businesses that compete or may in the future compete with us. Accordingly,
conflicts could arise with respect to allocation of corporate opportunities
between our majority stockholders and us.
Current or future agreements between us and our majority stockholders or
their affiliates may not be the result of arm's-length negotiations.
Consequently, such agreements may be less favorable to us than agreements that
we could otherwise have entered into with unaffiliated third parties. We have
not instituted any formal plans to address conflicts of interest that may arise
or allocation of corporate opportunities.
INABILITY TO SECURE AND MAINTAIN INTELLECTUAL PROPERTY PROTECTION FOR OUR
PRODUCTS AND TECHNOLOGIES COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE.
The patent positions of biotechnology companies, including our patent
positions, can be highly uncertain and involve complex legal and factual
questions and, therefore, enforceability cannot be predicted with certainty. We
will be able to protect our proprietary rights from unauthorized use by third
parties only
8
<PAGE> 14
to the extent that our technologies are protected by valid and enforceable
patents or are effectively maintained as trade secrets. We file patent
applications in the United States and in foreign countries as part of our
strategy to protect our proprietary products and technologies. We cannot assure
you that patents will be granted with respect to any of our patent applications,
that the scope of any of our issued patents will be sufficiently broad to offer
meaningful protection or that we will develop additional proprietary
technologies that are patentable. We cannot be sure that we will obtain the
patents or licenses to technologies that we will need to develop products for
our target markets.
Our issued patents or patents licensed to us could be successfully
challenged, invalidated or circumvented so that our patent rights would not
create an effective competitive barrier. The loss of significant patents or the
failure of patents to issue from pending patent applications that we consider
significant could have a material adverse effect on our business. The laws
governing the scope of patent coverage in the United States and abroad continue
to evolve, particularly in the biotechnology area. The laws of some foreign
countries may not protect our intellectual property rights to the same extent as
United States law. Third parties can make, use and sell products covered by our
patents in some countries in which we do not have patent protection.
INTELLECTUAL PROPERTY LITIGATION COULD ADVERSELY AFFECT OUR BUSINESS.
The biotechnology industry is characterized by extensive litigation
regarding patents and other intellectual property rights because of the
uncertainty in the breadth of patent coverage for inventions, technologies and
products for biotechnology inventions. We periodically receive notices of
potential infringement of patents held by others. In addition, many
biotechnology companies have employed intellectual property litigation as a way
to gain a competitive advantage.
We are aware that patents have been applied for and in some cases issued
to others claiming technologies which are closely related to ours. We cannot
assure you that we will not be found to infringe these patents, other patents or
proprietary rights of third parties.
In the event of an intellectual property dispute, we may become involved
in litigation or arbitration. Litigation could involve proceedings in United
States or foreign courts as well as in United States or foreign patent and
trademark offices. Intellectual property litigation is expensive and may divert
management's time and resources away from our operations. The outcome of any
such litigation is inherently uncertain. Even a successful outcome may take
years to achieve and the costs associated with the litigation, in terms of
dollars spent and diversion of management time and resources could adversely
affect our business.
If a third party claims an intellectual property right to technology we
use, we may be forced to discontinue an important product or product line, alter
our products and processes, pay license fees, pay damages for past infringement
or cease certain activities. Under these circumstances, we may attempt to obtain
a license to this intellectual property; however, we may not be able to do so on
commercially reasonable terms, or at all.
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.
In order to protect our technologies and processes, we also rely in part
on trade secret protection for our confidential and proprietary information. We
have taken security measures to protect this information through confidentiality
agreements and non-disclosure policies with our employees and consultants upon
the commencement of an employment or consulting arrangement with us. These
measures may not provide adequate protection for our trade secrets or other
proprietary information. These agreements generally require that all
confidential information developed by the individual or made known to the
individual by us during the course of the individual's relationship with us be
kept confidential and not disclosed to third parties. These agreements also
generally provide that inventions conceived by the individual in the course of
rendering services to us shall be our exclusive property. We cannot assure you
that proprietary information will not be disclosed, that others will not
independently develop substantially
9
<PAGE> 15
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets or that we can meaningfully protect our trade secrets. Costly
and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business position.
ETHICAL, LEGAL AND SOCIAL CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD
ADVERSELY AFFECT OUR BUSINESS.
A significant amount of our products are produced from genetically
modified microorganisms. Additionally, we intend to expand into agriculture
markets, either alone or with strategic partners, through the development of
genetically modified foods and transgenic crops. Public attitudes and acceptance
of products made from genetically modified microorganisms are unpredictable,
particularly with respect to genetically modified foods and transgenic crops. As
a result, if we are not able to overcome the ethical, legal and social concerns
relating to safety and environmental hazards of genetic engineering, our
products may not be accepted by the general public and this may prevent the
commercialization of products dependent on our technologies or inventions. In
addition, public attitudes may influence laws and regulations governing the
ownership or use of genetic material, which could result in greater government
regulation of genetic research and bioengineered products.
FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
In 1999, we derived approximately 60% of our revenues from our foreign
operations. Sales and expenses of our foreign operations are conducted in local
currency. As a result, we are exposed to market risk related to interest rates
and foreign currency exchange rate fluctuations. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations between the U.S. dollar and the currencies in which we do
business could adversely affect our results of operations.
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 currency 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.
ECONOMIC AND POLITICAL CONDITIONS IN FOREIGN COUNTRIES COULD ADVERSELY AFFECT
OUR BUSINESS.
We expect to continue to operate in foreign countries and that our
international sales will continue to account for a significant percentage of our
revenues. Any one of the following factors arising from our international
business operations, many of which are beyond our control, could adversely
affect our business, including:
- Difficulties and costs associated with staffing and managing foreign
operations;
- Unexpected changes in regulatory requirements;
- Difficulties of compliance with a wide variety of foreign laws and
regulations;
- Limited protection for intellectual property rights in some countries;
- Changes in our international distribution network and direct sales
force;
- Potential trade restrictions and exchange controls;
- Political and social unrest;
- Labor disputes including work stoppages, strikes and embargos;
- Inadequate and unreliable services and infrastructure;
- Import or export licensing or permit requirements; and
10
<PAGE> 16
- Greater risk on credit terms and long accounts receivable collection
cycles in some foreign countries.
IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY
POTENTIALLY FACE NUMEROUS OTHER RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS
OPERATIONS.
One element of our strategy is to acquire businesses, technologies or
products that we believe are a strategic fit with our business. If we undertake
any transaction of this sort, we may not be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire without a
significant expenditure of operating, financial and management resources, if at
all. Further, we may fail to realize the anticipated benefits of any
acquisition. Future acquisitions could dilute your ownership interest in us and
could cause us to incur substantial debt, expose us to contingent liabilities
and result in amortization expenses related to goodwill and other intangible
assets. Any of these adverse consequences could adversely affect our business.
OUR FEES AND ROYALTY REVENUES COULD DECLINE.
A portion of our revenues are derived from research funding, milestone
payments, license fees and royalties. These fees and royalty revenues in future
periods could vary significantly. Major factors affecting these revenues
include, but are not limited to:
- The expiration or termination of agreements with strategic alliance
partners;
- Our licensees' sales of licensed products;
- The expiration or termination of license agreements with licensees;
- Whether and when we achieve technical and commercial milestones in our
product developments in some of our strategic alliances;
- The failure of or refusal of a licensee to pay license fees or
royalties; and
- The expiration or invalidation of patents or other licensed
intellectual property.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
Our quarterly revenue and operating results have fluctuated in the past
and are likely to do so in the future. These fluctuations could cause our stock
price to fluctuate significantly or decline. Some of the factors that could
cause our revenue and operating results to fluctuate include:
- The receipt of technology and commercialization milestone payments and
royalties;
- The ability and willingness of strategic partners to commercialize
products derived from our technology or containing our products on
expected timelines;
- Our ability to successfully satisfy all pertinent regulatory
requirements;
- Our ability to successfully commercialize products developed
independently and the rate of adoption of such products;
- The overall competitive environment for our products;
- Fluctuations in foreign currencies; and
- Geographic specific economic conditions, such as in Asia and Latin
America.
A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed. Accordingly, if product revenue
declines or does not grow as anticipated or non-product revenue declines due to
the expiration or termination of strategic alliance agreements, failure to
obtain new
11
<PAGE> 17
agreements or grants, lower than expected royalty payments or other factors, we
may not be able to correspondingly reduce our operating expenses.
Due to the possibility of fluctuations in our revenue and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would likely decline.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN.
Management will retain broad discretion over the use of proceeds from
this offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering for research and
development, working capital and other general corporate purposes and to finance
potential acquisitions or investments. There are a number of factors that will
influence our use of the net proceeds from this offering, and we cannot assure
you that these uses will not vary substantially from our current plans.
WE MAY BE SUED FOR PRODUCT LIABILITY.
We may be held liable if any product we develop, or any product that is
made with the use or incorporation of any of our products, causes injury or is
found otherwise unsuitable during product testing, manufacturing, marketing or
sale. Our current product liability insurance may not cover our potential
liabilities. Inability to obtain sufficient insurance coverage in the future at
an acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or our strategic partners. If we are sued for any injury caused by our
products, our liability could exceed our insurance coverage amounts and total
assets.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS THAT MAY SUBJECT US TO COSTLY
ENVIRONMENTAL LIABILITY.
Our research and development processes involve the controlled use of
hazardous materials, including chemical, radioactive and biological materials.
Our operations also generate potentially hazardous waste. We cannot eliminate
entirely the risk of contamination or the discharge of hazardous materials and
any resultant injury from these materials. Federal, state, local and foreign
laws and regulations govern the use, manufacture, storage, handling and disposal
of these materials. We may be sued for any injury or contamination that results
from our use or the use by third parties of these materials. Any accident could
partially or completely shut down our research and manufacturing facilities and
operations. In addition, compliance with applicable environmental laws and
regulations may be costly, and current or future environmental regulations may
impair our research, development or production efforts.
OUR UNITED STATES RESEARCH AND DEVELOPMENT FACILITY AND CORPORATE OFFICE IS
LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE OF AN EARTHQUAKE
OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO THIS FACILITY AND
EQUIPMENT, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.
Our United States research and development facility and corporate office
is located in Palo Alto, California near known earthquake fault zones and is
vulnerable to damage from earthquakes. In October 1989 a major earthquake that
caused significant property damage and a number of fatalities struck this area.
We are also vulnerable to damage from other types of disasters, including fire,
floods, power loss, communications failures and similar events. If any disaster
were to occur, our ability to operate our business at our facilities would be
seriously, or potentially completely, impaired. In addition, the unique nature
of our research activities and much of our equipment could make it difficult for
us to recover from a disaster. The insurance we maintain may not be adequate to
cover our losses resulting from disasters or other business interruptions.
12
<PAGE> 18
THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for shares of our
common stock. An active, liquid trading market may not develop following
completion of this offering, or if developed, may not be maintained. We will
determine the public offering price for the shares through negotiations between
representatives of the underwriters and us. This price may not be indicative of
prices that will prevail later in the trading market. The market price of the
common stock may decline below the public offering price, and you may not be
able to resell your shares at or above the public offering price.
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE DUE TO THE NATURE OF THE INDUSTRY
IN WHICH WE OPERATE.
The stock market, from time to time, has experienced significant price
and volume fluctuations that are unrelated to the operating performance of
companies. The market prices for securities of biotechnology companies, in
general, have been highly volatile and may continue to be highly volatile in the
future. Our stock may be affected by this type of market volatility, as well as
by our own performance. The following factors, among other risk factors, may
have a significant effect on the market price of our common stock:
- Developments in our relationships with current or future strategic
partners;
- Announcements of technological innovations or new products by us or our
competitors;
- Developments in patent or other intellectual proprietary rights or
announcements relating to these matters;
- Investor concern regarding the public acceptance of the safety of
biotechnology products;
- Litigation or governmental proceedings or announcements relating to
these matters;
- Developments in domestic and international governmental policy or
regulation, for example, relating to intellectual property rights;
- Economic and other external factors or other disaster or crisis;
- Future royalties from product sales, if any, by our licensees;
- Our ability to access genetic material from diverse ecological
environments and the development of our technologies; and
- Fluctuations in our operating results.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales
by our existing stockholders of a large number of shares of our common stock in
the public market after the closing of this offering, or the perception that
these sales could occur. Such sales also could make it more difficult for us to
sell equity securities in the future at a time and price that we deem
appropriate. After this offering, we will have shares of common
stock outstanding. All the shares sold in this offering will be freely tradable,
except those held by our affiliates. Of the remaining shares of
common stock outstanding after this offering, all of the shares held by Eastman
Chemical Company and affiliates of Danisco A/S will be subject to registration
rights. See "Certain Transactions -- Agreements with Significant Stockholders."
After this offering, we also intend to register up to approximately
18,000,000 shares of our common stock for sale upon exercise of outstanding
stock options issued pursuant to compensatory benefit plans or reserved for
future issuance pursuant to our stock option plan. In addition, the market price
of our common stock could decline if we sell additional equity securities in
connection with financings, acquisitions or strategic alliance arrangements. See
"Shares Eligible for Future Sale."
13
<PAGE> 19
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE
NET TANGIBLE BOOK VALUE OF YOUR SHARES.
We expect the public offering price to be substantially higher than the
net tangible book value per share of the common stock. Therefore, if you
purchase shares of our common stock in this offering, you will incur immediate
and substantial dilution in pro forma net tangible book value of
$ per share. You may incur additional dilution if the holders of
outstanding options exercise those options. Additional information regarding the
dilution to investors in this offering is included in this prospectus under the
heading "Dilution."
14
<PAGE> 20
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements relating to, among
other things, future results of operations, our plans and expectations regarding
our future products, market and growth opportunities, and general industry and
business conditions applicable to us. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about us, including those we describe in the "Risk Factors"
section of this prospectus. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future
events.
We use market and industry data throughout this prospectus, which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable,
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this information.
15
<PAGE> 21
USE OF PROCEEDS
We expect to receive approximately $ million from the sale of the
shares offered by this prospectus at an assumed public offering price of $
per share, the mid-point of the range set forth on the cover of this prospectus,
after deducting estimated underwriting discounts and offering expenses ($
million if the underwriters' over-allotment options are exercised in full). We
currently intend to use the net proceeds of this offering for research and
development activities, for capital expenditures, to finance possible
acquisitions and for working capital and other general corporate purposes.
We have not yet finalized the amount of net proceeds to be used
specifically for each of the foregoing purposes. Accordingly, our management
will have significant flexibility in applying the net proceeds of this offering.
Pending any use, as described above, we intend to invest the net proceeds in
high quality, interest-bearing securities. See "Risk Factors -- Management may
invest or spend the proceeds of this offering in ways with which you may not
agree and in ways that may not yield a return."
DIVIDEND POLICY
We currently intend to retain future earnings, if any, 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 be dependent upon our
financial condition, results of operations, capital requirements, general
business conditions and other factors that the board of directors may deem
relevant. In addition, covenants in our senior note indenture may limit our
ability to declare and pay cash dividends on our capital stock.
16
<PAGE> 22
CAPITALIZATION
This table sets forth as of March 31, 2000:
- our actual capitalization; and
- our capitalization as adjusted to give effect to the sale of
shares of our common stock in this offering at an
assumed public offering price of $ per share after deducting
estimated underwriting discounts and estimated expenses of this
offering.
This table excludes:
- 18,000,000 shares of our common stock reserved for issuance under our
stock option plan, of which 11,478,900 shares are subject to options
outstanding as of March 31, 2000, at a weighted average exercise price
of $4.85 per share; and
You should read this table in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and the notes to those statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Long-term debt, less current maturities..................... $143,660 $
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par
value, authorized 1,000 shares, 970 shares issued and
outstanding, including dividends in arrears of
$50,925................................................ 149,744
Shareholders' equity:
Common stock, par value $.01 per share, 150,000,000 shares
authorized, 100,000,000 shares issued and outstanding
actual, shares issued and outstanding as
adjusted............................................... 1,000
Preferred stock, par value $.01 per share, 500,000 shares
authorized, no shares issued and outstanding actual and
as adjusted............................................ --
Additional paid-in capital................................ 187,945
Deferred stock-based compensation......................... (2,119)
Accumulated deficit....................................... (20,235)
Accumulated other comprehensive loss...................... (43,210)
Total shareholders' equity........................... 123,381
-------- --------
Total capitalization................................. $416,785 $
======== ========
</TABLE>
17
<PAGE> 23
DILUTION
Our net tangible book value as of March 31, 2000 was approximately $33.5
million, or approximately $0.34 per share of common stock, based on an aggregate
of 100,000,000 shares of common stock outstanding. The number of shares
outstanding as of March 31, 2000 excludes 11,478,900 shares of our common stock
issuable upon exercise of outstanding options to purchase common stock under our
stock option plan. "Net tangible book value" per share represents the amount of
our total consolidated tangible assets minus total consolidated liabilities and
redeemable preferred stock, divided by the shares of our common stock
outstanding, before giving effect to the sale of our common stock in this
offering. Assuming the sale by us of the shares offered by this prospectus at an
assumed public offering price of $ per share and after deducting
underwriting discounts and the estimated offering expenses payable by us, our
pro forma net tangible book value as of March 31, 2000 would have been $
million, or $ per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$ per share to new investors purchasing common stock in this offering at the
assumed public offering price. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Historical net tangible book value per share as of March
31, 2000............................................... $
Increase in net tangible book value per share attributable
to this offering.......................................
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
Dilution per share to new investors is determined by subtracting pro
forma net tangible book value per share after this offering from the assumed
public offering price per share paid by a new investor. If any shares are issued
in connection with outstanding options or the indemnitees' over-allotment
option, you will experience further dilution.
The following table summarizes, on a pro forma basis as of March 31,
2000, the difference between the existing stockholders and new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid at an assumed public
offering price of $ per share (before deducting estimated underwriting
discounts and commissions and offering expenses payable by us):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.....................
New public investors......................
Total...................................
</TABLE>
The foregoing table assumes no exercise of stock options. As of May 5,
2000, there were options outstanding to purchase 8,312,900 shares of our common
stock at an exercise price of $4.85 per share. To the extent outstanding options
are exercised, there will be further dilution to new investors.
18
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our financial statements and the notes to our financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations and balance sheet data for the five-year period ended December 31,
1999, are derived from our audited financial statements. The statement of
operations and balance sheet data for the three-month period ended March 31,
2000 are derived from our unaudited interim financial statements. In our
opinion, the unaudited financial statements have been prepared on substantially
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. Historical results
are not indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Product revenue...................... $ 189,107 $ 235,041 $ 293,643
Fees and royalty revenues............ 26,006 24,951 16,699
------------ ------------ ------------
Total revenues....................... 215,113 259,992 310,342
Operating expenses:
Cost of product sold................. 124,261 164,440 179,112
Research and development............. 31,196 33,989 37,306
Sales, marketing and business
development........................ 21,876 22,837 25,392
General and administrative........... 13,931 16,027 17,995
Amortization......................... 5,934 8,659 7,773
Restructuring and related charges.... -- -- --
Other (income)/expense............... 609 (37) 938
------------ ------------ ------------
Total operating expenses............. 197,807 245,915 268,516
Operating income....................... 17,306 14,077 41,826
Non operating (income)/expenses:
Investment income.................... -- -- --
Interest expense..................... 7,630 12,419 11,633
Interest income...................... (637) (1,084) (446)
Other (income)/expense............... 5,200 (5,381) 1,100
------------ ------------ ------------
Total non operating
(income)/expenses.................. 12,193 5,954 12,287
Income before provision for income
taxes and extraordinary item......... 5,113 8,123 29,539
Provision for income taxes............. 1,316 6,036 5,106
------------ ------------ ------------
Net income before extraordinary item... 3,797 2,087 24,433
Extraordinary loss on early
extinguishment of debt (Net of
income tax benefit of $1,302)...... -- 1,954 --
------------ ------------ ------------
Net Income........................... $ 3,797 $ 133 $ 24,433
============ ============ ============
Net income available to holders of
common stock....................... $ (3,478) $ (7,142) $ 17,158
Earnings per common share before
extraordinary item:
Basic.............................. $ (0.03) $ (0.05) $ 0.17
============ ============ ============
Diluted............................ $ (0.03) $ (0.05) $ 0.17
============ ============ ============
Earnings per common share:
Basic.............................. $ (0.03) $ (0.07) $ 0.17
============ ============ ============
Diluted............................ $ (0.03 $ (0.07) $ 0.17
============ ============ ============
Weighted average shares outstanding:
Basic.............................. 100,000,000 100,000,000 100,000,000
============ ============ ============
Diluted............................ 100,000,000 100,000,000 100,000,000
============ ============ ============
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Product revenue...................... $ 279,492 $ 305,637 $ 72,602 $ 73,640
Fees and royalty revenues............ 9,619 10,965 2,264 6,059
------------ ------------ ------------ ------------
Total revenues....................... 289,111 316,602 74,866 79,699
Operating expenses:
Cost of product sold................. 167,604 176,756 43,500 41,998
Research and development............. 40,205 43,955 10,022 11,824
Sales, marketing and business
development........................ 24,394 24,564 5,162 5,665
General and administrative........... 22,940 22,984 4,900 5,542
Amortization......................... 8,272 8,750 2,071 2,351
Restructuring and related charges.... -- 7,500 -- --
Other (income)/expense............... (342) (845) (143) (299)
------------ ------------ ------------ ------------
Total operating expenses............. 263,073 283,664 65,512 67,081
Operating income....................... 26,038 32,938 9,354 12,618
Non operating (income)/expenses:
Investment income.................... (990) -- -- (15,046)
Interest expense..................... 10,727 10,487 2,503 2,660
Interest income...................... (557) (750) (140) (560)
Other (income)/expense............... (1,442) -- -- --
------------ ------------ ------------ ------------
Total non operating
(income)/expenses.................. 7,738 9,737 2,363 (12,946)
Income before provision for income
taxes and extraordinary item......... 18,300 23,201 6,991 25,564
Provision for income taxes............. 3,279 5,294 1,595 8,700
------------ ------------ ------------ ------------
Net income before extraordinary item... 15,021 17,907 5,396 16,864
Extraordinary loss on early
extinguishment of debt (Net of
income tax benefit of $1,302)...... -- -- -- --
------------ ------------ ------------ ------------
Net Income........................... $ 15,021 $ 17,907 $ 5,396 $ 16,864
============ ============ ============ ============
Net income available to holders of
common stock....................... $ 7,746 $ 10,632 $ 3,577 $ 15,045
Earnings per common share before
extraordinary item:
Basic.............................. $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============
Diluted............................ $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============
Earnings per common share:
Basic.............................. $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============
Diluted............................ $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============
Weighted average shares outstanding:
Basic.............................. 100,000,000 100,000,000 100,000,000 100,000,000
============ ============ ============ ============
Diluted............................ 100,000,000 100,000,000 100,000,000 102,695,294
============ ============ ============ ============
</TABLE>
19
<PAGE> 25
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............................... $ 28,047 $ 13,597 $ 10,310 $ 12,792 $ 39,331 $ 53,863
Working capital......................................... 30,767 63,084 68,485 84,871 82,414 98,959
Total assets............................................ 418,213 534,580 500,535 508,016 512,120 509,422
Total long-term debt and capital leases................. 92,058 194,000 171,000 158,000 146,080 147,060
Total liabilities....................................... 197,666 280,610 249,819 243,515 246,239 236,297
Redeemable preferred stock.............................. 118,825 126,100 133,375 140,650 147,925 149,744
Total shareholders' equity.............................. 101,722 127,870 117,341 123,851 117,956 123,381
</TABLE>
20
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by forward-looking information due to factors discussed under "Risk
Factors" and "Business" and elsewhere in this prospectus.
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.
RECENT DEVELOPMENTS
Net income for the quarter ended March 31, 2000 was favorably impacted by
two non-recurring transactions. We recognized a gain of $15.0 million ($9.2
million, tax-effected) from the sale of marketable equity securities. We
received this stock upon the sale of an equity investment made in 1998. In
January 2000, we successfully settled patent infringement issues with one of our
customers, which resulted in a one-time fee of $3.5 million ($2.1 million,
tax-effected). We are also entitled to future royalties related to this
intellectual property arrangement.
On December 9, 1999, our board of directors approved the implementation
of an employee stock option and stock appreciation right plan. Under the terms
of this plan, we have the ability to grant stock options and stock appreciation
rights for, in the aggregate, up to 18 million shares of common stock. Options
vest ratably over a three-year period and expire ten years from their grant
date. Stock appreciation rights vest 50% after three years, with the remaining
50% vesting after four years, and expire ten years from their grant date. On
December 31, 1999, there were stock options to purchase 10.9 million shares and
0.9 million stock appreciation rights outstanding, at an exercise price of $4.85
per share.
On March 28, 2000 we granted 0.5 million stock options. For financial
reporting purposes, we determined that the fair value of our common stock
increased from December 1999 to March 28, 2000. As a result, we recorded
deferred compensation expense of $2.1 million. This amount will be amortized
over the vesting period of three years, beginning in April 2000. On May 3, 2000,
we issued an additional 0.5 million stock options at an exercise price of $4.85
per share. Accordingly, we will recognize deferred compensation expense related
to these options for the quarter ended June 30, 2000. On April 28, 2000, the
board of directors allowed certain key employees to accelerate the vesting
provisions on 3.7 million stock options and purchase restricted shares of our
common stock through the use of promissory notes from the employees. For further
information, please refer to note 18 to our consolidated financial statements.
At May 5, 2000, there were stock options to purchase 8.3 million shares and 0.9
million stock appreciation rights at an exercise price of $4.85 per share and
3.7 million shares of restricted common stock outstanding.
21
<PAGE> 27
In June 1999, our board of directors terminated our long-term incentive
plan that had been in existence since 1994. Under this plan, we granted
employees units whose value was established at least annually by our board of
directors. The appreciation in value multiplied by the number of units, at their
assumed vesting percentage for accounting purposes, was recognized as long-term
incentive compensation plan expense. Our 1999 net income of $17.9 million, 1998
net income of $15.0 million, and 1997 net income of $24.4 million was reduced by
this long-term incentive compensation expense of $4.3 million ($2.8 million,
tax-effected), $12.3 million ($8.0 million, tax-effected) and $3.3 million ($2.2
million, tax-effected), respectively. These amounts were included in cost of
product sold and research and development, sales, marketing and business
development, and general and administrative expenses for all periods presented.
In July 1999, we implemented a plan to restructure our manufacturing
facility in Belgium. Production overcapacity in the enzyme market and the
operating costs of the Belgium plant, which were considerably higher than in any
of our other plants, led to this plan. Approximately 58 employees were affected
by this restructuring. As a result of the plan, we recorded a restructuring and
related charge of $7.5 million ($6.2 million, tax-effected) in 1999. These
charges related primarily to personnel-related costs and equipment impairment.
We have completed the remaining activities under this plan in fiscal year 2000.
For more information, please refer to note 3 to our consolidated financial
statements.
In May 1999, we acquired an 80% ownership interest in Genencor (Wuxi)
Bio-Products Company, Ltd. located in Wuxi, China, for a total cash purchase
price of $9.9 million. We accounted for the acquisition under the purchase
method. Therefore, we allocated the purchase price to the acquired assets and
liabilities based upon management estimates of fair value. Intangible assets of
$7.5 million, including goodwill, are being amortized on a straight-line method
over ten years. The acquired company's results of operations approximated a loss
of $0.3 million in 1999 and a loss of $0.2 million for the quarter ended March
31, 2000 and has been consolidated since May 1, 1999.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2000 and 1999
Revenues. Total revenues for the first quarter of 2000 increased $4.8
million, or 6%, to $79.7 million from the first quarter of 1999, primarily due
to an increase in fees and royalty revenues.
Product Revenues. Product revenues for the first quarter of 2000
increased $1.0 million, or 1%, to $73.6 million from the first quarter of 1999.
In the first quarter of 2000, unit volume grew by 7%, while price fell 1%. The
increase in volume was primarily due to increased protease enzyme sales to our
largest customer, sales of a new enzyme-based dishwasher-cleaning product, new
product introductions and expanded business with our textiles customers, and
product revenue related to our joint venture, Genencor (Wuxi) Bio-Products,
which we acquired in May 1999.
On a regional basis, our first quarter 2000 product revenues in North
America showed a $3.8 million, or 12%, increase to $34.5 million over the first
quarter of 1999 due primarily to increased protease sales to our largest
customer. Revenues in Asia benefited from increased market penetration and our
acquisition of an ownership interest in Genencor (Wuxi) Bio-Products in Wuxi,
China. In total, product revenues in Asia increased $2.0 million, or 34%, to
$7.7 million in the first quarter of 2000. Europe showed a decrease of $5.0
million, or 16%, to $27.1 million primarily driven by the impact of the stronger
U.S. dollar against the Euro and a decrease in sales of cellulase products to
our animal feed customers. Latin America product revenues increased by $0.3
million, or 7%, to $4.3 million due to improving economic conditions impacting
our customers in Brazil.
Approximately 40% 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 first quarter of
2000, the strengthening of the U.S. dollar caused a reduction in our product
revenues of $3.6 million, or 5%. However, because most of the costs associated
with our Euro revenues are also denominated in Euro, the impact on net income is
minimized.
22
<PAGE> 28
Fees and Royalty Revenues. Our fees and royalty revenues consist
primarily of funded research. Funded research revenues increased $0.3 million,
or 15%, to $2.5 million from the first quarter of 1999 to 2000 primarily due to
funding from our second largest customer and an increase in funding provided by
the Advanced Technology Program of the National Institute of Standards and
Technology to develop low allergenicity enzyme products.
License and technology fees increased $3.5 million, or 100%, in the first
quarter of 2000 due to resolution of certain patent infringement issues with a
customer. The related intellectual property agreement also provides for future
royalties.
Operating Expenses
Cost of Product Sold. Cost of product sold decreased $1.5 million, or 3%,
to $42.0 million in the first quarter of 2000 from the first quarter of 1999
based on favorable impacts of cost reduction efforts and reductions in our fixed
manufacturing costs due to the change in the Euro, offset by increases in our
distribution costs.
Research and Development. Research and development expenses primarily
consist of the personnel related, consulting, and facilities costs incurred in
connection with our research activities conducted in Palo Alto, California, and
Leiden, The Netherlands. These expenses increased $1.8 million, or 18%, to $11.8
million in the first quarter of 2000 from the first quarter of 1999 as we
continue to increase our investment in technology platforms and enzyme discovery
for new markets. 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 strategic development opportunities.
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 $0.5 million,
or 9%, to $5.6 million in the first quarter of 2000 from the first quarter of
1999 due to personnel related costs.
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 $0.6 million, or 13%, to $5.5 million in the first quarter of 2000
from the first quarter of 1999 due primarily to personnel related costs.
Amortization. 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 18 years. Amortization expense
increased $0.3 million, or 14%, to $2.4 million in the first quarter of 2000
from the first quarter of 1999 primarily due to the goodwill related to the 1999
acquisition of Genencor (Wuxi) Bio-Products. For further information, please
refer to note 2 to our consolidated financial statements.
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.
Non Operating Expenses and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities. Investment income increased $15.0 million, or
100%, from the first quarter of 1999 due to the sale of marketable equity
securities. These securities were received upon the sale of an equity investment
made in 1998.
Income Taxes. The effective income tax rate for the quarter ended March
31, 2000 was 34% as compared to 23% for the same quarter of 1999. The higher
effective tax rate for the current quarter is primarily due to an increase in
the expected pre-tax income resulting from two one-time events. During the first
quarter of 2000, we realized $15.0 million of pre-tax gains from the sale of
marketable equity
23
<PAGE> 29
securities and a $3.5 million pre-tax gain from the settlement of certain patent
infringement issues, both in the United States. These items were tax effected at
a marginal rate of 38.6%.
Deferred Compensation and Other Non-Cash Compensation Charges. Deferred
compensation for options granted to employees has been determined as the
difference between the grant price and the fair value of our common stock, as
estimated for financial reporting purposes, on the date options were granted. In
connection with the grant of stock options to employees on March 28, 2000, we
recorded deferred compensation expense of approximately $2.1 million. This
amount was recorded as a component of shareholders' equity and will be amortized
as a charge to operations over the vesting period of the options. There was no
amortization of deferred compensation expense for the period ended March 31,
2000.
Comparison of Years Ended December 31, 1999, 1998 and 1997
Revenues. Total revenues for 1999 increased $27.5 million, or 10%, to
$316.6 million from 1998, primarily due to an increase in product revenues.
Total revenues for 1998 decreased $21.2 million, or 7%, to $289.1 million from
1997 to 1998 primarily due to reduced product revenues related to divested and
discontinued product lines. Additionally, 1997 fees and royalty revenues
included certain non-recurring items, which are discussed more fully below.
Product Revenues. Product revenues in 1999 increased $26.1 million, or
9%, to $305.6 million from 1998. Without the impact of the stronger U.S. dollar
against the Euro in 1999 versus 1998, product revenues in 1999 would have
further increased by 2%. In 1999, unit volume grew by 13%, while price fell 2%.
The increase in volume was primarily due to increased protease enzyme sales to
our largest customer and the successful launch of a new enzyme based
dishwasher-cleaning product by our third highest volume customer. In 1999, 1998
and 1997, our two largest customers accounted for 39%, 39% and 36% of our
product revenues.
Regionally, our 1999 product revenues in Europe showed a $14.0 million,
or 13%, increase to $123.3 million from 1998 due primarily to the increased
protease sales to our largest customer, while our revenues in Asia benefited
from increased market penetration and the acquisition of an ownership interest
in Genencor (Wuxi) Bio-Products, which reported $6.8 million in product revenues
in 1999. In total, product revenues in Asia increased $13.2 million, or 66%, to
$33.2 million from 1998. North America also showed an increase of $5.2 million,
or 4%, to $131.8 million driven by our grain processing sales, but Latin America
product revenues declined by $6.3 million, or 27%, to $17.3 million due to the
economic crisis in Brazil.
Product revenues in 1998 decreased $14.2 million, or 5%, to $279.5
million from 1997, driven largely by divested and discontinued product lines and
termination of third party contract manufacturing arrangements of approximately
$17.8 million. In addition, revenues were negatively impacted by $1.6 million
due to the 1998 economic crisis in Asia. These decreases were partially offset
by growth in sales to our largest customer and sales of our animal feed enzymes.
On a regional basis our 1998 product revenues in the United States declined by
$9.5 million, or 7%, primarily due to a product rationalization program.
In 1999, the strengthening of the U.S. dollar caused a reduction in our
product revenues of $5.0 million. The strengthening of the U.S. dollar also
caused a reduction in our product revenues in 1998 from 1997 of $3.0 million.
However, because most of the costs associated with our Euro revenues are also
denominated in Euro, the impact on net income is minimized.
Fees and Royalty Revenues. Our fees and royalty revenues consist
primarily of funded research. Funded research revenues increased $1.6 million,
or 18%, to $10.7 million from 1998 to 1999 primarily due to reaching the second
of three milestone targets under our collaborative program with E.I. du Pont de
Nemours and Company to develop an efficient biological process for making 1,3
propanediol from glucose.
Funded research revenue increased $0.6 million, or 8%, to $9.0 million
from 1997 to 1998 primarily due to receipt of the first of three milestone
payments from E.I. du Pont de Nemours and
24
<PAGE> 30
Company referenced above, funding provided by the Advanced Technology Program of
the National Institute of Standards and Technology to develop low allergenicity
enzyme products and a program with FinnFeeds International specifically related
to in vivo applications in the nutrition and health of animals.
License and technology fees decreased, $7.1 million, or 97%, to $0.2
million in 1998 due to one-time gains of $7.2 million included in 1997 from the
transfer of certain technical and manufacturing know-how and the grant of a
fully paid-up license to a third party.
Royalties in both 1999 and 1998 decreased from 1997 due to a reduction in
a royalty on diagnostic products as the related patents expired in 1997.
Operating Expenses
Cost of Product Sold. Cost of product sold increased $9.2 million, or 5%,
to $176.8 million in 1999 from 1998 based on increased product volume and costs
associated with the establishment of new warehouse facilities in Singapore,
partially offset by favorable impacts of cost reduction efforts and a decrease
in long-term incentive compensation expense. The decrease of $12.0 million, or
7%, to $167.6 million in 1998 from 1997 in cost of product sold was due to the
decrease in total product revenues discussed above, technological and process
improvements, and a shift in the mix of products sold from higher to lower cost
products. Partially offsetting the above noted decrease in 1998 was an increase
in long-term incentive compensation expense. As a result of these factors, gross
margin on product revenue increased to 42% in 1999 from 40% in 1998 and 39% in
1997.
Research and Development. These expenses increased $3.8 million, or 9%,
to $44.0 million in 1999 from 1998 as we increased our investment in technology
platforms and enzyme discovery for new markets. The increase from 1998 was
substantially offset by a decrease in long-term incentive compensation expenses.
The increase of $2.9 million, or 8%, to $40.2 million in 1998 from 1997 was
primarily driven by long-term incentive compensation expense.
Sales, Marketing and Business Development. Total expenses remained
constant in 1999 from 1998. The decrease of $1.0 million, or 4%, to $24.4
million in 1998 from 1997 is due primarily to final royalty payments in 1997 of
$2.0 million resulting from a 1990 acquisition.
General and Administrative. In total, these expenses were consistent from
1998 to 1999. Increases, due primarily to strategic consulting and Year 2000
system compliance consulting, were offset by decreased long-term incentive
compensation expense. Increases in general and administrative expenses of $4.9
million, or 27%, to $22.9 million in 1998 from 1997 relate primarily to
long-term incentive compensation expense, the further development of our
information technology infrastructure, the creation of a formal corporate
communications function, and outside legal consulting expenses incurred in
connection with the defense of a patent infringement claim settled in our favor
in early 1998.
Amortization. Amortization expense increased $0.5 million, or 6%, to $8.8
million in 1999 from 1998 due to amortization of the intangible assets resulting
from the acquisition of Genencor (Wuxi) Bio-Products Company, Ltd discussed
above. Amortization expense increased $0.5 million, or 6%, to $8.3 million in
1998 from 1997 primarily due to amortization of an increase in goodwill in
December 1997 of $8.2 million related to an adjustment to the purchase
accounting of prior acquisitions.
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.
Non Operating Expense and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities. During 1998 we realized a $1 million gain on the
sale of an equity investment.
Other Expense and Income. Other non operating income, net of other
expenses, decreased $1.4 million, or 100%, in 1999 from 1998 due to the
non-recurring nature of certain items recognized in 1998. These non-recurring
events related to the settlement of patent infringement litigation, and to a
lesser
25
<PAGE> 31
extent, the sale of assets related to divested product lines. The increase of
$2.5 million of income from 1997 to 1998 primarily related to the settlement of
the patent infringement litigation and the 1997 non-recurring expense items
related to the impairment write-off of a joint venture equity investment.
Income Taxes. Our effective income tax rate in 1999 was affected by
several factors including the statutory income tax rate in foreign
jurisdictions, amortization of intangible assets which is not deductible for tax
purposes, and research and experimental tax credits. The effective income tax
rate for 1999 was 23% compared with 18% in 1998 and 17% in 1997. The 1998
effective rate includes the effect of the utilization of research and
experimental tax credits totaling $2.5 million. The effective income tax rate
for 1997 includes a $3.1 million impact associated with the increased likelihood
of the utilization of net operating loss carry forwards that have since been
realized. Without these one-time adjustments, the effective income tax rates for
1997 and 1998 would have remained comparable but significantly higher than the
rate in 1999. We are subject to a tax ruling in The Netherlands, which reduces
the local effective income tax rate from 35% to 17.5%. This ruling will expire
at the end of 2005. More information regarding our income tax position can be
found in note 13 to our consolidated financial statements.
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 operating activities, combined with the proceeds from this offering, will be
sufficient to fund our future operations and strategic investments for the
foreseeable future. Factors that could negatively impact our cash position
include, but are not limited to, future levels of product, fees and royalty
revenues, expense levels, capital expenditures, acquisitions, and foreign
currency exchange rate fluctuations.
As of March 31, 2000, we had cash and cash equivalents of $53.9 million,
which are invested in short-term instruments including commercial paper,
institutional money market funds and bank deposits.
Cash provided by operations was $3.4 million in the first quarter of
2000, $10.1 million for the first quarter of 1999, $58.2 million in 1999, $45.1
million in 1998, and $47.3 million in 1997. The decrease of $6.7 million in the
first quarter of 2000 from the first quarter of 1999 and the increase of $13.1
million in 1999 from 1998 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 operations decreased by only
$2.2 million in 1998 from 1997.
Cash provided by investing activities was $12.3 million in the first
quarter of 2000 versus $1.0 million in the first quarter of 1999. This
difference of $11.3 million was driven by proceeds from the sale of marketable
securities, completion of a sale/leaseback transaction in 1999 (for further
information, refer to discussion below) and a reduced level of capital spending
in the first quarter of 2000. Cash used in investing activities was $20.1
million in 1999, $20.2 million in 1998 and $16.8 million in 1997. Spending in
each of these years was driven by capital expenditures, which totaled $21.3
million in 1999 compared with $22.9 million in 1998 and $23.9 million in 1997. A
significant portion of this spending included process improvement projects at
our manufacturing and research and development facilities and information
technology enhancements.
During 1998, we constructed a new technology and regional operations
center in Leiden, The Netherlands. The cost of this project was included in our
cash paid for purchases of property, plant and equipment under cash flows for
investing activities in our 1998 consolidated financial statements. In 1999, we
sold this facility to a third party for $4.2 million and leased it back for a
period of 20 years as more fully discussed in note 6 to our consolidated
financial statements.
To expand our industrial enzyme manufacturing and distribution presence
in Asia, we invested $9.9 million to acquire an 80% interest in a joint venture
in Wuxi, China, in 1999. This investment
26
<PAGE> 32
consisted of approximately $4.0 million paid to acquire shares from pre-existing
owners, $5.0 million of cash infused to improve operations and provide liquidity
and approximately $0.9 million in acquisition related costs.
Cash used in financing activities of $1.0 million during the first
quarter of 1999 resulted from the reductions in our outstanding borrowings on
our revolving credit facilities. Cash used in financing activities was $9.7
million in 1999, $23.0 million in 1998 and $33.0 million in 1997. This spending
was primarily driven by reductions in our outstanding borrowings on our
revolving credit facilities, which were fully repaid as of December 31, 1999,
and dividends to our common shareholders. These dividends consisted of $10.0
million paid to our common shareholders in both 1998 and 1997. However, 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 be dependent 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.
We currently have a $30.0 million line of credit with a commercial bank,
which is available for general corporate purposes. At May 5, 2000 there were no
borrowings under the agreement. The line of credit matures on the earlier of
November 6, 2000, or when a new revolving credit agreement is executed. We are
currently negotiating a new facility which we expect to have in place by the end
of June 2000. 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 agreements. For more
information, please refer to note 8 to our consolidated financial statements. We
also have outstanding a $10.0 million note due in June 2000 which relates to the
acquisition of the enzyme business of Gist-Brocades in 1995.
MARKET RISK
Foreign currency risk and interest rate risk are the primary sources of
our market risk. Approximately 60% of our 1999 revenues are derived from foreign
operations, mainly denominated in Euro. We believe that our risk due to foreign
currency exchange rate fluctuation is mitigated by our strategy of locating our
manufacturing facilities so that the costs are denominated in the same currency
as our product revenues. The foreign currency exposures that remain are managed
through the use of foreign currency forward contracts and currency options. We
do not use these instruments for speculative purposes. There were no material
contracts outstanding at March 31, 2000.
As of March 31, 2000 we had cash and short-term investments of $53.9
million. Of this total, $22.4 million was denominated in Euros. Our short-term
debt outstanding was not significant. 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.
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. Our financial position and
results of operations are subject to economic conditions in countries where we
conduct business and by changing foreign currency exchange rates. We are exposed
to changes in exchange rates in Europe, Latin America and Asia. The most
significant foreign currency exchange risk is with the Euro. Changes in foreign
currency exchange
27
<PAGE> 33
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 whose local books and records are maintained in
foreign currencies.
NEW ACCOUNTING STANDARD
In July 1999, The Financial Accounting Standards Board announced the
delay of the effective date of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
for one year, to the first quarter of 2001.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under SFAS No. 133.
Based on the requirements of SFAS No. 133, there may be changes to the reported
assets and liabilities in the balance sheet. Though we are currently evaluating
the impact of SFAS No. 133 on our financial position and results of operations,
based on our limited use of derivative instruments as discussed in the "Market
Risk" section above, we believe the impact of adoption of this statement will
not be material.
YEAR 2000 COMPLIANCE
As of May 5, 2000, we had not experienced any Year 2000 related
disruption in the operation of our business. We cannot be sure, however, that
all potential Year 2000 problems involving our business or the business of our
customers have become apparent. We continue to monitor our technological
operations to evaluate whether there are any indications that Year 2000 problems
may still impact our business, and, given the general uncertainty regarding Year
2000 issues, we cannot be assured that Year 2000 issues will not have a material
adverse effect on our business. We spent approximately $0.8 million in Year 2000
related remediation costs. These costs did not have a material effect on our
results of operations and financial condition and we do not anticipate that we
will incur these types of costs in the future.
28
<PAGE> 34
BUSINESS
OUR COMPANY
We are a global leader in the development of genetically based
biotechnology products using our integrated suite of technology platforms,
including gene discovery and functional genomics, molecular evolution and
design, and human immunology. Over our 18-year operating history, we have built
an intellectual property portfolio of approximately 3,000 owned and licensed
patents and patent applications. We deliver over 250 products to customers in
over 80 countries and generated over $300 million in 1999 revenues.
Our products include proprietary enzymes, proteins and biochemicals and
are used in applications as diverse as removing stubborn stains from clothing,
converting starch to the sweetener in soft drinks and enhancing the nutritional
value of grains and animal feed. Our strategy is to apply our proven and
proprietary technologies and manufacturing capabilities to expand sales in our
existing markets and address new opportunities in the health care, agriculture
and industrial chemicals markets. Using our i-biotech approach we are currently
developing novel low allergenic proteases for consumer health care products, a
proprietary therapeutic agent for the treatment of human papilloma virus and a
novel process for the conversion of biomass to ethanol.
We have long-standing relationships with strategic partners such as
Danisco/Cultor, Eastman Chemical Company, E.I. du Pont de Nemours and Company
and The Procter & Gamble Company, and customers such as Archer Daniels Midland
Company, Benckiser N.V., Cargill Inc. and Unilever N.V. A key aspect of our
strategy is to continue to identify and develop long-term strategic alliances
with industry leaders in each of our target markets. These relationships have
provided us with access to funding for research and development, milestone
payments, distribution channels and access to industry expertise in our target
markets.
SCIENTIFIC OVERVIEW
Genomics is the study of the genetic content of an organism. Each
organism inherits its genetic information, or DNA, from the previous generation.
DNA is found in cells of all living organisms and is written as a linear code
that is divided into discrete units called genes. A collection of genes form a
chromosome, which, when bundled with other chromosomes, constitutes the genetic
blueprint of the organism, or its genome. Each gene carries instructions or
codes for the production, or expression, of proteins.
Proteins have various roles in a cell. Proteins act as structural
building blocks, sensors which identify environmental changes and the presence
of foreign materials and enzymes that catalyze reactions. Enzymes are catalysts
for virtually all the chemical reactions that are key to life. Subtle changes in
the genetic code of an enzyme can dramatically alter its characteristics and
function.
Enzymes are valuable for use in several applications such as enhancing
chemical reactions, laundry detergent and drug development. The commercial
success of new products and new applications depends on the discovery of new
genes, the optimization of these genes and the ability to produce their encoded
protein products or enzymes economically.
Scientists can read genetic code by sequencing an organism's DNA, which
allows the identification of proteins encoded in the genes. These genes and
their sequences are compiled into large data libraries that can be searched
using high throughput screening to ascribe function to these proteins. This
process is known as functional genomics.
Changes in DNA, or mutations, occur naturally in organisms. Beneficial
mutations may improve an organism's ability to survive. Over time, these
mutations and their related traits are passed on to subsequent generations in a
process known as evolution. Scientists attempt to accelerate evolution in a
process known as directed evolution. Directed evolution can be used to change
genes and their encoded proteins to design commercially useful
biologically-derived materials, or biomaterials.
29
<PAGE> 35
Commercial production of biomaterials requires the use of organisms that
have been adapted for the production of proteins. These organisms are referred
to as host production organisms. Through the application of molecular biology,
scientists move genes from one organism into a host production organism. By
introducing new genes into a host production organism, scientists can create new
chemical pathways to direct the production of a desired biomaterial in that host
production organism.
COMPLEXITY OF COMMERCIALIZING BIOMATERIALS
Commercialization of biomaterials is a complex process requiring the
integration of a number of technologies, including gene discovery, gene
optimization, production and allergenic analysis and testing. Many companies
focus on one or a subset of these technologies. In addition, many companies may
not apply these technologies in the context of an identified customer need or
the economical production of the desired biomaterial.
Traditional genomics approaches to gene discovery have focused primarily
on screening microorganisms from new and unique environments, relying upon high
throughput screening to identify a biomaterial with the desired properties.
These techniques are laborious and do not always yield materials that can be
commercialized successfully because the discovered genes may be incompatible
with the necessary host production system. Specifically, the host production
organism may not be able to express the desired biomaterial at all or in
sufficient quantity to be commercially viable.
Once identified, the biomaterial produced by a discovered gene may not be
optimal for the intended commercial application. Therefore, gene discovery
typically is followed by gene optimization to improve the performance and
stability of the gene product in its intended environment. In some cases, gene
optimization may result in biomaterials that upon exposure induce a human
allergic response. Traditional approaches to commercializing biomaterials fail
to identify the potential for allergenic responses early in the development
process. This inability to predict allergic potential may result in wasted
investment and the development of products that are not viable for applications
such as skin care, cosmetics and biopharmaceuticals.
Despite improvements in DNA sequencing and functional genomics, the
complexity of the commercialization process has limited the development of new
biomaterials. Successful commercialization of enzymes and other biomaterials
requires effective gene discovery to deliver biomaterials that can be produced
on an economic basis in host production organisms while concurrently optimizing
the biomaterial and reducing its potential to cause human allergic response.
30
<PAGE> 36
OUR I-BIOTECH APPROACH -- AN INTEGRATED SOLUTION
We have developed a unique integrated approach to address the complexity
inherent in the commercialization of biomaterials for application in the health
care, agriculture and industrial chemicals markets. We refer to this approach as
i-biotech. i-biotech integrates several related technology platforms that we
apply to the discovery, optimization, production and delivery of biomaterials.
We believe that our integrated approach results in faster, more efficient and
more successful discovery and production of biomaterials. The following diagram
illustrates the integration of our technology platforms.
FLOW CHART
In the discovery and development of commercial products, we employ our
i-biotech approach in the following manner:
- We define an opportunity based on the needs of our customers;
- We use our gene discovery and functional genomics platform to search
our libraries of microorganisms for genes that express proteins capable
of solving the customer need;
- We refine these libraries to identify biomaterials that can be produced
in our bacterial and fungal host production systems, which comprise our
biomaterial production systems platform;
- We apply our molecular evolution and design platform to genetically
engineer and evolve, or optimize, the desired biomaterial;
- We apply our human immunology platform to assess and limit the
allergenic risk of the desired biomaterial; and
- We apply our metabolic pathway engineering platform to reengineer the
metabolism of our host production systems to permit production of small
molecules and chemicals in large quantities.
We have consistently demonstrated our ability to discover novel gene
products, optimize these products to improve performance in commercial
applications and deliver the improved products to our customers in a timely,
cost-efficient manner. For example, we have recently commercialized Indiage
Neutra, a cellulase enzyme derived from organisms living in extreme alkaline,
high temperature environments. This enzyme is used to give denim a stonewashed
appearance. Using our i-biotech approach, we took this product from gene
discovery to commercial production in less than 12 months.
Our immunology platform is an integral part of our i-biotech approach.
This platform allows us to assess and reduce the human allergenic risk of
biomaterials early in the discovery and development process. This platform is a
direct outgrowth of our development of protease enzymes for cleaning
applications in the industrial chemicals markets. This platform has enabled us
to begin developing reduced allergenic products for the consumer health care and
agriculture markets.
31
<PAGE> 37
OUR STRATEGY
Our strategy is to continue to strengthen our position in the markets we
currently serve and employ our i-biotech approach to capitalize on new
opportunities in health care, agriculture and industrial chemicals. Key elements
of our strategy include:
Leverage our technology platforms and commercial experience to address new
large markets
We believe our proprietary technologies are applicable to a broad range
of growth opportunities in the health care, agriculture and industrial chemicals
markets. For example, we are developing two products for the health care market,
a low allergenic protease for skin care and a compound for treating human
papilloma virus, each of which was leveraged from our existing industrial
chemicals and agriculture businesses. We plan to capitalize on our proven track
record for innovating, developing and delivering products to market through our
global manufacturing, sales and distribution infrastructure to capture new
opportunities in our target markets.
Accelerate research and development with increased investment
We intend to increase our investment in research and development to
enhance our existing technology platforms and build new competencies. We believe
this increase, combined with our proven ability to commercialize products, will
accelerate our product development efforts and permit us to successfully capture
the growth opportunities in our target markets.
Pursue additional long-term strategic alliances with industry leaders
We have long-standing strategic alliances with industry leaders such as
The Procter & Gamble Company, E.I. du Pont de Nemours and Company and Eastman
Chemical Company. We intend to continue establishing long-term strategic
alliances with industry leaders that will provide us with access to research and
development expertise and distribution channels across our target markets. We
expect to structure these relationships with a combination of up-front payments,
research and development funding, milestone payments and royalties. We intend to
continue to retain a proprietary interest in the products and technology that we
develop with these partners, as well as the related manufacturing rights,
allowing us to leverage our discoveries into other market segments.
Make selected enabling technology and business acquisitions
We have in the past acquired technologies and businesses and integrated
those successfully into our operations. We will continue to identify, evaluate
and acquire or license enabling technologies to enhance our technology
platforms. Since 1995 we have successfully acquired and integrated three
businesses, adding significantly to our revenues and our technology and
manufacturing capabilities. We will explore acquisitions of strategic businesses
and technologies to expand our market presence and to enhance our technology
platforms.
OUR TECHNOLOGY PLATFORMS
Our development process begins with the identification and understanding
of a customer need. Understanding this need permits us to develop a predictive
test, or assay, that simulates the conditions or environment in which the
desired biomaterial will be used. We believe that by incorporating the customer-
driven predictive assay into our i-biotech approach, we can achieve a higher
probability of success in the commercialization of our products.
Gene discovery and functional genomics
Gene discovery is a series of techniques used to identify diverse genes
whose encoded proteins are capable of solving customer needs. Genes are
identified in two ways, either on the basis of their sequence or on the basis of
the function of their encoded protein products.
32
<PAGE> 38
We utilize a network of internationally respected scientists to gather
and preserve materials from ecosystems as extreme and diverse as Antarctica and
the high mountain, soda lakes of Kenya. From our hundreds of preserved
ecosystems, each of which includes thousands of microorganisms, we have the
potential to evaluate billions of genes. Using state-of-the-art robotics and
high throughput screening technology, we apply our customer driven predictive
assays to generate product leads.
When searching for novel bacterial genes, we search our ecosystems to
identify those organisms whose genes are compatible with our host production
organisms. By linking gene discovery to protein production, we increase the
probability of success through the elimination of incompatible leads. Through
this approach, we have access to a diverse set of bacterial genes that we are
confident can be expressed in our host production organisms.
We also search fungi for product leads. Traditionally, fungi have been
screened only for genes whose protein products are expressed at a high level. We
create a library of all the genes of a particular fungus and remove the
repetitive sequences through a process known as normalization. We systematically
express each gene and screen its protein product including those proteins that
are normally produced at extremely low levels. By screening the entire genome of
a single fungal organism, we gain access to a diverse set of genes, including
previously undiscovered genes.
Biomaterial production systems
A key element of our i-biotech approach is the concurrent application of
our biomaterial production systems platform with our other technology platforms.
Biomaterial production systems consist of: (a) host production organisms that
have been adapted to accept genes from other organisms, or foreign genes, and
produce the proteins encoded by these foreign genes; and (b) proprietary
fermentation processes. Our host production organisms are grown, or fermented,
under controlled conditions, allowing these organisms to grow, divide and
efficiently produce optimized proteins. In our 18 years of operations, we have
developed numerous host production organisms backed by patented technology and
process know-how.
Each host production organism has a unique set of requirements that must
be met before the organism can accept a foreign gene. For each host production
organism, we have identified the key elements that must be added to a foreign
gene to enable the host production organism to accept the gene and to produce
the gene's product, the desired protein. To produce the desired product we
cultivate the host production organisms using our proprietary fermentation
processes.
Molecular evolution and design
Molecular evolution and design is the process or set of tools by which we
accelerate the natural evolutionary process in order to engineer or optimize
gene products for customer needs.
In nature, evolution occurs at a very slow rate. We accelerate the
evolutionary process to engineer and evolve, or optimize, the function of the
protein identified in the discovery process to address the customer need. Genes
are optimized by changing or mutating their DNA sequence to produce a variant
protein with a modified function. This process is known as mutagenesis. These
proteins are altered at a single site, at multiple sites or randomly over the
entire length of the protein sequence. We employ several state-of-the-art
chemical and enzymatic methods for mutating the DNA sequence of genes. These
altered genes are inserted into our proprietary host production organisms so
that we can screen the variant proteins they produce for the identification of
product leads.
Generally, the properties of variant proteins generated through single
and multiple site mutation can be evaluated using high throughput screening.
When we randomly mutate living organisms over the entire length of the protein
sequence, the number of protein variants becomes too large to be screened
efficiently. We evaluate these variants using selection. In this approach, we
make the survival of the host organism dependent upon its production of an
improved protein variant. The organisms that produce
33
<PAGE> 39
improved protein variants survive. The surviving organisms are then evaluated
using high throughput screens to determine which variant is best.
Conventional mutagenesis is limited to modification of one or more genes
of a single protein. If the desired biomaterial is a small molecule or chemical
the simultaneous modification of a large number of different proteins may be
required. Conventional techniques cannot create and evaluate such a large number
of variants simultaneously. We have developed MutatorTechnology to address this
shortcoming. Using this approach, we can simultaneously modify hundreds of genes
in a host production organism and select the best host candidate in order to
produce these desired small molecules or chemicals.
Human immunology
The application of some engineered enzymes in health care, agriculture
and industrial chemicals markets is limited by the potential for human allergic
response. To address this limitation, we have developed our human immunology, or
i-mune, platform. This platform includes a high throughput assay that predicts
human immune response and a transgenic mouse model of the human immune system
which we are developing. We believe that this platform will also allow us to
create models for defective immune systems associated with genetic autoimmune
disorders and study disease progression.
i-mune assay. The human immune system is an extraordinary defense
mechanism capable of rapidly responding to invading pathogens and other foreign
molecules. We have developed a method to recreate the first steps of the human
immune response in a high throughput assay format. We take a target protein and
divide it into a series of small, easily synthesized pieces. Using the assay, we
determine if the protein contains any pieces capable of causing an immune
response. We then use the same system to determine how to modify the protein to
eliminate the response using our molecular evolution and design platform.
Using this tool, we can determine allergenic risk and reduce it without
human testing. We also believe that this technology can be utilized to develop
knowledge-based vaccines for bacterial and viral pathogens and as anti-cancer
therapeutics.
i-mune transgenic mouse model. We are also developing a transgenic mouse
model of the human immune system. Current transgenic mouse models either employ
mice which are abnormal and do not live their full life span or do not develop
normal immune systems when supplied with normal mouse or human immune cells. Our
transgenic mouse cannot develop its own immune system but in all other respects
is normal. We are in the process of creating a transgenic mouse that we believe
will be capable of developing a functional human immune system. As proof of
concept, we have transplanted bone marrow cells from a genetically distinct
donor mouse into our immune deficient mouse and restored an immune system in the
transgenic mouse. We believe that this model could be an important new system
for the modeling of human genetically linked immune disorders.
The human immunology platform allows us to determine the allergenic
potential of proteins, recommend ways to reduce their allergenic potential, and
using our molecular evolution and design platform, develop new materials with
reduced allergenic response profiles without human testing.
Metabolic pathway engineering
Metabolic pathway engineering is a process of modifying our host
production organisms to produce small molecules and chemicals, or biochemicals.
Microorganisms make biochemicals through sequences of enzyme-catalyzed
reactions, referred to as pathways. In order to produce these biochemicals, we
often add new pathways or parts of pathways from a variety of organisms into our
host production organisms.
Our approach to metabolic pathway engineering, referred to as DesignPath,
is the integration of a variety of tools including genomics and functional
genomics. We begin with known metabolic pathways of our host production
organisms and then reconstruct the pathways based upon our analysis. Then we add
34
<PAGE> 40
new genes, identified through our gene discovery and functional genomics
platform and optimized through our molecular evolution and design platform.
In parallel, we apply MutatorTechnology to adapt the host production
organism to allow economical, high level production of the desired biochemicals.
For example, using our MutatorTechnology we have increased the solvent tolerance
of a biochemical production host organism for 1,3 propanediol, a component of
high performance polyester, by more than 250% in less than a month. In addition,
using this platform, we have reengineered our host production organisms to use
renewable resources such as corn for the economical production of biochemicals
including ascorbic acid and 1,3 propanediol.
Formulation delivery systems
Once we have developed a desired biomaterial, we typically formulate it
in a manner customized for the intended use of the customer. Our patented
formulations range from stable liquids to multi-layer granular formulations,
including our Enzoguard granular products, which have sophisticated properties
such as delayed release and oxidation barriers. These formulations protect
biomaterials against harsh chemical and environmental conditions. In addition,
we have designed and developed highly efficient fluidized coating equipment and
processes to make our formulated products.
Early in a project, we develop prototype formulations to establish a
thorough understanding of the product requirements. In addition, through close
cooperation between our research and development and manufacturing
organizations, we ensure rapid technology transfer to our production facilities.
OUR MARKET OPPORTUNITIES
We believe we can apply our i-biotech approach to develop a broad range
of biotechnology products for the health care, agriculture and industrial
chemicals markets.
Health care. We believe that the relevant market segments within health
care that our technologies can address, and their respective 1998 worldwide
market sizes, are as follows: skin care products was approximately $4.6 billion,
therapeutic vaccines was approximately $3.1 billion, antiviral agents was
approximately $0.4 billion, products to treat autoimmune disorders was
approximately $3.4 billion and transplant rejection therapies was approximately
$1.8 billion.
We currently have exploratory programs to:
- Design over-the-counter and prescription skin care and cosmetic
products;
- Design vaccines for bacterial and viral pathogens such as salmonella,
AIDS and hepatitis C;
- Design therapeutic vaccines to treat chronic infection and cancers of
the immune system;
- Design and evolve second generation reduced immunogenic
biopharmaceuticals; and
- Develop transgenic models for various applications.
Agriculture. In 1997, the United States agriculture market for
biologically derived products was approximately $875 million and the market for
transgenic seeds and plants was $405 million. In addition, in 1998, the global
market for animal health was estimated at $11.3 billion.
We currently have exploratory programs to:
- Develop reduced allergenic and enhanced nutritional foods;
- Evaluate the absence of allergens in transgenic crops;
- Develop novel traits in crops; and
- Develop vaccines against livestock pathogens.
35
<PAGE> 41
Industrial chemicals. In 1998, the industrial chemicals market exceeded
$800 billion. We believe that biological processes can address opportunities of
over $50 billion in this market. In 1999, the global market for industrial
enzymes was estimated at $1.4 to $1.6 billion.
We currently have exploratory programs to:
- Develop new biomaterials, including plastics and monomers from
renewable resources;
- Development of low cost processes for the production of specialty
chemicals for the pharmaceutical industry; and
- Develop enzyme systems for modification and derivatization of synthetic
textiles.
Whether we address the opportunities in health care, agriculture and
industrial chemicals, however, will depend on a number of factors, including
potential market size of the product, developing the appropriate strategic
alliance consistent with our business strategy, licensing patent rights and
technology, and allocation of our resources.
PRODUCTS AND PRODUCT DEVELOPMENT
We have over 250 products that are distributed to over 500 customers in
over 80 countries. The continued success of our business, however, depends on
our ability to continuously develop innovative products that meet our customers'
needs.
Products under development
We have product development programs underway in each of our target
markets. The timeline from discovery to market for products in our industry can
vary significantly based upon a number of factors, including the complexity of
the product and the regulatory approval required. Generally, the longer the
development time of a product, the higher the degree of risk associated with its
commercialization. We reduce the financial aspects of this risk, in some
instances, by entering into strategic alliances that provide us with research
and development funding and payments, such as up-front or milestone payments,
during the development period. We currently have a number of products under
development in our target markets including the following:
Health care
Low allergenic proteases. We believe proteases, enzymes that break down
proteins, will be useful in the personal and skin care products, because they
release dead skin cells, refreshing, softening and renewing the skin surface.
Using our i-biotech approach we are developing reduced allergenic proteases for
the personal care market. Specifically, in conjunction with our strategic
partner, The Procter & Gamble Company, we are developing reduced allergenic
proteases for consumer skin care applications.
Human papilloma virus. We have developed a lead compound with topical,
anti-human papilloma virus activity. Over a million new cases of human papilloma
viral infections are reported each year and the human papilloma virus has been
shown to contribute to increased incidence of cervical cancer. The total market
for the treatment of the human papilloma virus was $800 million in 1999. While
several human papilloma virus vaccine developments are underway, we are not
aware of any topical anti-human papilloma virus treatment candidates in clinical
trials.
Agriculture
Phytase for animal feed and nutrition. We are developing a production
system for a phytase enzyme together with our strategic alliance partner,
Danisco/FinnFeeds. Phytase is used in animal feed to increase animal weight gain
and limit phosphate pollution in animal waste.
Biomass conversion to ethanol. The agriculture industry produces a vast
amount of waste product, known as biomass. It is currently not possible to
economically convert biomass on a large scale to useful
36
<PAGE> 42
chemicals, such as ethanol. We maintain and are building a significant
technological lead in the development of advanced, low-cost cellulases and other
related enzymes for the conversion of biomass into value-added chemicals. We
have been awarded a $17 million grant by the National Renewable Energy
Laboratory to develop a total process for the enzymatic conversion of biomass
into ethanol.
Production of enzymes from transgenic plants. We are developing a
transgenic plant system for the production of oxidase enzymes together with
Prodigene Inc. Oxidase enzymes, such as laccase, are used in a variety of
applications including bleaching of stains on clothing, the production of
biological glue for particle boards and the processing of textile fabrics.
Industrial chemicals
Ascorbic acid. Together with Eastman Chemical Company, we have recently
announced our intent to commercialize an advanced process for the production of
ascorbic acid, or vitamin C, from glucose. We believe our biotechnology-driven
aqueous process will deliver the world's lowest cost ascorbic acid production
process as it eliminates several steps from the traditional chemical synthesis.
The world market for ascorbic acid in 1999 was approximately $500 to $600
million.
Polymer intermediates. A polyester intermediate, 1,3 propanediol, is
presently being made using a chemical process. Propanediol is a critical
component of a high performance polyester, Sorona, to be commercialized by E.I.
du Pont de Nemours and Company. The benefits of Sorona include improved fit and
comfort, softness of touch, easy dyeability, and resilience and stretch
recovery. This polyester has applications in textiles and engineering
thermoplastics. It is anticipated that its most significant uses will be for
making apparel, upholstery, home fashions and carpets. Together with our
strategic partner E.I. du Pont de Nemours and Company, we have developed a novel
biological process for the production of 1,3 propanediol that we believe will be
less expensive than the current chemical process.
Low allergenic amylases. Following our development of a low allergenic
protease for the health care market, we intend to apply our i-mune platform to
develop reduced allergenic amylases to be used in cleaning products such as
laundry detergents and dish care products.
37
<PAGE> 43
Current products
Our products can generally be grouped into three functional categories,
enzymes that breakdown protein, starch or cellulose. The following table
illustrates classes of our products, based on enzyme function, and includes
examples of their applications and the markets in which they are utilized.
<TABLE>
- -------------------------------------------------------------------------------------------------------
PRODUCT FAMILY APPLICATIONS MARKETS
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
Protein Degrading - Removing protein-based stains (such as Industrial Chemicals
Enzymes blood, grass, gravy, tomato sauce and milk) and Agriculture
from soiled surfaces
- Modifying or treating protein-based fibers
(such as silk and wool)
- Producing fermentation alcohols
- Enhancing flavor and digestibility of pet
foods
- Cleaning contact lenses
- Protein separation from animal blood
products
- -------------------------------------------------------------------------------------------------------
Starch Degrading Enzymes - Producing sweeteners such as high fructose Industrial Chemicals
corn syrup and Agriculture
- Producing fuel ethanol from renewable
resources
- Enhancing digestibility of animal feed
- Removing starch based stains (such as
spaghetti, chocolate, oatmeal, rice and
baby food) from soiled surfaces
- Treating textiles to remove starch-based
sizing materials
- -------------------------------------------------------------------------------------------------------
Cellulose Degrading - Depilling, creating the stonewashed look Industrial Chemicals
Enzymes and softening of fabrics such as cotton and Agriculture
- Reducing viscosity of products in the
starch and alcohol industries
- Brightening of colors and anti-graying of
whites in laundry
- Enhancing the digestibility and
nutritional value of animal feed
- -------------------------------------------------------------------------------------------------------
</TABLE>
Protein degrading enzyme products. Proteases are a group of enzymes
capable of breaking down proteins into peptides and amino acids. This family of
products includes bacterial and fungal acid, alkaline, high alkaline and
engineered proteases. We currently sell these products primarily to the cleaning
segment of the industrial chemicals market. We distribute these products under
trademarks such as Properase and Purafect. Our protease family of products
accounted for 48%, 50% and 56% of revenue in 1997, 1998 and 1999, respectively.
The Procter & Gamble Company is our largest customer of protein degrading enzyme
products, accounting for approximately 30% of our 1999 revenue.
Starch degrading enzyme products. Our starch degrading enzyme products
include enzymes that break down starch to intermediate and small sugars. This
family of products includes enzymes such as amylase, glucoamylase, glucose
isomerase and pullulanase. We currently sell these products primarily to the
grain processing segment of the agriculture markets. We distribute these
products under trademarks
38
<PAGE> 44
such as Optimax, Fermenzyme and Spezyme. Our starch degrading family of products
accounted for 30%, 30% and 29% of revenue in 1997, 1998 and 1999, respectively.
Cellulose degrading enzyme products. Our cellulose degrading enzyme
products include enzymes or a mixture of enzymes that break down cellulose to
intermediate and small sugars such as glucose. This family of products includes
bacterial and fungal whole cellulase, xylanase and cellulase components. We
currently sell these products primarily to the textile processing segment of the
industrial chemicals market and the grain and animal feed segments of the
agriculture market. We distribute these products under trademarks such as
Puradax, Multifect and IndiAge. Our cellulase family of products accounted for
16%, 17% and 13% of revenue in 1997, 1998 and 1999, respectively.
STRATEGIC ALLIANCES
A key part of our strategy has been and will continue to be forming
strategic alliances with industry leaders in our target markets. In forming
commercial alliances we seek partners that share our desire and commitment to
grow, hold or have access to significant market share in the target market and
are willing to fund or participate in research and development efforts. We also
fund external alliances to access, apply and develop technologies that are
strategic to our target markets. Some of our key strategic alliances are as
follows.
The Procter & Gamble Company. Our alliance with The Procter & Gamble
Company began in 1984 and continues to the present. Through this relationship we
have conducted joint research and development leading to the commercialization
of five engineered protease enzymes. This relationship has enabled the launch of
major new brand initiatives including their flagship detergent products TIDE and
ARIEL. As a result of the success of this relationship, we are now exploring
product opportunities in the personal care markets.
E.I. du Pont de Nemours and Company. In 1995, we began a project designed
to develop and commercialize a biologically derived 1,3 propanediol, a key
intermediate for the production of a new type of polyester. To date, the
alliance has already met two key milestones and is meeting its intended
commercialization timeline.
Eastman Chemical Company. Established in 1994, this alliance represents a
$30 million investment in the development of continuous biocatalytic processes
for the production of a variety of chemicals using renewable resources. In 1995,
our partnership was awarded a matching funds five-year grant of over $15 million
from the Advanced Technology Program/National Institute of Science and
Technology. We have announced our intention to commercialize the first product
from this alliance, ascorbic acid or vitamin C.
Prodigene Inc. In 1997, we acquired rights to a portion of Prodigene
Inc.'s technology for the production of proteins in plants. We also fund
research and development activities in fields of interest and have taken an
equity position in Prodigene Inc. This alliance is designed to develop unique
transgenic plant production capabilities.
Xgene Corporation. In 1999, we began developing human skin models for
pharmaceutical and personal care applications with Xgene Corporation. We have
access to their proprietary human skin models and are developing in vitro-based
assays for screening applications.
RESEARCH AND DEVELOPMENT
A major portion of our operating expenses to date has been related to the
research and development of products. During 1997, 1998 and 1999, our total
research and development expenses were $37.3 million, $40.2 million and $44.0
million, respectively. During the three months ended March 31, 2000, our total
research and development expenses were $11.8 million.
39
<PAGE> 45
Our research and development efforts have been the primary source of our
products. We intend to accelerate our investment in research and development as
an essential component of our business strategy. As of March 31, 2000, we had
168 full time employees in technology, 60 of whom hold Ph.D. degrees.
COMPETITION
We face significant competition in the industrial chemicals and
agriculture markets in which we currently compete. As we develop products for
our newly identified markets in health care, agriculture and industrial
chemicals, we face a host of new competitors, including, for example,
biotechnology and pharmaceutical companies.
In the industrial chemicals market, some competitors may have a stronger
market position and more financial resources than we do. Specifically, in
cleaning enzymes, Novo Nordisk A/S, our largest competitor, has more product
offerings and greater market share than we do. In specialty enzymes, DSM N.V.
and Novo Nordisk A/S, have greater market shares and more product offerings than
we do. Specialty enzymes have a variety of applications, including baking,
protein processing and leather processing.
We face significant competition in each of our target markets and within
our technology platforms. There are a number of competitors who compete with us
in one or a subset of our processes, including genomics and molecular evolution
and design. For example, several genomics companies have DNA screening and
selection expertise. In the field of molecular evolution and design, companies
such as Energy BioSystems Corporation, Diversa Corporation and Maxygen, Inc. are
developing tools in the directed evolution area. The competitive landscape for
human immunology and transgenics is diverse and includes pharmaceutically
focused companies such as AbGenix, Inc., Immunex Corporation, Immunologic Inc.
and Systemix, Inc.
In agriculture and health care, we have significant competition from
larger more established companies such as Cargill Inc., Novartis AG, Hoffman-La
Roche Inc. and Pfizer Inc., among others.
Competition in our current and target markets is driven by:
- The ability to establish and maintain long-term customer relationships
in our target markets;
- Ability to develop, maintain and protect proprietary products and
technologies;
- Technology advances that lead to better products;
- Product performance, price, features and reliability;
- Timing of product introductions;
- Manufacturing, sales and distribution capabilities;
- Technical support and service; and
- Breadth of product line.
Many of our competitors in our target markets, particularly health care,
are more established, have strong brand name recognition and have greater
financial, operational and sales and marketing resources than we do. In
addition, competitors in all of our markets may have developed or could in the
future develop products that could render our products obsolete or
noncompetitive. Our competitors have in the past and may in the future compete
by lowering prices. We may respond by lowering prices, which could reduce
revenues and profits.
PROPRIETARY RIGHTS
We consider the protection of our proprietary technologies and products
to be important to the success of our business. We rely on a combination of
patents, licenses, trade secrets and trademarks to establish and protect our
proprietary rights in our technologies and products. As of March 31, 2000, our
40
<PAGE> 46
intellectual property portfolio included nearly 3,000 worldwide owned and
licensed patents and patent applications. Our intellectual property portfolio
includes rights in technologies ranging from specific products to host
production organisms and technology covering research tools such as high
throughput gene discovery, molecular evolution, immunological screens and
metabolic pathway engineering.
We cannot be sure that we will obtain the patents or licenses to
technologies that will be necessary to develop products for our target markets.
For example, we have licensed technologies related to our transgenic mouse model
that limit the use of this model to the development of nontherapeutic products.
We cannot be sure that relevant patents have not been or will not be issued that
would block our ability to obtain patents or to operate our business. Generally,
patents issued in the United States have a term of 17 years from the date of
issue for patents issued from applications submitted prior to June 8, 1995.
Patents issued in the United States from applications submitted on or after June
8, 1995 have a term of 20 years from the date of filing of the application.
Patents in most other countries have a term of 20 years from the date of filing
the patent application. Most patent applications in the United States are
maintained in secrecy until the patents are issued. Patent applications in
foreign countries are usually not published until 18 months after they are
filed. The publication of discoveries in scientific or patent literature tends
to lag behind actual discoveries by at least several months. As a result, there
may be patent applications or scientific discoveries we are not currently aware
of.
MANUFACTURING AND SUPPLY CAPABILITIES
We have a global supply chain consisting of eight manufacturing
facilities with over three million liters of fermentation capacity on four
continents and 14 distribution locations covering the globe. Our supply effort
has a proven capability to meet customer demands. This involves quality
certification, such as ISO 9002, multi-site product qualification, delivery
capabilities and special custom supply requirements. We produce materials in
locations and with processes that allow us to minimize manufacturing and
distribution costs, inventory and capital investment.
An element of our strategy is to link our technology platforms and
large-scale processing. This strong link has allowed us to increase the capacity
of our existing facilities through continuous improvement of processes and host
production systems. We believe this focus is unique and will continue to enable
our facilities to deliver larger production yields while reducing our production
costs.
REGULATORY ENVIRONMENT
Product regulation
Our products are regulated according to their intended use. The Food and
Drug Administration regulates food, feed, cosmetic and pharmaceutical products.
Non-drug biologically derived products are regulated based on their application
by the Food and Drug Administration, the Environmental Protection Agency or, in
the case of plants, plant pests and animals, the U.S. Department of Agriculture.
The Environmental Protection Agency regulates biologically derived chemicals not
within the Food and Drug Administration's jurisdiction or the jurisdiction of
other regulatory agencies. Although the food and industrial regulatory process
can vary significantly in time and expense from application to application, the
timelines generally are shorter in duration than the drug regulatory process and
range from three months to three years.
The European regulatory process for biologically derived products has
undergone significant change in the recent past, as the European Union attempts
to replace national regulatory procedures with a consistent European Union
regulatory standard. Some national regulatory oversight remains although most
countries generally accept either a United States or a European clearance
together with associated data and information for a new biologically derived
product.
Regulatory approval of our products in Asian countries having
registration processes ranges from three months to three years. Some Asian
countries rely on United States and European product registrations.
41
<PAGE> 47
Environmental regulation
We also are subject to federal, state, local and foreign environmental
laws and regulations, including those governing the handling and disposal of
hazardous wastes and other environmental matters. Our research, development and
manufacturing activities involve the controlled use of hazardous materials,
including chemical, radioactive and biological materials. Although we believe
that our safety procedures for handling and disposing of these materials comply
with applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of an accident, we
could be held liable for resulting damages. We do not expect that compliance
with the governmental regulations to which we are subject will have a material
effect on our capital expenditures, earnings or competitive position.
Genetically modified microorganisms
Genetically modified microorganisms and products derived from these
organisms are regulated in many countries around the world. In the United
States, we voluntarily comply with the National Institutes of Health Guidelines
for Research Involving Recombinant DNA Molecules at all of our facilities. We
also comply with the EPA's regulation of intergeneric microorganisms under the
Toxic Substances Control Act. Our production organisms and processes are
designed to ensure full compliance with regulatory principles and practices in
both manufacturing and commercial venues regardless of the location. By using
production organisms that are classified as Good Industrial Large Scale Practice
or Biosafety Class I organisms we are able to maximize environmental safety
while minimizing regulatory concerns. Through this strategy, we have been
successful in gaining regulatory clearance to use our genetically modified
microorganisms in our factories in the United States, Belgium and Finland and in
our research facilities in the United States and The Netherlands.
Animal Welfare Act
The Animal Welfare Act governs the humane handling, care, treatment and
transportation of some animals used in United States research activities. Mice,
including the mice used in connection with our i-mune transgenic mouse model,
are currently not subject to regulation under the Animal Welfare Act. However,
the U.S. Department of Agriculture, which enforces the Animal Welfare Act, is
presently considering changing the regulations issued under the Animal Welfare
Act to include mice within its coverage. The Animal Welfare Act imposes a wide
variety of specific regulations on producers and users of animal subjects, most
notably personnel, facilities and statistical standards, cage size, feeding,
watering and shipping conditions and environmental enrichment methods.
Currently, we house no mice at our facilities. We believe that our housing
facility vendors and external toxicology laboratories are in compliance with the
Animal Welfare Act.
Compliance
To be able to commercialize our products around the world, we need to
ensure that they are safe and suitable for their intended use and meet
applicable regulatory requirements. Their manufacture also must comply with all
existing regulations at our manufacturing sites. In order to meet this need, we
have an experienced internal regulatory and safety department which is involved
in projects from the earliest stage.
EMPLOYEES
As of March 31, 2000 we had 1,021 regular employees in our wholly owned
entities, plus 552 employees in our joint venture in Wuxi, China. We plan to
expand our research and development and business operations and hire additional
staff as we expand our technology and market opportunities and establish new
strategic alliances and customer relationships. We continue to search for
qualified individuals with interdisciplinary training and flexibility to address
the various aspects and applications of our technologies. In the United States,
35 of our employees are represented by a labor union. Several of our
42
<PAGE> 48
non-United States locations are also covered by collective labor agreements,
including employees in Argentina, Belgium, Finland, France, Germany and the
Netherlands. We strive to maintain strong working relationships with all the
employee representatives.
FACILITIES
We lease and own 21 facilities throughout the world, including eight
manufacturing facilities located in Cedar Rapids, Iowa; Rochester, New York;
Elkhart, Indiana; Hanko and Jamsankoski, Finland; Brugge, Belgium; Jiangsu
Province, China and Province De Cordoba, Argentina, and 13 other administrative
offices around the world. We lease our corporate offices located in 124,000 and
43,944 square feet of space in Palo Alto, California, and Rochester, New York,
respectively. The leases for these facilities expire in 2017 and 2009,
respectively.
Information concerning each of our manufacturing facilities is as
follows:
<TABLE>
<CAPTION>
SITE OWNERSHIP SQUARE FOOTAGE
---- --------- --------------
<S> <C> <C>
CEDAR RAPIDS Owned 82.0 acres; 135,000 sq. ft.
Genencor International, Inc.
Cedar Rapids, Iowa
ELKHART Owned 6.0 acres leased; 90,000 sq. ft.
Genencor International Indiana, Inc.
Elkhart, Indiana
HANKO Owned 30.0 acres leased; 170,000 sq. ft.
Genencor International Ltd.
Hanko, Finland
BRUGGE Owned 8.3 acres; 275,556 sq. ft.
International BVBA
Brugge, Belgium
JAMSANKOSKI Owned 5.8 acres; 85,000 sq. ft.
Genencor International Ltd.
Jamsankoski, Finland
ARROYITO Owned 7.4 acres; 76,571 sq. ft.
International Argentina, S.A.
Prv. De Cordoba, Argentina
RCDC Leased, 50 year term, 22.6 acres; 70,000 sq. ft.
Genencor International, Inc. Rochester, New expiring 2040, with
York right to purchase for
$1.00
WUXI Governmental land use 9.0 acres; 324,000 sq. ft.
Genencor (Wuxi) Bio-Products Co., Ltd. rights to use land
Jiangsu Province, P.R. of China
</TABLE>
LEGAL PROCEEDINGS
On March 6, 2000 we received an access letter from the Federal Trade
Commission's Bureau of Competition requesting that we provide information and
documents in connection with a non-public investigation. The letter states that
the existence of such a non-public investigation should not be construed as
indicating that a violation has occurred or is occurring. We have voluntarily
provided the requested information and documents. We do not expect the results
of this request to have a material adverse effect on us.
As of the date of this prospectus, we are not engaged in any legal
proceeding that we expect to have a material adverse effect on our financial
condition.
43
<PAGE> 49
CORPORATE BACKGROUND
Genencor Inc. was founded in 1982. Genencor Inc. was a joint venture
between Genentech, Inc. and Corning Inc. and was formed to develop and
commercialize genetically engineered enzymes for industrial uses. Eastman Kodak
Company acquired a 25% interest in Genencor Inc. in 1987. Genencor
International, Inc. commenced in 1990 when Cultor Ltd. and Eastman Kodak formed
a joint venture in the industrial biotechnology area and acquired Genencor Inc.
In 1993, Eastman Kodak transferred its 50% interest in Genencor to Eastman
Chemical Company. In 1999, Danisco A/S acquired Cultor Ltd., now known as
Danisco Finland OY.
44
<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our current directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W. Thomas Mitchell........................ 54 President, Chief Executive Officer and
Director
Michael V. Arbige......................... 45 Senior Vice President, Technology
Debby Jo Blank............................ 48 Chief Business Officer, Health Care and
Agricultural Products
Carole Beth Cobb.......................... 42 Senior Vice President, Global Supply
Raymond J. Land........................... 55 Senior Vice President and Chief Financial
Officer
Stuart L. Melton.......................... 53 Senior Vice President, Commercial and
Legal Affairs
Thomas J. Pekich.......................... 51 Senior Vice President, Global Business
Groups
Richard J. Ranieri........................ 48 Senior Vice President, Human Resources
Soren Bjerre-Nielsen...................... 47 Director
James L. Chitwood......................... 57 Director
Bjorn Mattsson............................ 59 Director
Robert H. Mayer........................... 56 Director
David M. Pond............................. 57 Director
James P. Rogers........................... 49 Director
</TABLE>
W. THOMAS MITCHELL is our President and Chief Executive Officer, a
position he has held since 1991. Prior to 1991, he served as our Executive Vice
President, Operations. He has also served as a director since March 2000. Mr.
Mitchell was a key member of the management team that formed Genencor in 1990.
From 1969 until 1990, Mr. Mitchell worked at Eastman Kodak Company in a variety
of management positions in engineering and manufacturing functions. Mr. Mitchell
received his B.S. degree in chemical engineering from Drexel University and has
completed the Executive Development Program at the University of Michigan.
DR. MICHAEL V. ARBIGE is our Senior Vice President, Technology, a
position he has held since 1999. Since joining us in 1990, he has served
variously as Vice President of Research, Vice President of Development, Senior
Scientist and Director of Fermentation and Recovery. During his early tenure
with our predecessor company, Dr. Arbige was the fermentation leader in the
development of the first series of recombinant and protein engineered protease
processes for The Procter & Gamble Company. Dr. Arbige received his B.S. degree
in microbiology from the University of Rhode Island and his Ph.D. degree in
microbial physiology from the University of New Hampshire.
DR. DEBBY JO BLANK joined us in May 2000 as our Chief Business Officer,
Health Care and Agricultural Products. Prior to joining us, Dr. Blank was
Executive Vice President at Isis Pharmaceuticals, Inc. from March 1999 until May
2000. Dr. Blank served as President and Chief Operating Officer of Cypress
Bioscience, Inc. from 1996 until 1999. From 1994 until 1996, Dr. Blank was
Senior Vice President, Marketing, for Advanced Technology Laboratories (ATL
Ultrasound). At DuPont Merck Pharmaceutical Company, Dr. Blank was Vice
President, Worldwide Marketing from 1992 until 1993, and Vice President, New
Product Planning & Business Development from 1991 until 1992. Dr. Blank received
her B.A. degree from Stanford University, her M.D. degree from Tufts University
School of Medicine.
CAROLE BETH COBB is our Senior Vice President, Global Supply, a position
she has held since 1999. Ms. Cobb joined us in 1990 and has served in various
capacities, including Vice President of Global Manufacturing from 1997 until
1999, Plant Manager of our Cedar Rapids facility from 1995 until 1997, and
Director, Business Development from 1990 until 1995. Before joining us, Ms. Cobb
spent over nine years at Eastman Kodak Company, where she was a research
engineer and product manager in the
45
<PAGE> 51
biotechnology area. Ms. Cobb has undergraduate degrees in cell and molecular
biology, chemical engineering and biochemistry from the State University of New
York at Buffalo, and an M.B.A. in finance from the University of Rochester.
RAYMOND J. LAND is our Senior Vice President and Chief Financial Officer,
a position he has held since joining us in 1997. Mr. Land has over 28 years of
experience in financial and general management positions. From 1991 until 1997,
he was Senior Vice President and Chief Financial Officer of The West
Pharmaceutical Services Company. Prior to that, he was General Manager of a food
division and held various financial positions at Campbell Soup Company. Mr. Land
is a certified public accountant and has a B.B.A. degree in accounting and
finance from Temple University.
STUART L. MELTON is our Senior Vice President, Commercial and Legal
Affairs, and Secretary, positions he has held since joining us in 1990. From
1986 until 1990, he served as Director, Business Development, Corporate
Commercial Affairs for Eastman Kodak Company. Mr. Melton has over 25 years of
experience in private and corporate law practice. He holds a B.S. degree from
St. Louis College of Pharmacy and a law degree from Georgetown University. He is
also a graduate of the Pennsylvania State University Executive Program.
THOMAS J. PEKICH is our Senior Vice President, Global Business Groups, a
position he has held since 1999. Mr. Pekich served as our Vice President of
Grain Processing and Specialties from 1995 until 1999, and our Vice President
for North American Manufacturing and Plant Manager of our Cedar Rapids facility
from 1992 until 1995. Before joining us in 1990, Mr. Pekich spent over 15 years
at Eastman Kodak Company in a variety of assignments, and played a major role in
establishing Kodak's bio-products site in Cedar Rapids, which opened in 1991 as
a Genencor facility. Mr. Pekich holds a B.S. degree in mathematics from the
State University of New York at Albany and an M.S. degree in industrial and
systems engineering from Pennsylvania State University.
RICHARD J. RANIERI is our Senior Vice President, Human Resources, a
position he has held since 1993. Prior to joining us, Mr. Ranieri spent over 15
years with SmithKline Beecham, a worldwide healthcare company, in various human
resource positions at the corporate and divisional level. Mr. Ranieri holds a
B.S. degree from Villanova University and an M.B.A. from Rider University.
SOREN BJERRE-NIELSEN has served as a director since 1999. He is currently
Executive Vice President and Chief Financial Officer of Danisco A/S, a position
he has held since 1995, and has been a member of the Danisco A/S Executive Board
since 1995. Mr. Bjerre-Nielsen holds a M.Sc. in accounting and is a
state-authorized public accountant. Prior to joining Danisco A/S, Mr.
Bjerre-Nielsen was employed by Deloitte & Touche.
DR. JAMES L. CHITWOOD has served as a director since 1999. He is
currently Senior Vice President and Chief Technology Officer of Eastman Chemical
Company, a position he has held since 1994. Dr. Chitwood has been with Eastman
Chemical Company since 1968 and has held various management positions since
1984. He has a Ph.D. in organic chemistry from University of California at
Berkeley and attended Harvard University's Advanced Management Program in 1988.
BJORN MATTSSON has served as a director since 1990. He is currently
Deputy-Chief Executive Officer of Danisco A/S, a position he has held since
1999. Prior to the merger of Cultor Ltd. with Danisco A/S in 1999, Mr. Mattsson
held various positions with Cultor Ltd., including President and Chief Executive
Officer since 1989.
DR. ROBERT H. MAYER has served as a director since 1999. He is currently
Executive Vice President, Ingredients Sector of Danisco A/S, a position he has
held since 1999. Dr. Mayer joined Danisco A/S in 1981 and has been a member of
its Executive Board since 1999. He holds a Ph.D. in chemical engineering. Dr.
Mayer was the president of Danisco USA from 1981 until 1999.
DR. DAVID M. POND has served as a director since 1999. He is currently
Vice President, Chemical Technology at Eastman Chemical Company, a position he
has held since 1998. Dr. Pond has held various research and management positions
since joining Eastman Chemical Company in 1970, including Vice
46
<PAGE> 52
President, Technical Service and Development from 1996 to 1997 and Director,
Technical Service and Development from 1991 until 1995.
JAMES P. ROGERS has served as a director since 1999. He is currently
Senior Vice President and Chief Financial Officer of Eastman Chemical Company,
which he joined in 1999. From 1992 until 1999, Mr. Rogers held various positions
at GAF Corporation and International Specialty Products, Inc., including
Treasurer of GAF Corporation in 1992, Executive Vice President and Chief
Financial Officer of GAF Corporation from 1993 to 1999, and Executive Vice
President, Finance of International Specialty Products, Inc. from 1993 to 1999.
He has an M.B.A. from the Wharton School of the University of Pennsylvania.
BOARD COMPOSITION AND COMMITTEES
We currently have seven directors. Our restated certificate of
incorporation provides for a classified board of directors consisting of three
classes of directors, each serving staggered three-year terms. As a result, only
a portion of our board of directors will be elected each year. The terms of
Messrs. Pond and Mayer will expire at the 2001 annual meeting of stockholders.
The terms of Messrs. Bjerre-Nielsen and Rogers will expire at the 2002 annual
meeting of stockholders. The terms of Messrs. Chitwood, Mattsson and Mitchell
will expire at the 2003 annual meeting of stockholders. In addition, our board
of directors intends to elect Mr. Mitchell to serve as chairman of the board
immediately upon completion of this offering. For additional discussion
regarding the effects of our classified board, see "Description of Capital
Stock -- Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws." Our board of directors currently has four committees:
executive, compensation, audit, and technology.
The executive committee acts on behalf of the board of directors between
meetings of the board of directors, including taking board action on emergency
or other matters requiring prompt attention. The committee also advises the
Chief Executive Officer on policies and actions of our board of directors.
The compensation committee makes recommendations to the board of
directors regarding our stock and compensation plans, approves compensation of
certain officers and management, and grants stock options. Mr. Mitchell serves
as an advisor to the compensation committee but is not a voting committee
member.
The audit committee makes recommendations to the board of directors
regarding the selection of our independent auditors, reviews the scope of audit
and other services by our independent auditors, reviews the accounting
principles and auditing practices and procedures to be used for our financial
statements and reviews the results of those audits.
The technology committee makes recommendations to the board of directors
regarding the status and progress of key technology projects and strategies,
including research and development.
We anticipate that prior to the offering we, Eastman Chemical Company and
Danisco A/S, will enter into a standstill and registration rights agreement to
increase the number of directors from seven to ten, effective upon the
completion of this offering. The board of directors will continue to have three
classes of directors. We expect that, within 90 days from the consummation of
the offering, our board of directors will consist of three director nominees of
Eastman Chemical Company, three director nominees of Danisco A/S, the president
of our company and three independent directors. The independent directors will
be nominated by a nominating committee comprised of one Eastman Chemical Company
nominated director, one Danisco A/S nominated director and our president. Under
the standstill and registration rights agreement, Eastman Chemical Company and
Danisco A/S will each vote in favor of the nominee directors of the other as
well as the directors nominated by the nominating committee. In addition, the
audit committee will consist of the three independent directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Mr. Mitchell, our President and Chief Executive Officer,
served on the compensation committee. He participated in discussions of the
compensation committee and made
47
<PAGE> 53
recommendations to it, but he did not vote or otherwise participate in the
deliberations of the compensation committee with respect to his own compensation
and benefits. Mr. Mitchell no longer serves on the compensation committee. None
of the members of the compensation committee has served as a member of the board
of directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
Prior to the completion of this offering, our directors did not receive
compensation for service as members of the board of directors. Following the
completion of this offering, however, we will make available to all non-employee
directors, including employees of our majority stockholders: annual
discretionary grants of options to purchase up to 50,000 shares of our common
stock, $1,000 for each board meeting attended or $1,500 if that director also
participates on a committee, and $25,000 per year. In addition, all directors
will receive travel expense reimbursement and director's liability insurance.
Currently, directors who are employees of our majority stockholders, Eastman
Chemical Company and affiliates of Danisco A/S, may not be permitted to accept
any compensation, including grants of options to purchase shares of our common
stock, due to their internal policies.
EXECUTIVE COMPENSATION
The following table sets forth the compensation, for all services
rendered, that we paid to the following "named executives" for the years ended
December 31, 1999, 1998 and 1997:
- our Chief Executive Officer;
- those persons who were, at December 31, 1999, our four most highly
compensated executive officers other than the Chief Executive Officer;
and
- two of our former executive officers who would have been among our four
most highly compensated executive officers if they had remained
executive officers until December 31, 1999.
48
<PAGE> 54
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------- SECURITIES
OTHER ANNUAL LONG TERM ALL OTHER UNDERLYING
NAME & PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) COMPENSATION COMPENSATION($)(2) OPTIONS/SARS(#)
- ------------------------- ---- --------- -------- ------------------ ------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
W. Thomas Mitchell........ 1999 $383,850 $248,586 $274,143(3) $800,300(6) $26,087 503,000
President & CEO 1998 352,561 209,950 -- 80,135(7) 25,406 --
1997 324,244 209,950 -- 217,386(8) 12,400 --
Stuart L. Melton.......... 1999 251,983 114,835 164,205(4) 626,250(6) 17,577 385,000
Senior Vice President, 1998 239,686 103,500 -- 67,210(7) 18,356 --
Commercial & Legal 1997 227,250 77, 875 -- 149,832(8) 10,379 --
Affairs
Raymond J. Land........... 1999 235,232 105,510 -- 246,300(6) 17,082 385,000
Senior Vice President, 1998 222,409 87,447 -- 19,620(7) 17,082 --
Finance & CFO 1997 143,058 30,389 106,808(5) -- 10,066 --
Richard J. Ranieri........ 1999 198,426 89,045 -- 464,350(6) 14,238 385,000
Senior Vice President, 1998 190,448 82,800 -- 54,285(7) 14,068 --
Human Resources 1997 182,527 67,825 -- -- 9,841 --
Michael V. Arbige......... 1999 190,705 66,361 -- 317,070(6) 9,600 385,000
Senior Vice President, 1998 164,437 37,008 -- 34,381(7) 9,600 --
Technology 1997 150,437 35,784 -- 54,563(8) 9,600 --
Wayne H. Pitcher, Jr...... 1999 230,885 103,719 -- 589,080(6) 22,021 --
Senior Vice President, 1998 228,738 99,450 -- 59,455(7) 21,011 --
Technology(9) 1997 220,154 76,125 -- 156,240(8) 10,637 --
Carl D. Copeland.......... 1999 204,484 91,859 -- 516,050(6) 16,069 --
Senior Vice President, 1998 202,170 87,300 -- 56,870(7) 16,069 --
Global Manufacturing(9) 1997 192,565 66,325 -- 83,144(8) 10,033 --
</TABLE>
- ---------------
(1) Includes taxable relocation expenses and housing cost supplements pursuant
to our senior executive relocation policy.
(2) In 1999, includes (a) contributions to MetLife Group Universal Life
supplemental fund (Mr. Mitchell $13,687, Mr. Melton $7,198, Mr. Land $6,684,
Mr. Ranieri $4,397, Dr. Pitcher $11,385, and Mr. Copeland $6,036); (b) long
term disability premiums (Mr. Mitchell $2,800, Mr. Melton $779, Mr. Land
$798, Mr. Ranieri $241, Dr. Pitcher $1,037, and Mr. Copeland $433); (c)
year-end defined contributions under our 401(k) plan ($4,800 for each named
executive); and (d) employer match contributions under our 401(k) plan
($4,800 for each named executive).
(3) Includes $237,559 for reimbursement of relocation costs.
(4) Includes $148,513 for reimbursement of relocation costs.
(5) Consists of reimbursement of relocation costs.
(6) Final payout under our equity value plan with a closing value of $17.50 per
unit. This plan was terminated in June 1999.
(7) Repurchase of 10% of each employee's outstanding equity value plan units.
(8) Final payout under our employees' profit plan, the predecessor plan to the
equity value plan.
(9) Dr. Pitcher and Mr. Copeland ceased holding such offices on June 26, 1999.
PENSION PLAN TABLE
Our income replacement plan is a defined benefit plan intended to be tax
qualified and designed to provide employees with a source of income after
retirement. The retirement benefit is determined by a formula based on the
employee's age, years of service and compensation. Benefits are payable at
termination or may be deferred until normal retirement age.
49
<PAGE> 55
The following table sets forth the estimated annual benefits payable to
participating employees on a single-life annuity basis assuming retirement at
age 65, including officers, in specified years of service classifications. The
named executives are each currently credited with two years of service. Benefits
are determined based upon average total salary for the five consecutive years of
highest compensation during the ten years preceding retirement.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ------------------------------------------------------------------
COMPENSATION 5 10 15 20 25 30 35
- --------------------------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000....................... $3,904 $ 7,612 $11,320 $14,736 $18,249 $21,372 $24,690
125,000....................... 4,879 9,515 14,150 18,420 22,812 26,715 30,863
150,000....................... 5,855 11,418 16,981 22,104 27,374 32,058 37,035
>160,000........................ 6,246 12,179 18,113 23,578 29,199 34,195 39,504
</TABLE>
Under the terms of the plan, estimated annual benefits payable on a
single-life annuity basis on retirement at age 65 will be as follows: Mr.
Mitchell -- $25,991, Mr. Melton -- $22,591, Mr. Land -- $18,974, Mr.
Ranieri -- $26,858, Dr. Arbige -- $30,935, Dr. Pitcher -- $18,035, and Mr.
Copeland -- $18,933.
OPTION GRANTS
The following table sets forth information regarding grants of stock
options to each of the executive officers named in the executive compensation
table above during the year ended December 31, 1999. The percentage of total
options set forth below is based on 10.9 million options granted during the year
ended December 31, 1999. All options were granted at the fair market value of
our common stock, as determined by the board of directors on the date of grant.
Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are provided in accordance with
rules of the SEC and do not represent our estimate or projection of the future
common stock price.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE AT ASSUMED ANNUAL RATES
SHARES OF TOTAL OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS EXERCISE FOR OPTION TERMS($)
OPTIONS GRANTED TO PRICE PER EXPIRATION ---------------------------
NAME GRANTED EMPLOYEES SHARE($) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
W. Thomas Mitchell.......... 503,000 4.6% $4.85 12/9/09 $3,973,770 $6,327,564
Stuart L. Melton............ 385,000 3.5 4.85 12/9/09 3,041,553 4,843,166
Raymond J. Land............. 385,000 3.5 4.85 12/9/09 3,041,553 4,843,166
Richard J. Ranieri.......... 385,000 3.5 4.85 12/9/09 3,041,553 4,843,166
Michael V. Arbige........... 385,000 3.5 4.85 12/9/09 3,041,553 4,843,166
</TABLE>
STOCK OPTION AND STOCK APPRECIATION RIGHT PLAN
On December 9, 1999 our board of directors adopted and our stockholders
approved our stock option and stock appreciation right plan. This plan provides
for the grant of incentive stock options to our employees and nonstatutory stock
options and stock appreciation rights to our employees, consultants and
advisors. The plan authorizes the granting of options to issue (or stock
appreciation rights measured by) up to 18,000,000 shares of common stock. As of
May 5, 2000, 8,312,900 shares were subject to outstanding options. The per share
exercise price of these options is $4.85. Stock appreciation rights had been
granted measured by 909,750 shares.
This plan is administered by the board of directors. Subject to the
limitations set forth in the plan, the board of directors has the authority to:
- select the eligible persons to whom grants are to be made;
- determine the number of shares subject to options or stock appreciation
rights;
50
<PAGE> 56
- decide whether an option is an incentive stock option or a nonstatutory
option;
- determine the type of consideration to be paid by a participant when
exercising an option; and
- establish the vesting schedule of options and stock appreciation
rights.
The exercise price of nonstatutory options must generally be at least 85%
of the fair market value of the common stock on the date of grant. The exercise
price of incentive stock options cannot be lower than 100% of the fair market
value of the common stock on the date of the grant and, in the case of incentive
stock options granted to holders of more than 10% of our voting power, not less
than 110% of the fair market value. The term of an option cannot exceed ten
years, or five years in the case of an incentive stock option granted to a
holder of more than 10% of our voting power. Stock appreciation rights may, at
the discretion of the board of directors, be subject to a fixed or discretionary
maturity date, provided that their term cannot exceed ten years. Stock
appreciation rights at their maturity entitle a holder to cash equal to the
difference between the base value and the maturity value of a share, as defined
by our board of directors.
A participant may not transfer rights to incentive stock options.
Nonstatutory options and stock appreciation rights are also generally
non-transferable, although the stock option or stock appreciation right
agreement may provide for some transfers in limited circumstances. Incentive
stock options are generally exercisable for three months after termination of
employment, while nonstatutory options and stock appreciation rights are subject
to termination as determined by the board of directors, but not less than 60
days after termination of employment. However, options and stock appreciation
rights generally fully vest and remain exercisable for one year in the event of
the death of a participant, and fully vest and remain exercisable for a period
ranging from six to nine months in the event a participant's employment
terminates due to disability. All options and stock appreciation rights
terminate immediately if a participant's employment is terminated for cause as
defined in the plan.
All options and stock appreciation rights will accelerate and become
fully exercisable in the event of a tender offer for 40% of our voting stock, a
merger or consolidation, a sale of substantially all of our assets, or a
liquidation. However, all options and stock appreciation rights will be subject
to the terms of any agreement for a merger, reorganization, or sale of assets.
These provisions do not apply if the merger or other transaction is with Eastman
Chemical Company or affiliates of Danisco A/S.
The board of directors may amend, suspend, or terminate the plan at any
time, except that existing rights of holders of options or stock appreciation
rights cannot be adversely affected. Amendments will be submitted for
stockholder approval as required by law or by the plan.
On April 28, 2000, our board of directors authorized the immediate
acceleration of vesting of certain of the options granted under the plan,
including certain options granted to our executive officers. The board of
directors also authorized us to accept promissory notes in payment of the
exercise price of these stock options. The promissory notes are secured by a
pledge of the stock purchased and are non-recourse to the extent of 50% of the
outstanding principal balance. In addition, the purchased stock is subject to a
restricted stock purchase agreement that provides for the repurchase of the
stock upon the occurrence of specified events, including if the owner of the
stock ceases to be an officer or terminates employment with us. As of May 5,
2000, options to purchase 3,713,000 shares have been exercised under the terms
of this accelerated vesting program, including the following: Mr. Mitchell:
703,000 shares; Mr. Melton: 435,000 shares; Mr. Land: 435,000 shares; Mr.
Ranieri: 435,000 shares; Dr. Arbige: 435,000 shares; Ms. Cobb: 435,000 shares;
Mr. Pekich: 435,000 shares and Dr. Blank: 400,000 shares.
We intend promptly after the completion of this offering to register on
Form S-8 all shares of common stock issuable under our stock option plan.
VARIABLE PAY PLAN
The variable pay plan, adopted by our board of directors on December 8,
1999, is an incentive plan that ties employee bonuses with financial measures
established by our senior management and board
51
<PAGE> 57
of directors. The variable pay plan covers our regular employees in the United
States and certain foreign locations. Before 1999, the amounts paid under the
variable pay plan were based upon our return on invested capital, which was
measured on a rolling four quarter basis. This incentive plan was terminated in
early 1999. Payouts under this plan are reported in the summary compensation
table above. The board of directors adopted and implemented a transition year
bonus plan for 1999 that was based on annual net income and product revenue. On
March 27, 2000, our board of directors declared the 1999 bonus amounts, and
these bonus amounts are reported in the summary compensation table above.
The terms of the current variable pay plan are described in this
paragraph. Early each year, our performance for the prior year will be assessed
against goals set previously for that year and an award determination made. The
target award for plan participants will range from approximately 4% to 65% of
eligible earnings, depending on salary grade levels. For any variable pay plan
participant, the actual amount of any such award will be contingent upon the
level of achievement by us and by the employee relative to pre-established
goals.
The total variable pay plan award pool will be set by the achievement of
product revenue and cash flow with the targets recommended annually by our
management and approved by the compensation committee. Generally, awards vary
from zero if financial goals are not met to one and a half times the target if
all financial goals are exceeded. For certain salary grade levels, individual
performance may also modify the actual amounts paid under the variable pay plan.
EMPLOYEE RETIREMENT INVESTMENT PLAN
In February 1990, our board of directors adopted the employee retirement
investment plan or 401(k) plan covering our eligible employees located in the
United States. This plan is intended to qualify under Section 401(a) of the
Internal Revenue Code of 1986, as amended, so that contributions to this plan,
and the investment earnings thereon, are not taxable to employees until
withdrawn. Pursuant to this plan, employees may elect to reduce their current
compensation by up to the lesser of 15% of their annual compensation or the
statutory prescribed annual limit ($10,000 in 1999; $10,500 in 2000) and to have
the amount of the reduction contributed to their accounts in the plan. We
contribute to the plan by making a limited quarterly matching contribution to
the accounts of those employees who are contributing to the plan. An additional
employer profit sharing contribution is also made on an annual basis on behalf
of all employees who are eligible to participate. Employees do not have to
contribute to the plan in order to be eligible for the employer profit sharing
contribution each year.
EXECUTIVE METLIFE GROUP UNIVERSAL LIFE INSURANCE PROGRAM
Participation in the MetLife group universal life insurance program is an
optional benefit offered to all our employees. The MetLife group universal life
insurance program provides employees with the opportunity to purchase up to four
times his or her salary in life insurance which contains a provision for cash
value accumulation. The program also accepts lump sum contributions to the
MetLife accumulation fund. These contributions can be used for a variety of
reasons, one of which is to save a sufficient amount to cover paid-up life
insurance in retirement. If a senior executive employee chooses to participate
in the MetLife group universal life insurance program, including carrying at his
or her own expense life insurance of at least one times his or her salary and
contributes to the accumulation fund an annual amount sufficient to pay for
continued life insurance coverage in retirement, we will reimburse the executive
for his or her lump sum contribution to the accumulation fund.
EXECUTIVE LONG TERM DISABILITY
We maintain an insured long-term disability plan for all eligible
employees. The terms of that plan cap eligible compensation at $180,000. The
executive long term disability plan is designed to replace the long-term
disability benefit for that portion of the executive employee's income that is
above the maximum level of the insured plan.
52
<PAGE> 58
SENIOR EXECUTIVE RELOCATION POLICY
The senior executive relocation policy provides that we will pay or
reimburse executives for certain costs of relocation. Included in this policy
are provisions for items such as travel and moving expenses, temporary living
expenses, bridge loans and tax consultation. In addition, for permanent
relocation of senior executives to our Palo Alto facility, provisions for home
down payment assistance in the form of repayable loans (up to 50% of the cost of
the home), home price guarantee, repayable loans and a housing mortgage cost
supplement are available.
EMPLOYMENT AGREEMENTS
In 1995, we entered into an employment agreement with W. Thomas Mitchell,
our President and Chief Executive Officer, for a two year term with automatic
two year renewals unless otherwise agreed. Mr. Mitchell is entitled to
participate in our retirement, stock option, stock purchase, pension, insurance,
profit-sharing, bonus and similar plans as in effect from time to time. In the
event that Mr. Mitchell's employment is terminated without cause, including in
connection with a change in our ownership or control, he will receive severance
in the form of continued compensation for 24 months at the highest salary rate
paid during the last 24 months, continuation of company paid benefits for 24
months, and outplacement services of $12,000. Finally, we have agreed to
compensate Mr. Mitchell for 24 months if Mr. Mitchell's employment is terminated
by reason of his permanent disability.
We have entered into similar employment agreements with the following
officers: Michael V. Arbige, Debby Jo Blank, Carole Beth Cobb, Raymond J. Land,
Stuart L. Melton, Thomas J. Pekich, and Richard J. Ranieri. These employment
agreements each have a one year term with automatic one year renewals unless
otherwise agreed, with bonus compensation to be determined by our board of
directors or the compensation committee. Each individual's salary has increased
from time to time by action of the compensation committee, and such increases
constitute amendments to their respective employment agreements. Each individual
is entitled to participate in our retirement, stock option, stock purchase,
pension, insurance, profit-sharing, bonus and similar plans as in effect from
time to time. In the event that the individual's employment is terminated
without cause, including in connection with a change in our ownership or
control, he or she will receive severance in the form of continued compensation
for 18 months at the highest salary rate paid during the last 18 months,
continuation of company-paid benefits for 18 months, and outplacement services
of $12,000. Finally, we have agreed to continue compensation for these
individuals for 18 months if that person's employment is terminated by reason of
his or her permanent disability.
In July 1999 we entered into employment agreements with Carl D. Copeland
and Wayne H. Pitcher, Jr., pursuant to which each became a Senior Advisor to the
President. These contracts both expire on December 31, 2000. Both contracts
provide for a 1999 and 2000 bonus under the variable pay plan. In addition, Mr.
Copeland and Dr. Pitcher may receive a percentage of the value of stock options
granted to senior vice presidents. Finally, Mr. Copeland and Dr. Pitcher are
each entitled to continue participation in our employee retirement investment
plan and income replacement plan, and welfare plans generally available to our
other employees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our restated certificate of incorporation limits the liability of
directors, officers, employees and other agents to the fullest extent permitted
by Delaware law. Our bylaws provide that we indemnify any such person in
connection with a proceeding initiated by such person only if such proceeding
was authorized by our board of directors. Delaware law authorizes a charter
provision which we have adopted that provides that directors of a corporation
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for liability for: (1) breach of their duty of
loyalty to the corporation or its stockholders; (2) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (3) unlawful payments of dividends or unlawful stock repurchases or
redemptions; or (4) any transaction from which the director derived an improper
personal
53
<PAGE> 59
benefit. This limitation of liability does not apply to liabilities arising
under the federal or state securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Before the completion of this offering, we expect to enter into
agreements to indemnify our directors, in addition to the indemnification
provided for in our bylaws. These agreements, among other things, will provide
for indemnification of our directors for certain expenses, including attorneys'
fees, judgments, fines and settlement amounts incurred in any action or
proceeding, including any action by or in the right of Genencor arising out of
such person's services as one of our directors, any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors.
There is no pending litigation or proceeding involving any of our
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
54
<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common
stock as of May 5, 2000, as adjusted to reflect the sale of the shares offered
by this prospectus, by:
- each person who is known to us to own beneficially more than 5% of our
common stock;
- each of the named executives and each of our directors who own shares
of common stock; and
- all of our executive officers and directors as a group.
Percentage of ownership of our common stock is based on 103,713,000
shares outstanding as of May 5, 2000, and shares outstanding
after this offering, assuming no exercise of the underwriters' over-allotment
option. Beneficial ownership is calculated based on SEC requirements and
generally includes voting or investment power with respect to the shares. Unless
otherwise indicated below, each stockholder named in the table has sole voting
and investment power with respect to all shares shown as beneficially owned by
them. Unless otherwise indicated in the table, the address of each individual
listed in the table is Genencor International, Inc., 925 Page Mill Road, Palo
Alto, California 94304.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
--------------------------------------------
NUMBER PERCENTAGE PERCENTAGE
BEFORE AND AFTER BEFORE AFTER
BENEFICIAL OWNER OFFERING OFFERING OFFERING
---------------- ---------------- ---------- ----------
<S> <C> <C> <C>
Eastman Chemical Company(1).......................... 50,000,000 48.2%
Danisco A/S(2)....................................... 50,000,000 48.2%
W. Thomas Mitchell................................... 703,000 *
Stuart L. Melton..................................... 435,000 *
Raymond J. Land...................................... 435,000 *
Richard J. Ranieri................................... 435,000 *
Michael V. Arbige.................................... 435,000 *
All executive officers and directors as a group (14
persons)........................................... 3,713,000 3.6%
</TABLE>
- ------------
* Less than 1%.
(1) Eastman Chemical Company's address is 100 N. Eastman Road, Kingsport,
Tennessee 37660.
(2) An affiliate of Danisco A/S, Danisco Finland OY, beneficially owns
25,000,000 shares of our common stock. Danisco Finland OY's address is
Keilaranta a, Espoo Finland. Another Danisco affiliate, Cultor, U.S., Inc.,
beneficially owns 25,000,000 shares of our common stock. Cultor U.S., Inc.'s
address is 430 Saw Mill Road, Ardsley, New York 10502.
55
<PAGE> 61
CERTAIN TRANSACTIONS
AGREEMENTS WITH EXECUTIVE OFFICERS AND DIRECTORS
In order to facilitate the relocation of certain of our key executives,
we have made interest-free loans to W. Thomas Mitchell, Stuart L. Melton,
Raymond J. Land, Thomas J. Pekich and Richard J. Ranieri. Upon termination of
employment under certain circumstances, some or all of the amounts due under
these loans may be forgiven in connection with the executive's sale of his home
at a loss. The principal balances reported in this paragraph are as of May 5,
2000. Mr. Mitchell is indebted to us under a promissory note dated July 1999,
with an outstanding principal balance of $750,000. Mr. Melton is indebted to us
under a promissory note dated October 1999, with an outstanding principal
balance of $650,000. Mr. Land is indebted to us under a promissory note dated
April 2000, with an outstanding principal balance of $1,350,000. Mr. Ranieri is
indebted to us under a promissory note dated March 2000, with an outstanding
principal balance of $1,200,000.
We have also made interest-bearing loans to some of our employees,
including executives, to accommodate relocation. Mr. Pekich was indebted to us
under a promissory note dated August 1999. The largest amount of principal and
unpaid interest outstanding since inception was $230,000. This loan was fully
repaid in December 1999. Mr. Land is indebted to us under a promissory note
dated April 2000 which will bear interest beginning in November 2000 at 2% above
prime. The largest amount of principal and unpaid interest outstanding since
inception and as of May 5, 2000 was $5,600. Mr. Ranieri is indebted to us under
a promissory note dated March 2000 which will bear interest beginning in October
2000 at 2% above prime. The largest amount of principal and unpaid interest
outstanding since inception and as of May 5, 2000 was $300,000.
From time to time, we have also made short-term bridge loans to certain
of our executives in connection with their costs of relocation. These loans bear
interest at the prime rate, and include loans of $500,000 to W. Thomas Mitchell
in July 1999, which has been fully repaid, and $123,880 to Raymond J. Land in
April 2000, which has been fully repaid.
In connection with her relocation first to Cedar Rapids, Iowa, and then
to Rochester, New York, we have made three separate loans to Carole Beth Cobb in
the amounts of $20,000, $25,000 and $44,500. The loan of $20,000 does not bear
interest and will be forgiven on July 14, 2000 if Ms. Cobb remains our full-time
employee on that date. The loan of $25,000 will bear interest at the lowest rate
allowed to avoid imputed interest income, beginning in July 2000, and the
largest amount of principal and unpaid interest outstanding since inception and
as of May 5, 2000 under this loan was $25,000. The loan of $44,500 does not bear
interest and will be forgiven in increments of 25% each year beginning on
January 29, 2001, provided that Ms. Cobb remains our full-time employee on those
dates.
As described in "Management -- 2000 Stock Option and Stock Appreciation
Right Plan", our board of directors authorized us to accept promissory notes as
payment of the exercise price of certain of the options granted under that plan.
As of May 5, 2000, the following executive officers have exercised options to
purchase shares, and have elected to make payment by delivery of promissory
notes in the amounts indicated: Mr. Mitchell -- $3,409,550; Mr.
Melton -- $2,109,750; Mr. Land -- $2,109,750; Mr. Ranieri -- $2,109,750; Dr.
Arbige -- $2,109,750; Dr. Blank -- $1,940,000; Ms. Cobb -- $2,109,750 and Mr.
Pekich -- $2,109,750. Each of the promissory notes bear interest at the rate of
6.71% per year and are non-recourse to the extent of 50% of the outstanding
principal balance. The largest amount of principal and unpaid interest
outstanding since inception and as of May 5, 2000 under each promissory note is
the amount indicated above.
In May 2000, each of the executives who exercised options to purchase
shares, as described in the paragraph above, entered into a restricted stock
purchase agreement and pledge agreement with us. Under the terms of the
restricted stock purchase agreements, we have an option to repurchase each
executive's stock under certain circumstances at the price that the executive
paid to us for the shares ($4.85 per share). We also have a right of first
refusal to purchase the executive's stock at the bona fide price offered by a
third party purchaser. Under the pledge agreements, which secure the promissory
notes, we have the
56
<PAGE> 62
right to vote the executive's shares if the executive is in default under the
promissory note or pledge agreement.
See "Management -- Employment Agreements" for descriptions of other
agreements we have with our executive officers.
AGREEMENTS WITH SIGNIFICANT STOCKHOLDERS
We have entered into commercial partnerships with two of our
stockholders, Eastman Chemical Company and Danisco A/S. Our alliance with
Eastman Chemical Company is described in the section "Business -- Strategic
Alliances". In addition, we have collaborated with Danisco A/S, through its Finn
Feeds division, for the development and commercialization of enzymes for the
animal feed market. We have also entered into a commercial agreement under which
we sell certain of our products to Finn Feeds. Under this agreement, Finn Feeds
purchased $12 million, $15 million and $9.4 million of products from us during
1997, 1998 and 1999, respectively. In 1997, we purchased approximately $5
million in products from and/or through Danisco A/S and its affiliates and
approximately $9 million in each of 1998 and 1999.
In 1993, our majority stockholders entered into a stockholders' agreement
that restricts the sale or transfer of less than 100% of our stock owned by
either of them, and restricts the sale or transfer to more than one purchaser of
the stock. We also entered into an additional rights agreement in 1993 with our
majority stockholders under which we granted these stockholders specified rights
of first refusal to purchase products offered for sale by us. Also, we granted
the two stockholders certain priority rights to engage us to perform research
and development for so long as the stockholder owns at least 30% of our capital
stock. The 1993 stockholders' agreement and additional rights agreement will be
terminated and replaced entirely by the standstill and registration rights
agreement described in the next paragraph, effective upon the completion of this
offering.
We anticipate that we will enter into a standstill and registration
rights agreement with Eastman Chemical Company and Danisco A/S, our majority
stockholders, that will become effective upon the completion of this offering.
This agreement will provide for, among other things:
- Board of directors composition. Our board of directors has appointed a
three member nominating committee of the board of directors to recruit
and nominate additional qualified independent directors to our board of
directors within 90 days after completion of this offering. The
composition of our board of directors shall be in compliance with the
corporate governance requirements then in effect for listing on the
Nasdaq National Market. These listing provisions presently require
three independent directors.
- Limitations on activities of majority stockholders. For a period of two
years from the completion of this offering, each majority stockholder
will not, unless requested in writing by us or without the prior
approval of all of the members of our board of directors not designated
by that majority stockholder, make or support a proposal, directly or
indirectly, to cause: (a) any acquisition of our securities or our
assets or those of our subsidiaries; (b) any tender or exchange offer,
or merger or similar business combination; (c) any proxy contest to
obtain consents to vote any of our voting securities; or (d) any action
alone or with others to seek control or influence over our management,
board of directors or otherwise.
- Demand registration rights. After the expiration of the 180-day lockup
period, each of the majority stockholders may demand that we register
their shares on the appropriate form under the Securities Act in an
offering with an aggregate price to the public of at least $20 million.
The majority stockholders, whether acting independently or together,
may demand registration twice during any 12 month period upon at least
30 days notice. We will use commercially reasonable efforts to effect
registration as soon as practicable. However, we may postpone each
demand registration for up to 60 days in any 12 month period if
registration would be detrimental to us.
57
<PAGE> 63
- Piggyback registration rights. If we register any securities for sale
on a form that would be appropriate for sale of the majority
stockholders shares, the majority stockholders can request to have
their shares included in the registration statement. These registration
rights are unlimited but the managing underwriter for the registration
can reduce the number of shares held by the majority stockholders that
are included in the offering to no more than 25% of the offering.
We will pay all expenses incurred in connection with the piggyback
registration rights described above. In the case of demand registration rights,
the majority stockholders making the demand will pay all expenses pro rata on
the basis of the number of shares registered. We have the right to select the
managing underwriter, subject to approval by at least 70% of our board of
directors, in any underwritten offer of our securities or shares held by the
majority stockholders.
These registration rights will expire ten years after this offering is
completed.
Eastman Chemical Company and an affiliate of Danisco A/S have
unconditionally guaranteed our indebtedness under our previously existing $40
million revolving credit facility and our $10 million promissory note to
Gist-Brocades International B.V. This indebtedness is described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
58
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our restated certificate of incorporation, a form of which is filed as an
exhibit to the registration statement of which this prospectus is a part, and
other agreements referenced below.
Upon the completion of this offering, our authorized capital stock will
consist of 200,000,000 shares of common stock, $.01 par value, 1,000,000 shares
of preferred stock, $.01 par value, and 1,000 shares of series A preferred
stock, no par value. As of May 5, 2000, there were ten holders of record of
common stock and two holders of record of our Series A preferred stock. After
this offering, there will be shares of common stock and 970
shares of Series A preferred stock outstanding. As of May 5, 2000, options to
purchase 8,312,900 shares of common stock were outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and they do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
dividends, if any, as may be declared by the board of directors out of funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock. Upon our liquidation, dissolution or winding up the
holders of common stock are entitled to receive ratably our net assets available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock. Holders of the common stock have no
preemptive, subscription, redemption or conversion rights. The rights,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which we may designate and issue in the future. There will be no
redemption or sinking fund provisions available to the common stock. All
outstanding shares of common stock will be fully paid and non-assessable.
PREFERRED STOCK
As of the closing of this offering, 970 shares of series A preferred
stock will be outstanding. For a description of this preferred stock, please see
note 9 to our consolidated financial statements included elsewhere in this
prospectus. Upon the closing of this offering, our board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 1,000,000 shares of preferred stock in one or more series and
to fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of any series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption including sinking fund provisions, redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of any series. The number of authorized shares of preferred stock
may be increased or decreased, but not below the number of shares then
outstanding, by the affirmative vote of the holders of a majority of the common
stock, without a vote of the holders of the preferred stock, or of any series of
preferred stock, unless a vote of any such holders is required pursuant to the
terms of any preferred stock designation. We have no present plans to issue any
shares of preferred stock. See "-- Anti-Takeover Effects of Delaware Law and our
Certificate of Incorporation and Bylaws."
REGISTRATION RIGHTS
Pursuant to the terms of the standstill and registration rights
agreement, after the closing of this offering Eastman Chemical Company and
affiliates of Danisco A/S will be entitled to demand and piggyback registration
rights with respect to the registration of their shares under the Securities
Act. See "Certain Transactions -- Agreements with Significant Stockholders" and
"Shares Eligible for Future Sale."
59
<PAGE> 65
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Our restated certificate of incorporation and bylaws will contain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by our board of directors. In addition, provisions of Delaware law
may hinder or delay an attempted takeover of us other than through negotiation
with our board of directors. These provisions could have the effect of
discouraging attempts to acquire us or remove incumbent management even if some
or a majority of our stockholders believe this action to be in their best
interest, including attempts that might result in the stockholders receiving a
premium over the market price for their shares of common stock.
Removal and replacement of directors
Under our restated certificate of incorporation, directors may only be
removed with cause. In addition, under our restated certificate of incorporation
and bylaws only a majority of the directors then in office can fill board
vacancies and newly-created directorships resulting from any increase in the
size of the board of directors, even if those directors do not constitute a
quorum. These provisions could prevent stockholders, including parties who want
to take over or acquire us, from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
Classified board
Our restated certificate of incorporation provides that the board of
directors will be divided into three classes of directors, with each class
serving a staggered three-year term. See "Management -- Board Composition and
Committees." The classification system of electing directors may discourage a
third party from making a tender offer or otherwise attempting to obtain control
of us and may maintain the incumbency of the board of directors, because the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors.
Advance notice provisions for stockholder proposals and stockholder
nominations of directors
Our bylaws establish an advance notice procedure regarding stockholder
proposals and nominations for directors. The advance notice procedure will not
apply to proposals by our board of directors or management. Any stockholder that
wishes to make a proposal or nominate a director for election at an annual
meeting must deliver to us notice of the proposal or the nomination not less
than 45 days nor more than 75 days before the first anniversary of the mailing
of the proxy statement for the preceding year's annual meeting. For a special
meeting, the notice must generally be delivered not less than the later of 90
days before a special meeting or ten days following the day on which public
announcement of the meeting is first made. This advance notice proposal could
prevent someone interested in acquiring us from proposing actions that could
facilitate the takeover.
Special meetings of stockholders and actions in lieu of a meeting
Our restated certificate of incorporation and bylaws permit special
meetings of the stockholders to be called only by the board of directors, the
chairman of the board or the chief executive officer. This provision may make it
more difficult for stockholders to take actions opposed by the board of
directors.
Authorized but unissued shares
Without further stockholder approval, we can issue shares of common stock
and preferred stock up to the number of shares authorized for issuance in our
restated certificate of incorporation, except as limited by Nasdaq National
Market rules. We could use these additional shares for a variety of corporate
purposes. These purposes include future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. Our ability to issue
these shares of common stock and preferred stock could make it more difficult,
or discourage an attempt, to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
60
<PAGE> 66
Section 203 of Delaware law
In addition to the foregoing provisions of our restated certificate of
incorporation and bylaws, we will be subject to the provisions of Section 203 of
the Delaware General Corporation Law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date that
the person became an interested stockholder unless the business combination or
the transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to the
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior, did own, 15% or
more of the corporation's outstanding voting stock. This provision may have the
effect of delaying, deferring or preventing a change in control of us without
further action by our stockholders.
Neither Eastman Chemical Company nor Danisco A/S is subject to the
restrictions imposed by this statute.
Limitation of liability and indemnification matters
Our restated certificate of incorporation includes provisions to
eliminate the personal liability of our directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the Delaware
General Corporation Law. Our bylaws provide for indemnification of our directors
and officers to the fullest extent permitted by the Delaware General Corporation
Law, including circumstances in which indemnification is otherwise
discretionary.
Our bylaws permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions, regardless of whether the Delaware General Corporation Law would permit
indemnification.
TRANSFER AGENT AND REGISTRAR
Upon the closing of this offering, the transfer agent and registrar for
the common stock will be The Bank of New York.
LISTING
We have applied to have our common stock approved for listing on the
Nasdaq National Market under the trading symbol "GCOR".
61
<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common
stock. A significant public market for our common stock may not develop or be
sustained after this offering. Future sales of substantial amounts of our common
stock in the public market, or the possibility of these sales occurring, could
adversely affect prevailing market prices for our common stock or our future
ability to raise capital through an offering of equity securities.
Upon completion of this offering, we will have outstanding
shares of common stock. Of these shares, the
shares to be sold in this offering, shares if the underwriters'
over-allotment options are exercised in full, will be freely tradable in the
public market without restriction under the Securities Act, unless the shares
are held by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. All of the remaining shares of common stock outstanding upon
completion of this offering may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
under the Securities Act, as summarized below.
Pursuant to "lock-up" agreements, all executive officers, directors and
stockholders have agreed with the underwriters not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any of their shares
for a period of 180 days from the date of this prospectus. A total of
outstanding shares of common stock are subject to these lock-up agreements. We
also have entered into an agreement with the underwriters that we will not
offer, sell or otherwise dispose of common stock for a period of 180 days from
the date of this prospectus, subject to limited exceptions. However, Merrill
Lynch & Co. may in its sole discretion, at any time without notice, consent to
the release of all or any portion of the shares subject to lock-up agreements.
Taking into account the lock-up agreements, and assuming Merrill Lynch &
Co. does not release stockholders from these agreements, Eastman Chemical
Company and affiliates of Danisco A/S will be able to sell their shares of
common stock beginning 180 days after the date of this prospectus under Rule
144, subject to the limitations of Rule 144.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year would be entitled
to sell within any three-month period a number of shares not to exceed the
greater of (1) one percent of the then outstanding shares of common stock or (2)
the average weekly trading volume of our common stock during the four calendar
weeks preceding the filing of a Form 144 with respect to the sale. Sales under
Rule 144 are also subject to manner of sale and notice requirements, as well as
to the availability of current public information about us. Under Rule 144(k), a
person who is not deemed to have been an affiliate at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
We intend to file, after the effective date of this offering, a
registration statement on Form S-8 to register approximately 18,000,000 shares
of common stock reserved for issuance under our stock option plan. The
registration statement will become effective automatically upon filing. Shares
issued under our stock option plan after the filing of the registration
statement may be sold in the open market, subject, in the case of some holders,
to the Rule 144 limitations applicable to affiliates and vesting restrictions
imposed by us.
In addition, following this offering, Eastman Chemical Company and
affiliates of Danisco A/S will have rights to require us to register their
shares for future sale. See "Description of Capital Stock -- Registration
Rights" and "Certain Transactions -- Agreements with Significant Stockholders."
62
<PAGE> 68
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our common stock by
non-U.S. holders. As used herein, "non-U.S. holder" means any person or entity
that holds our common stock, other than:
- an individual citizen or resident of the U.S.;
- a corporation or partnership created or organized in or under the laws
of the U.S., or of any state of the U.S. or the District of Columbia,
other than any partnership treated as foreign under U.S. Treasury
Regulations.
- an estate the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source; or
- in general, a trust if a court within the U.S. may exercise primary
supervision over the administration of the trust and if one or more
U.S. persons have the authority to control all substantial decisions of
the trust.
This summary is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, existing, temporary and proposed U.S. Treasury Regulations
promulgated thereunder and administrative and judicial interpretations of each,
all as of the date hereof and all of which are subject to change, possibly on a
retroactive basis.
This summary is for general information only. It does not address aspects
of U.S. federal taxation other than income and estate taxation, and does not
address all aspects of U.S. federal income and estate taxation. This summary
does not discuss all the tax consequences that may be relevant to a non-U.S.
holder in light of the holder's particular circumstances (for instance,
insurance companies, tax-exempt organizations, broker-dealers, and financial
institutions). In addition, this summary does not address any state, local, or
foreign tax considerations that may be relevant to a non-U.S. holder's decision
to purchase shares of our common stock.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES, AS WELL AS OTHER
U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES, AND THE NON-U.S. TAX
CONSEQUENCES, TO THEM OF OWNING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
INCOME TAX
Dividends
Subject to the discussion below, dividends paid to a non-U.S. holder
generally will be subject to withholding of U.S. income tax at the rate of 30%
of the amount of the dividend, or such lower rate as may be prescribed by an
applicable income tax treaty.
However, if dividends we pay are effectively connected with a non-U.S.
holder's conduct of a trade or business in the U.S. (and, if a tax treaty
applies, are attributable to a U.S. permanent establishment (or, if the holder
is an individual, a "fixed base") of the non-U.S. holder), the 30% withholding
tax generally will not apply, and the non-U.S. holder generally will be subject
to tax on such dividends on a net basis in the same manner as holders that are
U.S. persons, provided the non-U.S. holder files appropriate IRS forms with us.
An additional branch profits tax of 30% (or such lower rate as may be prescribed
by an applicable income tax treaty) may apply if the non-U.S. holder is a
corporation.
Under current U.S. Treasury Regulations, in determining whether a holder
is eligible for the benefits of an income tax treaty, dividends paid to an
address in a foreign country are presumed to be paid to a resident of such
country, absent knowledge to the contrary. However, under new U.S. Treasury
Regulations generally effective for dividend payments made after December 31,
2000, a non-U.S. holder desiring to claim the benefits of an applicable tax
treaty must satisfy certification and other requirements and must provide us
with a taxpayer identification number unless an exception applies. In addition,
under
63
<PAGE> 69
these new Treasury Regulations, in the case of common stock held by a foreign
partnership, this certification requirement may be applied to the partners, and
not the partnership, and the partnership must provide certain information,
including a U.S. taxpayer identification number. These new regulations also
provide look-through rules for tiered partnerships. A non-U.S. holder that is
eligible for a reduced rate of U.S. withholding tax pursuant to a tax treaty may
obtain a refund of any excess amounts withheld by filing an appropriate claim
for refund with the IRS.
Disposition of our common stock
Generally, non-U.S. holders will not be subject to U.S. federal income
tax (or withholding thereof) in respect of gain recognized on a disposition of
our common stock unless:
- the gain is effectively connected with the holder's conduct of a trade
or business within the U.S., or, if a tax treaty applies, is
attributable to a permanent establishment or fixed base of the holder
in the U.S. (in any such case such gain will be subject to regular
graduated U.S. income tax rates and the branch profits tax described
above may also apply if the non-U.S. holder is a corporation);
- in the case of a non-U.S. holder who is a non-resident alien individual
and holds our common stock as a capital asset, the holder is present in
the U.S. for 183 or more days in the taxable year of the sale and other
conditions are met;
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes and certain other conditions are
met (we do not believe we are or have been a United States real
property holding corporation and do not expect to become one in the
future); or
- the holder is subject to tax pursuant to U.S. federal income tax
provisions applicable to certain U.S. expatriates.
Estate tax
If an individual non-U.S. holder owns, or is treated as owning, our
common stock at the time of his or her death, such stock would be includable in
the individual's gross estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax imposed on the estates of nonresident aliens,
in the absence of a contrary provision contained in an applicable tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides or is
established.
Under current law, dividends paid on our common stock to a non-U.S.
holder at an address outside the U.S. are generally exempt from backup
withholding tax (imposed at a 31% rate) and U.S. information reporting
requirements (but not from regular withholding tax as discussed above). Backup
withholding tax and information reporting generally will apply to dividends paid
to a non-U.S. holder at an address in the U.S. if the holder fails to establish
an exemption or to furnish other information. Under the Treasury Regulations
that are applicable to dividends paid after December 31, 2000, a non-U.S. person
must generally provide proper documentation establishing the person's non-U.S.
status to a withholding agent in order to avoid backup withholding tax.
64
<PAGE> 70
Broker sales
Payments of proceeds from the sale of our common stock by a non-U.S.
holder made to or through a U.S. office of a broker are generally subject to
both information reporting and backup withholding tax unless the holder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes entitlement to an exemption. Payments of proceeds from the sale of
our common stock by a non-U.S. holder made to or through a non-U.S. office of a
broker generally will not be subject to information reporting or backup
withholding. However, payments made to or through certain non-U.S. offices,
including the non-U.S. offices of a U.S. broker and foreign brokers with certain
types of relationships to the U.S., are generally subject to information
reporting (but not backup withholding) unless the holder certifies its non-U.S.
status under penalties of perjury or otherwise establishes entitlement to an
exemption.
Backup withholding is not an additional tax. A non-U.S. holder may obtain
a refund of any excess amounts withheld under the backup withholding rules by
filing an appropriate claim for refund with the IRS.
Non-U.S. holders should consult their tax advisors regarding the
application of information reporting and backup withholding in their particular
situation, including the availability of an exemption from such requirements and
the procedures for obtaining such an exemption, as well as the effect of the new
Treasury Regulations generally effective for payments made after December 31,
2000.
65
<PAGE> 71
UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Chase Securities Inc., Credit Suisse First
Boston Corporation and Salomon Smith Barney Inc. are acting as U.S.
representatives of the U.S. underwriters named below. Subject to the terms and
conditions described in a U.S. purchase agreement among us and the U.S.
underwriters, and concurrently with the sale of shares to the
international managers, we have agreed to sell to the U.S. underwriters, and the
U.S. underwriters severally have agreed to purchase from us the number of shares
listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Chase Securities Inc. ......................................
Credit Suisse First Boston Corporation......................
Salomon Smith Barney Inc. ..................................
-------
Total..........................................
=======
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, Chase Manhattan International Limited, Credit
Suisse First Boston (Europe) Limited and Salomon Brothers International Limited
are acting as lead managers. Subject to the terms and conditions in the
international purchase agreement, and concurrently with the sale of
shares to the U.S. underwriters pursuant to the U.S. purchase
agreement, we have agreed to sell to the international managers, and the
international managers severally have agreed to purchase shares from
us. The initial public offering price per share and the total underwriting
discount per share are identical under the U.S. purchase agreement and the
international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
U.S. underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters
propose initially to offer the shares to the public at the initial public
offering price on the cover page of this prospectus and to dealers at that price
less a concession not in excess of $ per share. The U.S. underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
66
<PAGE> 72
The following table shows the public offering price, underwriting
discount and proceeds before expenses to Genencor. The information assumes
either no exercise or full exercise by the U.S. underwriters and the
international managers of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price........................ $ $ $
Underwriting discount........................ $ $ $
Proceeds, before expenses, to Genencor....... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by Genencor.
OVER-ALLOTMENT OPTION
We have granted options to the U.S. underwriters to purchase up to
additional shares at the public offering price less the underwriting
discount. The U.S. underwriters may exercise these options for 30 days from the
date of this prospectus solely to cover any over-allotments. If the U.S.
underwriters exercise these options, each will be obligated, subject to
conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that U.S. underwriter's initial amount
reflected in the above table.
We have also granted options to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to
additional shares to cover any over-allotments on terms similar to
those granted to the U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus for
sale to some of our employees, directors and to some individuals designated by
them. If these persons purchase reserved shares, this will reduce the number of
shares available for sale to the general public. Any reserved shares that are
not orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and all existing stockholders
have agreed not to sell or transfer any common stock for 180 days after the date
of this prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and those other persons have agreed not to directly or
indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
67
<PAGE> 73
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition. We may continue to issue shares and options
under our stock option plan and file an S-8 registration statement relating to
our stock option plan.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "GCOR."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among us and the U.S. representatives and lead managers. In addition to
prevailing market conditions, the factors to be considered in determining the
initial public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect to
sell more than 5% of the shares in the aggregate to accounts over which they
exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
68
<PAGE> 74
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we not any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Latham & Watkins, Los Angeles, California. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Debevoise & Plimpton, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998
and for each of the three years in the period ended December 31, 1999 included
in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including the exhibits, schedules and amendments thereto,
under the Securities Act with respect to the shares of common stock to be sold
in this offering. This prospectus does not contain all the information set forth
in the registration statement. For further information regarding our company and
the shares of common stock to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. Reference is made to the contracts, agreements and other
documents filed as exhibits to the registration statement. These statements are
qualified in all respects by these references.
You may read and copy all or any portion of the registration statement or
any other information that we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-732-0330 for further information on the operation
of the public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available to you on the
Securities and Exchange Commission's Web site located at www.sec.gov.
As a result of this offering, we will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934, and in
accordance therewith will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Upon approval of the
common stock for the quotation on the Nasdaq National Market, reports, proxy and
information statements and other information may also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
69
<PAGE> 75
GENENCOR INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Genencor International, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Genencor International, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
January 28, 2000
F-2
<PAGE> 77
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
1998 1999 2000
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 12,792 $ 39,331 $ 53,863
Trade accounts receivable (less allowance for doubtful
accounts of $976 in 1998, $1,814 in 1999, and $1,861
in 2000 (unaudited))................................. 41,509 48,081 44,982
Inventories, net........................................ 64,484 50,716 50,265
Prepaid expenses and other current assets............... 12,772 19,266 15,305
Deferred income taxes................................... 7,573 1,104 1,104
-------- -------- --------
Total current assets............................... 139,130 158,498 165,519
Property, plant and equipment, net........................ 225,237 215,218 209,264
Investments and other assets.............................. 39,849 37,340 36,974
Intangible assets, net.................................... 95,385 93,268 89,869
Deferred income taxes..................................... 8,415 7,796 7,796
-------- -------- --------
Total assets....................................... $508,016 $512,120 $509,422
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable........................................... $ -- $ 5,774 $ 4,567
Current maturities of long-term debt.................... -- 10,000 10,000
Accounts payable and accrued expenses................... 29,899 43,506 40,577
Interest payable on long-term debt...................... 2,388 2,392 --
Accrued employee benefits............................... 21,459 11,104 8,108
Deferred income taxes................................... 513 3,308 3,308
-------- -------- --------
Total current liabilities.......................... 54,259 76,084 66,560
Long-term debt............................................ 158,000 142,486 143,660
Capital lease obligation.................................. -- 3,594 3,400
Deferred income taxes..................................... 20,946 14,388 13,190
Other long-term liabilities............................... 10,310 8,596 8,396
Minority interest......................................... -- 1,091 1,091
-------- -------- --------
Total liabilities.................................. 243,515 246,239 236,297
-------- -------- --------
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par
value, authorized 1,000 shares, 970 shares issued and
outstanding.......................................... 140,650 147,925 149,744
Shareholders' equity:
Common stock, par value $0.01 per share, 150,000,000
shares authorized, 100,000,000 shares issued and
outstanding.......................................... 1,000 1,000 1,000
Additional paid-in capital.............................. 185,826 185,826 187,945
Deferred stock-based compensation....................... -- -- (2,119)
Accumulated deficit..................................... (45,912) (35,280) (20,235)
Accumulated other comprehensive loss.................... (17,063) (33,590) (43,210)
-------- -------- --------
Total shareholders' equity......................... 123,851 117,956 123,381
-------- -------- --------
Total liabilities, redeemable preferred stock and
shareholders' equity............................ $508,016 $512,120 $509,422
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 78
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue................ $ 293,643 $ 279,492 $ 305,637 $ 72,602 $ 73,640
Fees and royalty revenues...... 16,699 9,619 10,965 2,264 6,059
------------ ------------ ------------ ------------ ------------
Total revenues............ 310,342 289,111 316,602 74,866 79,699
Operating expenses:
Cost of product sold........... 179,112 167,604 176,756 43,500 41,998
Research and development....... 37,306 40,205 43,955 10,022 11,824
Sales, marketing and business
development................. 25,392 24,394 24,564 5,162 5,665
General and administrative..... 17,995 22,940 22,984 4,900 5,542
Amortization of intangible
assets...................... 7,773 8,272 8,750 2,071 2,351
Restructuring and related
charges..................... -- -- 7,500 -- --
Other expense/(income)......... 938 (342) (845) (143) (299)
------------ ------------ ------------ ------------ ------------
Total operating
expenses............... 268,516 263,073 283,664 65,512 67,081
------------ ------------ ------------ ------------ ------------
Operating income................. 41,826 26,038 32,938 9,354 12,618
Non operating expenses/(income):
Investment income.............. -- (990) -- -- (15,046)
Interest expense............... 11,633 10,727 10,487 2,503 2,660
Interest income................ (446) (557) (750) (140) (560)
Other expense/(income)......... 1,100 (1,442) -- -- --
------------ ------------ ------------ ------------ ------------
Total non operating
expenses/ (income)..... 12,287 7,738 9,737 2,363 (12,946)
Income before provision for
income taxes................... 29,539 18,300 23,201 6,991 25,564
Provision for income taxes....... 5,106 3,279 5,294 1,595 8,700
------------ ------------ ------------ ------------ ------------
Net income....................... $ 24,433 $ 15,021 $ 17,907 $ 5,396 $ 16,864
============ ============ ============ ============ ============
Net income available to holders
of common stock............. $ 17,158 $ 7,746 $ 10,632 $ 3,577 $ 15,045
============ ============ ============ ============ ============
Earnings per common share:
Basic....................... $ 0.17 $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============ ============
Diluted..................... $ 0.17 $ 0.08 $ 0.11 $ 0.04 $ 0.15
============ ============ ============ ============ ============
Weighted average common shares
outstanding:
Basic....................... 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000
============ ============ ============ ============ ============
Diluted..................... 100,000,000 100,000,000 100,000,000 100,000,000 102,695,294
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 79
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DEFERRED STOCK- OTHER TOTAL
COMMON PAID-IN BASED ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL COMPENSATION DEFICIT LOSS EQUITY
------ ---------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996....... $1,000 $205,826 -- $(70,816) $ (8,140) $127,870
Comprehensive income:
Net income...................... 24,433 24,433
Other comprehensive loss:
Foreign currency
translation................. (17,540) (17,540)
Marketable securities, net of
tax......................... (147) (147)
--------
Other comprehensive loss...... (17,687)
--------
Comprehensive income............ 6,746
Preferred stock dividend
accrued......................... (7,275) (7,275)
Common stock dividend paid........ (10,000) (10,000)
------ -------- ------- -------- -------- --------
Balances, December 31, 1997....... 1,000 195,826 -- (53,658) (25,827) 117,341
------ -------- ------- -------- -------- --------
Comprehensive income:
Net income...................... 15,021 15,021
Other comprehensive income:
Foreign currency
translation................. 9,129 9,129
Marketable securities, net of
tax......................... (365) (365)
--------
Other comprehensive income.... 8,764
--------
Comprehensive income............ 23,785
Preferred stock dividend
accrued......................... (7,275) (7,275)
Common stock dividend paid........ (10,000) (10,000)
------ -------- ------- -------- -------- --------
Balances, December 31, 1998....... 1,000 185,826 -- (45,912) (17,063) 123,851
------ -------- ------- -------- -------- --------
Comprehensive income:
Net Income...................... 17,907 17,907
Other comprehensive loss:
Foreign currency
translation................. (21,325) (21,325)
Marketable securities, net of
tax......................... 4,798 4,798
--------
Other comprehensive loss...... (16,527)
--------
Comprehensive income............ 1,380
Preferred stock dividend
accrued......................... (7,275) (7,275)
------ -------- ------- -------- -------- --------
Balances, December 31, 1999....... 1,000 185,826 -- (35,280) (33,590) 117,956
------ -------- ------- -------- -------- --------
(Unaudited)
Comprehensive income:
Net Income...................... 16,864 16,864
Other comprehensive loss:
Foreign currency
translation................. (7,247) (7,247)
Marketable securities, net of
tax......................... (2,373) (2,373)
--------
Other comprehensive loss...... (9,620)
--------
Comprehensive income............ 7,244
Deferred stock-based
compensation.................... 2,119 (2,119) --
Preferred stock dividend
accrued......................... (1,819) (1,819)
------ -------- ------- -------- -------- --------
Balances, March 31, 2000.......... $1,000 $187,945 $(2,119) $(20,235) $(43,210) $123,381
====== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 80
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1998 1999 1999 2000
-------- -------- -------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 24,433 $ 15,021 $ 17,907 $ 5,396 $ 16,864
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 30,807 32,831 34,276 7,989 8,631
Loss (gain) on disposition of property, plant
and equipment................................ 1,113 (61) 1,927 348 --
Gain on sale of marketable securities........... -- -- -- -- (15,046)
Gain on sale of business........................ (134) (399) -- -- --
(Increase) decrease in operating assets:
Trade accounts receivable.................... 3,070 (1,174) (6,777) (3,650) 1,999
Inventories, net............................. (267) 1,083 9,999 2,873 (884)
Prepaid expenses and other current assets.... (2,825) (1,833) 1,352 (1,779) 369
Investments and other assets................. (5,718) (928) 1,693 773 (607)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses........ (11,491) (9,624) 4,180 (103) (2,145)
Interest payable on long-term debt........... (299) (31) 4 (2,377) (2,392)
Accrued employee benefits.................... 4,265 5,683 (8,980) (1,783) (2,870)
Other........................................ 4,374 5,514 2,599 2,416 (478)
-------- -------- -------- ------- --------
Net cash provided by operating activities.... 47,328 46,082 58,180 10,103 3,441
-------- -------- -------- ------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment.......... (23,910) (22,855) (21,274) (4,566) (3,639)
Proceeds from the sale of property, plant and
equipment......................................... 897 685 463 4,194 --
Proceeds from sale of business...................... 6,207 984 -- -- --
Proceeds from the sale of marketable securities..... -- -- -- -- 15,928
Sale-leaseback of facility.......................... -- -- 4,194 -- --
Reimbursement of purchase price..................... -- -- 1,331 1,331 --
Acquisition of business, net of cash acquired....... -- -- (3,293) -- --
Payment to acquire equity interest in affiliate..... -- -- (1,500) -- --
-------- -------- -------- ------- --------
Net cash (used in) provided by investing
activities................................. (16,806) (21,186) (20,079) 959 12,289
-------- -------- -------- ------- --------
Cash flows from financing activities:
Net payments on revolving credit facilities......... (23,000) (13,000) (8,000) (1,000) --
Net payments on notes payable of Chinese
affiliate......................................... -- -- (1,708) -- --
Dividends paid...................................... (10,000) (10,000) -- -- --
-------- -------- -------- ------- --------
Net cash used in financing activities........ (33,000) (23,000) (9,708) (1,000) --
-------- -------- -------- ------- --------
Effect of exchange rate changes on cash............... (809) 586 (1,854) (1,020) (1,198)
-------- -------- -------- ------- --------
Net (decrease) increase in cash and cash
equivalents......................................... (3,287) 2,482 26,539 9,042 14,532
Cash and cash equivalents -- beginning of period...... 13,597 10,310 12,792 12,792 39,331
-------- -------- -------- ------- --------
Cash and cash equivalents -- end of period............ $ 10,310 $ 12,792 $ 39,331 $21,834 $ 53,863
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 81
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- DESCRIPTION OF THE COMPANY AND ACCOUNTING POLICIES
Genencor International, Inc. and subsidiaries (the Company) integrates
the tools of biotechnology in meeting the needs of its customers. The Company's
current products include novel enzymes used in the cleaning, grain processing
and textile industries. The principal geographical markets for these products
are North America, South America, Europe and Asia.
The Company is a joint venture between Eastman Chemical Company (Eastman
Chemical) and Danisco Finland OY, a wholly-owned subsidiary of Danisco A/S
(Danisco), with each company holding 50% of the common and preferred shares of
the Company.
Significant accounting policies are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. Investments in affiliates in which the Company has
the ability to exercise significant influence, but not control, are accounted
for by the equity method. All other investments in affiliates are carried at
cost. Intercompany transactions are eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Statements (unaudited)
The consolidated financial statements for the three month periods ended
March 31, 2000 and 1999 are unaudited and should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31,
1999. Such interim financial statements have been prepared in conformity with
the rules and regulations of the 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, commercial
paper and bank deposits with original maturity dates of three months or less
from the date of purchase.
Revenue Recognition
The Company's revenue recognition policies comply with the guidance
contained in the provisions of SEC Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements".
F-7
<PAGE> 82
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- DESCRIPTION OF THE COMPANY AND ACCOUNTING POLICIES (CONTINUED)
Product Revenue
Revenue from product sales is recognized upon shipment to customers.
Fees and Royalty Revenues
Fees and royalty revenues consist primarily of research funding,
technology fees and royalties. Research funding expenses are reflected in
research and development in the statement of operations. Research funding
revenue is recognized over applicable periods as specified by each arrangement.
Fees from the sale of technology are recognized when earned, based upon
completion of the required technology transfer and release from any future
performance related responsibilities. Royalty revenue is recognized when earned
in accordance with contract terms.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses include expenses for services rendered related to the
Company's funded research activities.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. The Company provides
inventory reserves for excess, obsolete or slow-moving inventory based on
changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment
All property, plant and equipment is stated at acquisition cost.
Depreciation for financial statement purposes is calculated using the
straight-line method over the estimated useful lives of the assets. Land
improvements and buildings are depreciated over 10 - 40 years and machinery and
equipment over 3 - 15 years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the length of the applicable lease
term. Property under capital lease is amortized over the lease term. Maintenance
and repair expenditures are expensed as incurred.
Intangible Assets
Intangible assets consist of patents, licenses, technology and the excess
of cost over the net assets of acquired businesses, which are amortized on a
straight-line basis over their remaining useful lives. Patents and trademarks
are amortized over 15 years, technology over 10 - 20 years, the excess of cost
over the net assets of an acquired business over 10 - 40 years, and other
intangibles over 5 - 20 years.
Impairment of Long-Lived Assets
The Company assesses long-lived assets, including property, plant and
equipment and intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If undiscounted cash flows exceed the net recorded value, no
impairment is recognized.
F-8
<PAGE> 83
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- DESCRIPTION OF THE COMPANY AND ACCOUNTING POLICIES (CONTINUED)
Foreign Currency
All assets and liabilities of non-U.S. subsidiaries are translated at
exchange rates in effect at the balance sheet dates. Translation gains and
losses are included in determining comprehensive income. All income statement
amounts are translated at a rolling average exchange rate.
The Company, on occasion, uses forward exchange contracts and options to
hedge its exposure in foreign currencies. Option and forward exchange contracts
are used to minimize the impact of foreign currency fluctuations on the
Company's revenues and costs and are not used to engage in speculation. At
December 31, 1998 and 1999, the Company had no options or forward exchange
contracts outstanding.
Foreign currency transaction net (losses)/gains are included in other
operating income/expense. Total foreign currency transaction net (losses)/gains
were ($436) in 1997, $166 in 1998, and $824 in 1999.
Financial Instruments
The determination of fair value of financial instruments, consisting of
cash and cash equivalents, accounts receivable, obligations under accounts
payable, accrued expenses, and debt instruments is based on interest rates
available to the Company and comparisons to quoted market prices for the same or
similar issues. At December 31, 1998 and 1999, the fair value of these financial
instruments approximated carrying value.
Investments in Debt and Equity Securities
Available-for-sale securities are recorded within other current assets
and are carried at fair value, with unrealized gains and losses recorded as a
component of accumulated other comprehensive loss, net of tax.
Gross unrealized (losses)/gains on available-for-sale securities were
($327) at December 31, 1998 and $7,283 at December 31, 1999. The fair market
value of available-for-sale securities was $741 at December 31, 1998 and $8,351
at December 31, 1999. The deferred tax liability related to these unrealized
gains was $2,812 at December 31, 1999.
Investment Income (unaudited)
During the three months ended March 31, 2000, the Company realized a gain
on the sale of marketable securities in the amount of $15,046. This amount is
included in investment income as part of total non-operating income for the
period.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". This standard requires, among other things, recognition of
deferred tax assets and liabilities for future tax consequences, measured by
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities, and net operating loss
and tax credit carryforwards to the extent that realization of such benefits is
more likely than not.
F-9
<PAGE> 84
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- DESCRIPTION OF THE COMPANY AND ACCOUNTING POLICIES (CONTINUED)
Major Customers
In 1997, two customers accounted for 36% of sales and 28% of accounts
receivable. In 1998, two customers accounted for 39% of sales and 28% of
accounts receivable. In 1999, two customers accounted for 39% of sales and 36%
of accounts receivable.
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" as of January 1, 1998. This statement establishes
standards for reporting and presentation of comprehensive income and its
components. This statement requires reporting by major components and as a
single total, all changes in shareholders' equity from nonshareholder sources.
Adoption of this statement did not impact the Company's consolidated financial
position, results of operations or cash flows. The Company has chosen to display
comprehensive income in the Consolidated Statements of Changes in Shareholders'
Equity.
Earnings Per Share
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 cumulative preferred stock dividends of
$7,275 were deducted for each year presented.
Diluted earnings per share reflects the potential dilution that could
occur if dilutive securities and other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. As there were no dilutive
securities in 1997, 1998, and 1999, there is no effect on the numerator or
denominator between the computations of basic and diluted earnings per common
share in the years presented.
(unaudited)
As a result of stock options outstanding under the Company's Stock Option
and Stock Appreciation Right Plan, there were dilutive securities for the three
months ended March 31, 2000. The weighted-average impact of these has been
reflected in the calculation of diluted earnings per share for the quarter
ended.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 requires all derivatives to be recognized as assets or liabilities on the
balance sheet and measured at fair value. Changes in the fair value of
derivatives should be recognized in either net income or other comprehensive
income, depending on the designated purpose of the derivative. This statement is
effective for the Company on January 1, 2001. Based on its preliminary
assessment, the Company believes implementation of this statement will not have
a material affect on the consolidated financial statements.
F-10
<PAGE> 85
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 -- ACQUISITION
During May 1999, the Company acquired an 80% ownership interest in
Genencor (Wuxi) Bio-Products Company, Ltd. located in Wuxi, China for a total
cash purchase price of $9.9 million. The acquisition has been accounted for
under the purchase method. Intangible assets, including goodwill, acquired are
being amortized on a straight-line basis over ten years. The Company's share of
the acquired entity's results of operations has been consolidated with the
Company's results of operations since the acquisition date. Based on the
Company's allocation of the purchase price for the acquisition, the net assets
acquired consist of the following as of May 1999:
<TABLE>
<S> <C>
Working capital............................................. $ 500
Property, plant and equipment............................... 7,700
Intangible assets, including goodwill....................... 7,500
Long-term liabilities....................................... (4,700)
Minority interest........................................... (1,100)
-------
$ 9,900
=======
</TABLE>
Included in working capital acquired is a provision to restructure the
entity of approximately $3.2 million, representing primarily severance costs.
During 2000, the Company will continue to assess the cost of this restructuring.
Any changes in the anticipated cost to restructure the facility will be
reallocated to goodwill.
3 -- RESTRUCTURING AND RELATED CHARGES
During July 1999, the Company engaged in a plan to restructure its
facility in Belgium. This decision was driven primarily by two factors:
developments leading to a production overcapacity in the enzyme market and
operating costs of the Belgian plant that were considerably higher than in any
of the Company's other plants. Approximately 58 employees were affected by this
restructuring. As a result of the plan, restructuring and related charges of
$7.5 million were recorded in the Company's operating earnings in 1999. These
charges were primarily driven by personnel-related costs of $4.9 million, a
curtailment loss of $0.8 million under a related defined benefit pension
arrangement, and $1.8 million for certain equipment that was deemed impaired as
a result of the restructuring. At December 31, 1999, the Company had a remaining
severance liability of $2.9 million related to this restructuring.
4 -- FEES AND ROYALTY REVENUES
Fees and royalty revenues include the following:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Funded research.................................. $ 8,388 $9,035 $10,671
License fees..................................... 3,851 227 --
Royalties........................................ 1,023 157 95
Technology fees.................................. 3,437 -- --
Other............................................ -- 200 199
------- ------ -------
Fees and royalty revenues...................... $16,699 $9,619 $10,965
======= ====== =======
</TABLE>
5 -- INVENTORIES
Inventories consist of the following:
F-11
<PAGE> 86
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5 -- INVENTORIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................... $ 7,406 $ 5,730 $ 7,883
Work-in-progress............................ 9,153 8,024 8,126
Finished goods.............................. 47,925 36,962 34,256
------- ------- -------
Inventories, net.......................... $64,484 $50,716 $50,265
======= ======= =======
</TABLE>
Reserves for obsolete and slow moving inventory, and lower of cost or
market adjustments were approximately $2,676, $2,255, and $2,228, at December
31, 1998, 1999, and March 31, 2000 (unaudited), respectively.
6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land and buildings..................................... $112,575 $116,448
Machinery and equipment................................ 239,598 243,533
Construction-in-progress............................... 13,549 13,598
-------- --------
365,722 373,579
Less: Accumulated depreciation......................... 140,485 158,361
-------- --------
Property, plant and equipment, net................... $225,237 $215,218
======== ========
</TABLE>
Depreciation expense was $23,034 in 1997, $24,559 in 1998, and $25,526 in
1999.
The Company sold its facility in Leiden, The Netherlands, for $4,194 in
January 1999. There was no gain recorded on the sale of these assets, which are
being leased back from the purchaser over a period of 20 years. The lease is
being accounted for as a capital lease, and is included in 1999 property, plant
and equipment as follows:
<TABLE>
<S> <C>
Land and buildings.......................................... $3,655
Less: Accumulated depreciation.............................. 152
------
Capital lease assets, net................................. $3,503
======
</TABLE>
Land and buildings also includes $7,160 for a 50-year capitalized lease
entered into with a prior shareholder on January 1, 1990 for the Company's
development facility in Rochester, New York. Accumulated depreciation on this
lease is $1,519 at December 31, 1998 and $1,687 at December 31, 1999.
The Company entered into a 10-year operating lease during 1999 for office
space in Rochester, New York. Under provisions of the lease agreement, lease
payments will commence in January 2000 and escalate 5.6% as of January 2003 and
another 5.3% as of January 2007. The Company is recording rent expense under
this lease on a straight-line basis over the lease term. The Company may elect
to terminate the lease effective as of January 2007, for which it must provide
written notice by December 2005.
The Company leases certain other facilities and equipment under operating
leases. Rent expense relating to all operating leases was $3,053 for 1997,
$3,722 for 1998, and $2,994 for 1999.
F-12
<PAGE> 87
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6 -- PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Non-cancelable future minimum rental payments under significant leases as
of December 31, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
2000.................................................... $ 2,388 $ 276
2001.................................................... 2,415 276
2002.................................................... 2,407 276
2003.................................................... 2,463 276
2004.................................................... 2,540 276
Thereafter.............................................. 37,748 4,807
------- -------
Total minimum lease payments............................ $49,961 6,187
=======
Less: Amount representing interest...................... (2,593)
-------
Capital lease obligation................................ $ 3,594
=======
</TABLE>
7 -- INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Patents, licenses and other............................ $ 37,953 $ 46,978
Technology............................................. 43,167 41,928
Excess of cost over net assets of acquired
businesses........................................... 58,543 57,057
-------- --------
139,663 145,963
Less: Accumulated amortization......................... 44,278 52,695
-------- --------
Intangible assets, net............................... $ 95,385 $ 93,268
======== ========
</TABLE>
Amortization expense was $7,773 in 1997, $8,272 in 1998, and $8,750 in
1999.
F-13
<PAGE> 88
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
6.82% senior notes with payments of $28,000 due annually,
commencing in 2002........................................ $140,000 $140,000
$40,000 revolving credit facility due in 2000, with interest
rates ranging from 5.93% to 7.75% at December 31, 1998.... 8,000 --
Note payable to Gist-Brocades (G-b), as part of a 1995
acquisition, to finance the Company's purchase of a note
from G-b between a third party and G-b. Interest at 5% is
payable on the note only to the extent interest is paid to
the Company by the third party. Principal is due in a
balloon payment in June 2000.............................. 10,000 10,000
Notes payable of the Company's Chinese affiliate with
principal payments due in 2000 and 2001. Interest rates on
the notes range from 6.14% to 6.6%........................ -- 7,586
Other....................................................... -- 674
-------- --------
158,000 158,260
Less: Current maturities.................................... -- (15,774)
-------- --------
Long-term debt............................................ $158,000 $142,486
======== ========
</TABLE>
The senior note agreements contain various financial covenants which,
among other things, require the maintenance of certain financial ratios. The
most significant of these relate to: debt to total capital; total debt as a
multiple of earnings before interest, taxes, depreciation and amortization
(EBITDA); and minimum consolidated net worth. The Company is currently in
compliance with all of its financial covenants.
All debt outstanding under the $40,000 revolving credit facility and the
note to G-b is guaranteed 50% by Danisco and 50% by Eastman Chemical.
At December 31, 1999, principal obligations on notes payable and
long-term debt are as follows:
<TABLE>
<S> <C>
2000.............................................. $ 15,774
2001.............................................. 1,812
2002.............................................. 28,000
2003.............................................. 28,000
2004.............................................. 28,000
Thereafter........................................ 56,674
--------
Total........................................... $158,260
========
</TABLE>
9 -- REDEEMABLE PREFERRED STOCK
On December 1, 1991, the Company and its shareholders agreed to exchange
$97,000 of advances from shareholders (including interest payable of $12,604)
for 970 shares of no par value, 7 1/2% Cumulative Series A preferred stock
(Series A preferred stock). Dividends are cumulative from the date of issuance
and are subtracted from net income in 1997, 1998 and 1999 in determining net
income available to common shareholders. The Series A preferred stock was
authorized and issued on May 5, 1992 and has no voting rights except as required
by law or in respect to certain matters involving the Series A preferred stock.
The shares are redeemable in whole or in part for $100,000 per share plus
accrued unpaid dividends to the date of redemption. The total redemption value
of the Series A preferred stock at December 31, 1998 and 1999 in the amounts of
$140,650 and $147,925, respectively, is classified on the Company's
F-14
<PAGE> 89
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 -- REDEEMABLE PREFERRED STOCK (CONTINUED)
balance sheet as Redeemable Cumulative Series A Preferred Stock and includes
$43,650 and $50,925 of accrued and unpaid dividends, respectively. The
liquidation value is $100,000 per share plus accrued dividends to be paid on a
pro rata basis from assets available after payment of debt and prior to any
distribution on common stock. Shareholders of the Series A preferred stock have
agreed that no dividend will be declared or paid for the years ended December
31, 1998 and 1999.
10 -- SHAREHOLDERS' EQUITY
In addition to the Series A preferred stock, the Company has the
authority to issue 500,000 shares of preferred stock having a par value of $.01
per share. No shares have been issued as of December 31, 1999.
In December 1997 and 1998, the Company's Board of Directors declared and
the Company paid a dividend of $5 million to each of the Company's common
shareholders. No dividend was declared or paid in 1999.
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, 1996.............. $ (8,325) $ 185 $ (8,140)
Current period change.................. (17,540) (147) (17,687)
-------- ------- --------
Balances, December 31, 1997.............. (25,865) 38 (25,827)
Current period change.................. 9,129 (365) 8,764
-------- ------- --------
Balances, December 31, 1998.............. (16,736) (327) (17,063)
Current period change.................. (21,325) 4,798 (16,527)
-------- ------- --------
Balances, December 31, 1999.............. (38,061) 4,471 (33,590)
(unaudited)
Current period change.................. (7,247) (2,373) (9,620)
-------- ------- --------
Balances, March 31, 2000................. $(45,308) $ 2,098 $(43,210)
======== ======= ========
</TABLE>
Effective December 9, 1999, the Company's Board of Directors approved an
increase to the authorized number of shares of common stock to 150,000,000 with
a par value of $0.01 per share.
On December 9, 1999, the Board of Directors and shareholders approved a
25,000-for-1 stock split of the Company's common stock. All references to share
and per share amounts in these financial statements have been restated
retroactively to reflect the split.
(unaudited)
The change in the marketable securities valuation adjustment for the
period ended March 31, 2000 includes a $7,234 reduction of accumulated other
comprehensive loss related to realized gains from the sale of marketable equity
securities. The remaining $4,861 relates to unrealized holding gains on the
Company's available-for-sale securities.
F-15
<PAGE> 90
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 -- EMPLOYEE BENEFIT PLANS
Stock Option and Stock Appreciation Right Plan
On December 9, 1999, the Company adopted the Genencor International, Inc.
Stock Option and Stock Appreciation Right Plan (the Plan). Substantially all of
the Company's employees are eligible to participate in the Plan. The Plan allows
for the grant, generally at fair value as of the date of grant, of incentive or
non-statutory stock options to purchase the Company's common stock and stock
appreciation rights (SARs), based on the underlying value of the Company's
common stock. Under the terms of the Plan, the Company has the ability to grant
stock options and SARs representing up to 18 million shares of common stock.
Options vest ratably over a three-year period and expire 10 years from their
grant date. SARs vest 50% after three years, the remaining 50% after four years,
and expire 10 years from their grant date.
On December 9, 1999, the Company granted 10,930,500 nonqualified stock
options and 905,250 SARs to employees of the Company at an exercise price of
$4.85 per share. All of the options granted on December 9, 1999 remained
outstanding at December 31, 1999. Additionally, there were no options or SARs
exercisable at December 31, 1999.
Under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has elected to continue to account for stock options
in accordance with the provisions of APB Opinion No. 25 (APB 25) "Accounting for
Stock Issued to Employees". Had compensation cost for the Company's stock
options been determined consistent with the provisions of SFAS No. 123, there
would be no effect on the Company's 1999 net income available to holders of
common stock as the vesting period for the options granted commences on January
1, 2000.
For purposes of this disclosure, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model
using a risk-free interest rate of 6.48% and an average expected life of four
years. The grant date fair value of the stock options and SARs and restricted
stock granted on December 9, 1999 was $1.08 per share.
SARs are accounted for under the provisions of APB 25 as interpreted by
Financial Interpretation 28 (FIN 28) "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans, an interpretation of APB
Opinions No. 15 and 25". FIN 28 requires that compensation expense be recognized
over the vesting period for any increase in the fair value of the underlying
stock. Decreases in the fair value of the underlying stock in subsequent periods
would cause compensation expense to be reduced in that period although never
below zero.
(unaudited)
On March 28, 2000, the Company granted 548,400 options at an exercise
price of $4.85 per share. The Company determined that the estimated fair value
of its common stock increased from December 1999 to March 28, 2000 (the time of
the option grant). As a result, the Company recorded deferred stock-based
compensation of approximately $2,119 in connection with the option grants.
Stock-compensation expense is being recognized over the vesting periods of the
related options.
The Company also recorded compensation expense of $254 during the three
months ended March 31, 2000 to accrue the liability for the increase in the
estimated fair value of common stock in relation to the grant price of the
Company's outstanding stock appreciation rights.
F-16
<PAGE> 91
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Equity Value Plan
Effective July 15, 1994 the Company adopted the Equity Value Plan (EVP).
Under EVP, 4.15 million units out of a total 27.7 million units were reserved
for issuance. Units granted between July 15, 1994 and July 14, 1998 vested over
a two year period and expired five years from the date of grant. Effective July
15, 1998, units granted under the EVP vested over a three year period and
expired seven years from the date of grant. Grant and payout values under EVP
were based upon a valuation of the Company as determined annually by the Board
of Directors. In addition, the annual payout was subject to certain cash flow
requirements. Effective July 1, 1999, the Company terminated the plan. At that
time, units outstanding had exercise prices ranging from $11.50 to $16.67. All
units became fully vested and were paid out at $17.50 per unit. The Company
recognized EVP expense of $139 in 1997, $12,296 in 1998, and $3,571 in 1999.
These expenses are included in cost of product sold, research and development,
sales, marketing and business development and general and administrative
expenses for all periods presented.
Defined Contribution Pension Plans
The Company maintains employee benefit plans in the United States which
allow its eligible employees to make contributions, up to a certain limit, on a
tax deferred basis under Section 401(k) of the Internal Revenue Code.
The Company also contributes to the plans. Total employer contributions
to the plans for 1997, 1998 and 1999 amounted to approximately $1,850, $2,053,
and $2,222, respectively.
F-17
<PAGE> 92
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Defined Benefit Pension and Other Postretirement Benefits
The Company provides defined benefit pension and postretirement benefit
plans to employees. The following provides a reconciliation of benefit
obligations, plan assets, and funded status of all plans of the Company.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------- ---------------
1998 1999 1998 1999
-------------- -------------- ----- -------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year....... $ 34,817 $ 40,207 $ 623 $ 695
Service cost.................................. 2,622 2,820 26 108
Interest cost................................. 2,172 2,374 45 72
Plan participants' contributions.............. 109 110 -- --
Amendments.................................... (679) -- -- 383
Actuarial (gain)/loss......................... (177) (1,385) 18 (208)
Curtailment................................... -- 828 -- --
Benefits paid................................. (1,272) (2,786) (17) (18)
Translation................................... 2,615 (5,360) -- --
-------------- -------------- ----- -------
Benefit obligation at end of year............. $ 40,207 $ 36,808 $ 695 $ 1,032
============== ============== ===== =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year........................................ $ 60,493 $ 70,476 $ -- $ --
Actual return on plan assets.................. 6,125 7,393 -- --
Employer contributions........................ 355 3,085 -- --
Plan participants' contributions.............. 109 110 -- --
Benefits paid................................. (1,272) (2,786) -- --
Translation................................... 4,666 (10,031) -- --
-------------- -------------- ----- -------
Fair value of plan assets at end of year...... $ 70,476 $ 68,247 $ -- $ --
============== ============== ===== =======
FUNDED STATUS................................. $ 30,269 $ 31,439 $(695) $(1,032)
Unrecognized net actuarial (gain)/loss........ (15,568) (16,926) 43 (166)
Unrecognized prior service cost............... (653) (507) -- 328
-------------- -------------- ----- -------
Prepaid cost (accrued benefit)................ $ 14,048 $ 14,006 $(652) $ (870)
============== ============== ===== =======
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS CONSIST OF:
Prepaid benefit cost.......................... $ 18,338 $ 17,103 $ -- $ --
Accrued benefit cost.......................... (4,290) (3,097) (652) (870)
-------------- -------------- ----- -------
Net amount recognized......................... $ 14,048 $ 14,006 $(652) $ (870)
============== ============== ===== =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER
31:
Discount rate................................. 6.00% - 6.75% 6.00% - 8.00% 6.75% 8.00%
Expected return on plan assets................ 6.00% - 8.00% 6.00% - 8.00% N/A N/A
Rate of compensation increase................. 0.00% - 6.50% 0.00% - 6.50% N/A N/A
</TABLE>
F-18
<PAGE> 93
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------- --------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC COST
(BENEFIT):
Service cost............................ $ 1,254 $ 2,622 $ 2,820 $24 $27 $108
Interest cost........................... 2,183 2,172 2,374 41 44 72
Expected return on plan assets.......... (3,786) (4,215) (4,476) -- -- --
Amortization of prior service cost...... -- (59) (56) -- -- 55
Recognized net actuarial gain........... (287) (516) (622) -- -- --
------- ------- ------- --- --- ----
Net periodic cost (benefit)............. (636) 4 40 65 71 235
Curtailment............................. (441) -- 828 -- -- --
------- ------- ------- --- --- ----
Total net periodic cost
(benefit)................... $(1,077) $ 4 $ 868 $65 $71 $235
======= ======= ======= === === ====
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Projected benefit obligation............................. $11,620 $ 2,583
Accumulated benefit obligation........................... 9,633 2,374
Fair value of plan assets................................ 7,611 1,088
</TABLE>
Effective January 1, 1999, the Company established the Genencor
International, Inc. Retiree Medical Plan covering eligible non-union employees
in the United States. This plan resulted in an accrued liability of $157 and a
projected benefit obligation of $427 as of December 31, 1999.
As a result of the sizable reduction in the number of employees covered
by the restructuring plan (see note 3) in Belgium, a curtailment loss is
reflected in the net periodic pension cost for 1999.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The trend rates assumed for pre-65
claims graded to 5.00% in 2003, were 8.00% in 1998, and 7.00% in 1999. The trend
rates assumed for post-65 claims graded to 5.00% in 2003, were 6.50% in 1998,
and 6.00% in 1999. For both pre and post-65 claims, the trend rate was assumed
to remain at 5.00% after 2003. A one percentage point increase in assumed health
care cost trend rates would increase total service and interest cost by $15 and
increase the postretirement benefit obligation by $97. A one percentage point
decrease in assumed health care cost trend rates would decrease total service
and interest cost by $13 and decrease the postretirement benefit obligation by
$83.
12 -- NON OPERATING EXPENSES/(INCOME)
The components of other non-operating expenses/(income) are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- ----
<S> <C> <C> <C>
Gain on sale of business............................ $ -- $ (442) $--
Litigation settlement............................... -- (1,000) --
Write-down of equity investment..................... 1,100 -- --
------ ------- ---
Total non-operating expenses/(income)..... $1,100 $(1,442) $--
====== ======= ===
</TABLE>
F-19
<PAGE> 94
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ 570 $1,080
State.......................................... 885 -- 107
Foreign........................................ -- 2,433 2,603
------- ------- ------
885 3,003 3,790
------- ------- ------
Deferred:
Federal and State.............................. 2,081 (1,572) (146)
Foreign........................................ 5,279 1,848 1,811
------- ------- ------
7,360 276 1,665
------- ------- ------
Decrease in valuation allowances................. (3,139) -- (161)
------- ------- ------
$ 5,106 $ 3,279 $5,294
======= ======= ======
</TABLE>
The components of deferred tax assets and liabilities consist of the
following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Current assets and liabilities:
Unrealized appreciation on marketable securities....... $ -- $(2,812)
Inventories............................................ 1,597 486
Accrued expenses....................................... 5,450 519
Other items, net....................................... 13 114
-------- -------
7,060 (1,693)
-------- -------
Non-current assets and liabilities:
Net operating loss and tax credit carryforwards........ 14,407 21,855
Employee costs......................................... (5,484) (5,499)
Depreciation and amortization.......................... (14,294) (14,464)
Other items, net....................................... 801 (1,195)
-------- -------
(4,570) 697
Valuation allowances..................................... (7,961) (7,800)
-------- -------
Net deferred tax liability............................. $ (5,471) $(8,796)
======== =======
</TABLE>
The Company's practice is to reinvest the earnings of its foreign
subsidiaries in these operations. Deferred income taxes have not been provided
on these earnings, as the Company does not plan to initiate any action that
would require the payment of related U.S. income taxes. It is not practicable to
estimate the amount of additional tax that might be payable on these
undistributed foreign earnings.
The Company has net operating loss carryforwards of $20.1 million for
U.S. federal income tax purposes, which expire in 2004 through 2019. The Company
also has research and experimentation tax credit carryforwards of $6.5 million
for U.S. federal income tax purposes which expire in 2001 through 2013.
Additionally, the Company has alternative minimum tax credit carryforwards of
$1.9 million, which may be used indefinitely to reduce U.S. federal income
taxes. Certain foreign carryforwards have no expiration date.
F-20
<PAGE> 95
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 -- INCOME TAXES (CONTINUED)
A valuation allowance is provided for deferred tax assets if management
believes it is more likely than not these items will either expire before the
Company is able to realize their benefit, or that future deductibility is
uncertain. Although realization is not assured, management believes it is more
likely than not that the recorded deferred tax assets, net of valuation
allowance provided, will be realized. The Company's valuation allowance of $8.0
million and $7.8 million at December 31, 1998 and 1999 respectively, includes
$5.9 million of potential future tax benefits which, if recognized, will be
allocated to reduce goodwill.
The reconciliation of income tax from continuing operations computed at
the U.S. federal statutory tax rate to the Company's effective income tax rate
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory income tax rate................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit............................................. (0.4%) 0.5% 0.7%
Amortization of non-deductible intangible assets...... 4.2% 7.6% 6.3%
Foreign and U.S. tax effects attributable to foreign
operations.......................................... (14.5%) (11.1%) (15.2%)
Change in valuation allowances........................ (10.6%) -- (0.7%)
Tax credits........................................... -- (13.7%) (3.3%)
Other, net............................................ 3.6% (0.4%) --
----- ----- -----
17.3% 17.9% 22.8%
===== ===== =====
</TABLE>
The Company is subject to a tax ruling in The Netherlands, which reduces
the local effective income tax rate from 35% to 17.5%. This ruling will expire
at the end of 2005.
(unaudited)
The Company's effective income tax rate for the three months ended March
31, 2000 of 34% includes the effects of two one-time events totaling $18,456,
including a gain on sale of marketable equity securities and the settlement of
patent infringement claims, which were tax-effected at our U.S. effective income
tax rate.
14 -- SEGMENT DATA
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The Company maintains one industry segment,
which produces and distributes novel enzymes used in the cleaning, grain
processing and textile industries. The Company operates in four geographical
regions: North America, Europe (including Africa and the Middle East), Asia, and
South America. Product revenues are attributed to regions based on the
geographic location of the customer. Intercompany transactions between regions
have been eliminated. Long-lived assets include property, plant,
F-21
<PAGE> 96
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14 -- SEGMENT DATA (CONTINUED)
and equipment, intangible assets, and investments and other assets and are
attributed to regions based on physical location. Geographical segment
information for 1997, 1998, and 1999 is as follows:
<TABLE>
<CAPTION>
NORTH SOUTH
AMERICA EUROPE ASIA AMERICA CONSOLIDATED
-------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
1997
Product revenue.......... $136,098 $111,464 $21,596 $24,485 $293,643
Long-lived assets........ 258,959 83,938 722 9,686 353,305
1998
Product revenue.......... 126,588 109,285 20,044 23,575 279,492
Long-lived assets........ 246,390 94,265 835 9,658 351,148
1999
Product revenue.......... 131,785 123,319 33,241 17,292 305,637
Long-lived assets........ 217,377 99,686 8,335 10,468 335,866
</TABLE>
15 -- RELATED PARTY TRANSACTIONS
Danisco and its affiliates purchased approximately $12 million, $15
million, and $9 million of products from the Company during 1997, 1998, and
1999, respectively. The Company purchased products from and/or through these
related parties for approximately $6 million in 1997, and approximately $9
million in both 1998 and 1999. At December 31, 1998 and 1999, the Company had
amounts due from Danisco of $1,105 and $685, respectively, and due to Danisco of
$332 and $371, respectively. At December 31, 1998 and 1999, the Company had no
amounts due to or from Eastman Chemical.
At December 31, 1999 the Company had outstanding notes receivable with
balances totaling $1,466 from officers of the Company, of which $1,425 were
initiated in 1999. The notes are non-interest bearing and are due at the
conclusion of five years from the date of issuance. Accordingly, interest income
is imputed on the notes, with an offset recorded as compensation expense.
16 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1998 1999 1999 2000
------- ------- ------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid.......................... $11,857 $10,758 $10,487 $4,883 $3,283
======= ======= ======= ====== ======
Taxes paid............................. $ 3,350 $ 1,279 $ 2,254 $ 269 $ 260
======= ======= ======= ====== ======
Schedule of non-cash investing and
financing activity:
Adjustments relating to purchase
accounting for acquisitions..... $ 7,600 $ -- $ -- $ -- $ --
======= ======= ======= ====== ======
Sale-leaseback of facility........... $ -- $ -- $ 4,194 $ -- $ --
======= ======= ======= ====== ======
Debt of acquired business............ $ -- $ -- $ 4,700 $ -- $ --
======= ======= ======= ====== ======
</TABLE>
F-22
<PAGE> 97
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17 -- COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in legal matters, which are
handled and defended in the ordinary course of business. There are no such
matters pending that the Company and its General Counsel expect to be material
in relation to the Company's business, financial position or results of
operations.
18 -- SUBSEQUENT EVENTS
Legal Settlement
As of December 31, 1999, the Company was continuing to pursue certain
patent infringement claims with one of its customers. In January 2000, the
Company, in settlement of these legal claims, received $3.5 million plus future
royalties.
Additional Stock Options (unaudited)
On May 3, 2000, the Company issued an additional 547,000 options at an
exercise price of $4.85 per share.
Restricted Common Stock (unaudited)
On April 28, 2000, the Board of Directors of the Company allowed certain
key employees to accelerate the vesting provisions on 3,713,000 stock options
granted under the Genencor International, Inc. Stock Option and Stock
Appreciation Right Plan and purchase restricted shares of common stock. The
restricted shares were purchased through the use of notes receivable from the
employees. The vesting provisions of the restricted common stock agreements are
the same as those of stock options under the Plan. The shares purchased are held
in escrow by the Company until the note has been fully paid. Interest is charged
on the note at 6.71 percent. The total notes receivable for common stock was
$18,008 and are non recourse to the extent of 50% of the outstanding principal
balance.
Related Party Transactions (unaudited)
Subsequent to March 31, 2000, the Company issued additional notes to
officers of the Company. The increase to notes receivable was $2,856 and total
outstanding notes receivable was $4,322 as of May 5, 2000. The notes are
non-interest bearing and are due at the conclusion of five and one-half years
from the date of this offering. Accordingly, interest income is imputed on the
notes, with an offset recorded as compensation expense.
F-23
<PAGE> 98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the
date of this prospectus), all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriting and with respect to an unsold
allotment or subscription.
SHARES
[LOGO]
GENENCOR INTERNATIONAL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 99
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT
SOLICITING OFFERS TO BUY SECURITIES, IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 8, 2000
PROSPECTUS
SHARES
[LOGO]
GENENCOR INTERNATIONAL, INC.
COMMON STOCK
----------------------
This is Genencor International, Inc.'s initial public offering of common
stock. Genencor is selling all of the shares. The international managers are
offering shares outside the U.S. and Canada and the U.S. underwriters
are offering shares in the U.S. and Canada.
We estimate the public offering price to be between $ and
$ per share. Currently, no public market exists for the shares. After
pricing of the offering, we expect that the shares will be quoted on the Nasdaq
National Market under the symbol "GCOR."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Genencor...................... $ $
</TABLE>
The international managers may also purchase up to an additional shares
from Genencor at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
The U.S. underwriters may similarly purchase up to an additional shares
from Genencor.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about ,
2000.
----------------------
MERRILL LYNCH INTERNATIONAL
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY INTERNATIONAL
----------------------
The date of this prospectus is , 2000.
<PAGE> 100
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, Chase Manhattan International Limited, Credit
Suisse First Boston (Europe) Limited and Salomon Brothers International Limited
are acting as lead managers for the international managers named below. Subject
to the terms and conditions described in our international purchase agreement
among us and the international managers, and concurrently with the sale of
shares to the U.S. underwriters, we have agreed to sell to the
international managers, and the international managers severally have agreed to
purchase from us the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
INTERNATIONAL MANAGERS ---------
<S> <C>
Merrill Lynch International.................................
Chase Manhattan International Limited.......................
Credit Suisse First Boston (Europe) Limited.................
Salomon Brothers International Limited......................
-----------
Total.........................................
===========
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch Pierce, Fenner & Smith, Inc., Chase Securities Inc., Credit Suisse First
Boston Corporation and Salomon Smith Barney Inc. are acting as U.S.
representatives. Subject to the terms and conditions in the U.S. purchase
agreement, and concurrently with the sale of shares to the
international managers pursuant to the international purchase agreement, we have
agreed to sell to the U.S. underwriters, and the U.S. underwriters severally
have agreed to purchase shares from us. The initial public offering
price per share and the total underwriting discount per share are identical
under the international purchase agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
international and U.S. purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and the
U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The international managers may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
U-1
<PAGE> 101
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
The following table shows the public offering price, underwriting
discount and proceeds before expenses to Genencor. The information assumes
either no exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price....................... $ $ $
Underwriting discount....................... $ $ $
Proceeds, before expenses, to Genencor...... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by Genencor.
OVER-ALLOTMENT OPTION
We have granted options to the international managers to purchase up to
additional shares at the public offering price less the underwriting discount.
The international managers may exercise these options for 30 days from the date
of this prospectus solely to cover any over-allotments. If the international
managers exercise these options, each will be obligated, subject to conditions
contained in the purchase agreements, to purchase a number of additional shares
proportionate to that international manager's initial amount reflected in the
above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to persons who are U.S. or
Canadian persons, except in the case of transactions under the intersyndicate
agreement. Similarly, the U.S. underwriters and any dealer to whom they sell
shares will not offer to sell or sell shares to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, except in the case of transactions under
the intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus for
sale to some of our employees, directors and to some individuals designated by
them. If these persons purchase reserved shares, this will reduce the number of
shares available for sale to the general public. Any reserved shares that are
not orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
U-2
<PAGE> 102
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and all existing stockholders
have agreed not to sell or transfer any common stock for 180 days after the date
of this prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and those other persons have agreed not to directly or
indirectly
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition. We may continue to issue shares and options
under our stock option plan and file an S-8 registration statement relating to
our stock option plan.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "GCOR."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among us and the U.S. representatives and lead managers. In addition to
prevailing market conditions, the factors to be considered in determining the
initial public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect to
sell more than 5% of the shares in the aggregate to accounts over which they
exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
U-3
<PAGE> 103
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we not any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that:
- It has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding managing, or
disposing of investments (as principal or agent) for the purposes of
their business or otherwise in circumstances which do not constitute an
offer to the public in the United Kingdom with the meaning of the
Public Offers of Securities Regulations 1995;
- It has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- It has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 as amended by the Financial
Services Act of 1986 (Investment Advertisements) (Exemptions) Order
1997 or is a person to whom such document may otherwise lawfully be
issued or passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation, or distribution of this prospectus or any
other material relating to our company, the selling stockholders, or shares of
our common stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of our common stock may not be offered or sold, directly
or indirectly, and neither this prospectus nor any other common stock may not be
offered or sold, directly or indirectly, and neither this prospectus nor any
other offering materials or advertisements in connection with the shares of
common stock may be distributed or published, in or from any country or
jurisdiction except in compliance with any applicable rules and regulations or
any such country or jurisdiction.
Purchasers or the shares offered by this prospectus may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price on the cover page of
this prospectus.
U-4
<PAGE> 104
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the
date of this prospectus), all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriting and with respect to an unsold
allotment or subscription.
SHARES
[LOGO]
GENENCOR INTERNATIONAL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH INTERNATIONAL
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY INTERNATIONAL
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. THE EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses to be paid by Genencor in connection with the
distribution of the securities being registered are as set forth in the
following table:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee...................... $ 39,600
NASD Filing Fee............................................. 15,500
Nasdaq National Market Listing Fee..........................
Legal Fees and Expenses.....................................
Accounting Fees and Expenses................................
Printing Expenses...........................................
Blue Sky Fees and Expenses..................................
Registrar and Transfer Agent Fees and Expenses..............
Miscellaneous...............................................
--------
Total..................................................... $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware (the "DGCL")
empowers a corporation to indemnify, subject to the standards set forth therein,
any person who is a party to any action in connection with any action, suit or
proceeding brought or threatened by reason of the fact that the person was a
director, officer, employee or agent of the corporation, or is or was serving as
such with respect to another entity at the request of the corporation. The DGCL
also provides that a corporation may purchase insurance on behalf of any such
director, officer, employee or agent. Section 8.1 of Genencor's Bylaws provides
that Genencor will indemnify its officers and directors, and persons serving at
its request as officers, directors, employees and agents, of other entities, to
the fullest extent, indemnification may be permitted under Delaware law.
Genencor provides directors' and officers' liability insurance coverage for its
directors and officers.
Section 102(b)(7) of the DGCL enables a Delaware corporation to provide
in its certificate of incorporation for the elimination or limitation of the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Any such provision
cannot eliminate or limit a director's liability: (1) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (3) under Section 174 of the DGCL (which imposes
liability on directors for unlawful payment of dividends or unlawful stock
purchase or redemption); or (4) for any transaction from which the director
derived an improper personal benefit. Article 8 of Genencor's Restated
Certificate of Incorporation provides for the eliminations or limitations of
personal liability set forth in clauses (i) through (iv) of Section 102(b)(7) of
the DGCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 1997, Genencor has issued and sold unregistered securities as
follows:
(1) Genencor issued to W. Thomas Mitchell, through the exercise of
stock options at an exercise price of $4.85 per share, 703,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
(2) Genencor issued to Stuart L. Melton, through the exercise of
stock options at an exercise price of $4.85 per share, 435,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
II-1
<PAGE> 106
(3) Genencor issued to Raymond J. Land, through the exercise of
stock options at an exercise price of $4.85 per share, 435,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
(4) Genencor issued to Richard J. Ranieri, through the exercise of
stock options at an exercise price of $4.85 per share, 435,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
(5) Genencor issued to Michael V. Arbige, through the exercise of
stock options at an exercise price of $4.85 per share, 435,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
(6) Genencor issued to Carole Beth Cobb, through the exercise of
stock options at an exercise price of $4.85 per share, 435,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
(7) Genencor issued to Thomas J. Pekich, through the exercise of
stock options at an exercise price of $4.85 per share, 435,000
shares of common stock on April 28, 2000 pursuant to a
restricted stock purchase agreement and pledge agreement.
(8) Genencor issued to Debby Jo Blank, through the exercise of
stock options at an exercise price of $4.85 per share, 400,000
shares of common stock on May 3, 2000 pursuant to a restricted
stock purchase agreement and pledge agreement.
These sales of securities were made in reliance upon Section 4(2) of the
Securities Act, which provides exemptions for transactions not involving a
public offering. Genencor did not retain underwriters in connection with the
issuance of any of Genencor's currently outstanding securities.
II-2
<PAGE> 107
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<S> <C>
1.1(2) Form of the U.S. Purchase Agreement.
3.1(2) Certificate of Incorporation, as amended, as currently in
effect.
3.2(2) Bylaws, as currently in effect.
3.3(2) Form of Restated Certificate of Incorporation, to be
effective upon the closing of this offering.
3.4(2) Form of Amended and Restated Bylaws, to be effective upon
the closing of this offering.
4.1(2) Form of Specimen Common Stock Certificate.
4.2(2) 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.
4.3(2) 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.
4.4(2) $10 million Promissory Note by the Company in favor of
Gist-Brocades International B.V., dated June 2, 1995.
5.1(2) Opinion of Latham & Watkins.
10.1(2) Form of Indemnity Agreement between the Company and its
directors and executive officers.
10.2(2) Stock Option and Appreciation Right Plan.
10.3(2) Form of Nonstatutory Stock Option or Stock Appreciation
Right Agreement under the Stock Option and Appreciation
Right Plan.
10.4(2) Form of Stock Grant Notice.
10.5(2) Standstill and Registration Rights Agreement between the
Company, Eastman Chemical Company and Danisco A/S, dated
, 2000.
10.6(2) Lease agreement by and between the Company and The Board of
Trustees of the Leland Stanford Junior University, dated May
22, 1995. (Palo Alto)
10.7(2) Lease Agreement between the Company and Meridian Centre
Associates, L.P., dated August 16, 1999, as amended
September 1, 1999. (Rochester)
10.8(2) Lease between the Genencor B.V. and ABN AMRO Onroerend Goed
Lease en Financieringen B.V., dated January 6, 1999.
(Leiden, The Netherlands)
10.9(2) Lease agreement by and between the Company and Eastman Kodak
Company, dated August 28, 1991. (Rochester)
10.10(2)* Joint Research and Development Venture Agreement between the
Company and Eastman Chemical Company, ElectroSynthesis
Company, MicroGenomics, and Argonne National Laboratory,
dated September 14, 1995.
10.11(2)* Research Agreement between the Company and The Procter &
Gamble Company, dated September 1, 1997.
10.12(2)* Technology Transfer Agreement between the Company and The
Procter & Gamble Company, dated September 1, 1997.
10.13(2)* Commercialization Agreement between the Company and The
Procter & Gamble Company, dated April 25, 2000.
10.14(2)* Collaborative Research and Development Agreement between the
Company and E.I. du Pont de Nemours and Company, dated
September 1, 1995, as amended.
10.15(2) Amended and Restated Equity Joint Venture Contract between
Genencor Mauritius Ltd. and Wuxi Enzyme Factory, dated May
10, 1998.
</TABLE>
II-3
<PAGE> 108
<TABLE>
<S> <C>
10.16(2) Employee Retirement Investment Plan.
10.17(2) Income Replacement Plan.
10.18(2) Senior Executive Relocation Policy.
10.19(2) Form of executive officer Promissory Note.
10.20(2) Employment Agreement for W. Thomas Mitchell, dated June 21,
1995.
10.21(2) Form of executive officer Employment Agreement.
10.22(2) Employment Agreement for Carl D. Copeland, dated July 16,
1999.
10.23(2) Employment Agreement for Wayne H. Pitcher, dated July 27,
1999.
10.24(2) Form of Restricted Stock Purchase Agreement.
10.25(2) Form of executive officer Secured Promissory Note.
10.26(2) Form of executive officer Pledge Agreement.
21.1(2) Subsidiaries of the Registrant.
23.1(1) Consent of independent accountants.
23.2(2) Consent of Latham & Watkins (included in Exhibit 5.1).
24.1(1) Power of Attorney (included on the signature page to this
registration statement).
27.1(1) Financial Data Schedule.
</TABLE>
- ------------
(1) Filed herewith.
(2) To be filed by amendment.
* The registrant is seeking confidential treatment with respect to portions of
this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable, or the information is included in our financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to
II-4
<PAGE> 109
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Palo Alto,
State of California, on May 5, 2000.
GENENCOR INTERNATIONAL, INC.
By: /s/ W. THOMAS MITCHELL
------------------------------------
W. Thomas Mitchell
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below does hereby constitute and
appoint W. Thomas Mitchell and Raymond J. Land, and each of them, with full
power of substitution and full power to act, with or without the other, such
person's true and lawful attorneys-in-fact and agents to act for him in his
name, place and stead, in any and all capacities, to sign this Registration
Statement and any and all amendments thereto (including any pre- and
post-effective amendments), any and all registration statements filed pursuant
to Rule 462(b) of the Securities Act of 1933 (including any pre- and post-
effective amendments) and to file the same, with all exhibits and schedules
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
necessary or desirable to be done in order to effectuate the same as fully, to
all intents and purposes, as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by each of the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ W. THOMAS MITCHELL President, Chief Executive Officer May 5, 2000
- ------------------------------------------ and Director (Principal Executive
W. Thomas Mitchell Officer)
/s/ RAYMOND J. LAND Senior Vice President and Chief May 5, 2000
- ------------------------------------------ Financial Officer (Principal
Raymond J. Land Financial and Accounting Officer)
/s/ JAMES L. CHITWOOD Director May 5, 2000
- ------------------------------------------
James L. Chitwood
/s/ ROBERT H. MAYER Director May 5, 2000
- ------------------------------------------
Robert H. Mayer
/s/ SOREN BJERRE-NIELSEN Director May 5, 2000
- ------------------------------------------
Soren Bjerre-Nielsen
/s/ JAMES P. ROGERS Director May 5, 2000
- ------------------------------------------
James P. Rogers
</TABLE>
II-6
<PAGE> 111
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Genencor International, Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 28, 2000 appearing in the Registration Statement filed on
Form S-1 (which report and consolidated financial statements are included in
this Form S-1) also included an audit of the financial statement schedule listed
in Item 16(b) of this Form S-1. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
Rochester, NY
January 28, 2000
S-1
<PAGE> 112
SCHEDULE II
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO AMOUNTS END
OF PERIOD EARNINGS WRITTEN OFF OF PERIOD
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Deducted in the Consolidated Balance Sheet:
From current assets:
Trade accounts receivable, allowance for
doubtful accounts............................. $ (1,396) $ (951) $ 1,169 $(1,178)
Reserve for obsolete and slow moving inventory
and lower of cost or market adjustments....... (9,837) -- 6,995 (2,842)
-------- ------- ------- -------
Total.............................................. (11,233) (951) 8,164 (4,020)
======== ======= ======= =======
Deferred tax valuation allowance................... (24,486) -- 16,525 (7,961)
======== ======= ======= =======
Year Ended December 31, 1998
Deducted in the Consolidated Balance Sheet:
From current assets:
Trade accounts receivable, allowance for
doubtful accounts............................. (1,178) (147) 349 (976)
Reserve for obsolete and slow moving inventory
and lower of cost or market adjustments....... (2,842) -- 166 (2,676)
-------- ------- ------- -------
Total.............................................. (4,020) (147) 515 (3,652)
======== ======= ======= =======
Deferred tax valuation allowance................... (7,961) -- -- (7,961)
======== ======= ======= =======
Year Ended December 31, 1999
Deducted in the Consolidated Balance Sheet:
From current assets:
Trade accounts receivable, allowance for
doubtful accounts............................. (976) (1,500) 662 (1,814)
Reserve for obsolete and slow moving inventory
and lower of cost or market adjustments....... (2,676) -- 421 (2,255)
-------- ------- ------- -------
Total.............................................. (3,652) (1,500) 1,083 (4,069)
======== ======= ======= =======
Deferred tax valuation allowance................... $ (7,961) $ -- $ 161 $(7,800)
======== ======= ======= =======
</TABLE>
S-2
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1(2) Form of the U.S. Purchase Agreement.
3.1(2) Certificate of Incorporation, as amended, as currently in
effect.
3.2(2) Bylaws, as currently in effect.
3.3(2) Form of Restated Certificate of Incorporation, to be
effective upon the closing of this offering.
3.4(2) Form of Amended and Restated Bylaws, to be effective upon
the closing of this offering.
4.1(2) Form of Specimen Common Stock Certificate.
4.2(2) 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.
4.3(2) 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.
4.4(2) $10 million Promissory Note by the Company in favor of
Gist-Brocades International B.V., dated June 2, 1995.
5.1(2) Opinion of Latham & Watkins.
10.1(2) Form of Indemnity Agreement between the Company and its
directors and executive officers.
10.2(2) Stock Option and Appreciation Right Plan.
10.3(2) Form of Nonstatutory Stock Option or Stock Appreciation
Right Agreement under the Stock Option and Appreciation
Right Plan.
10.4(2) Form of Stock Grant Notice.
10.5(2) Standstill and Registration Rights Agreement between the
Company, Eastman Chemical Company and Danisco A/S, dated
, 2000.
10.6(2) Lease agreement by and between the Company and The Board of
Trustees of the Leland Stanford Junior University, dated May
22, 1995. (Palo Alto)
10.7(2) Lease Agreement between the Company and Meridian Centre
Associates, L.P., dated August 16, 1999, as amended
September 1, 1999. (Rochester)
10.8(2) Lease between the Genencor B.V. and ABN AMRO Onroerend Goed
Lease en Financieringen B.V., dated January 6, 1999.
(Leiden, The Netherlands)
10.9(2) Lease agreement by and between the Company and Eastman Kodak
Company, dated August 28, 1991. (Rochester)
10.10(2)* Joint Research and Development Venture Agreement between the
Company and Eastman Chemical Company, ElectroSynthesis
Company, MicroGenomics, and Argonne National Laboratory,
dated September 14, 1995.
10.11(2)* Research Agreement between the Company and The Procter &
Gamble Company, dated September 1, 1997.
10.12(2)* Technology Transfer Agreement between the Company and The
Procter & Gamble Company, dated September 1, 1997.
10.13(2)* Commercialization Agreement between the Company and The
Procter & Gamble Company, dated April 25, 2000.
10.14(2)* Collaborative Research and Development Agreement between the
Company and E.I. du Pont de Nemours and Company, dated
September 1, 1995, as amended.
10.15(2) Amended and Restated Equity Joint Venture Contract between
Genencor Mauritius Ltd. and Wuxi Enzyme Factory, dated May
10, 1998.
10.16(2) Employee Retirement Investment Plan.
</TABLE>
<PAGE> 114
<TABLE>
<S> <C>
10.17(2) Income Replacement Plan.
10.18(2) Senior Executive Relocation Policy.
10.19(2) Form of executive officer Promissory Note.
10.20(2) Employment Agreement for W. Thomas Mitchell, dated June 21,
1995.
10.21(2) Form of executive officer Employment Agreement.
10.22(2) Employment Agreement for Carl D. Copeland, dated July 16,
1999.
10.23(2) Employment Agreement for Wayne H. Pitcher, dated July 27,
1999.
10.24(2) Form of Restricted Stock Purchase Agreement.
10.25(2) Form of executive officer Secured Promissory Note.
10.26(2) Form of executive officer Pledge Agreement.
21.1(2) Subsidiaries of the Registrant.
23.1(1) Consent of independent accountants.
23.2(2) Consent of Latham & Watkins (included in Exhibit 5.1).
24.1(1) Power of Attorney (included on the signature page to this
registration statement).
27.1(1) Financial Data Schedule.
</TABLE>
- ------------
(1) Filed herewith.
(2) To be filed by amendment.
* The registrant is seeking confidential treatment with respect to portions of
this exhibit.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated January 28, 2000 relating to the consolidated financial statements
and financial statement schedule of Genencor International, Inc. and
Subsidiaries, which appear in such Registration Statement. We also consent to
the reference to us under the caption "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Rochester, New York
May 5, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED CONSOLIDATED
FINANCIAL STATEMENTS OF GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES FOR THE
YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY ON FORM S-1 FOR
THE PERIOD ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 39,331
<SECURITIES> 8,351
<RECEIVABLES> 48,081
<ALLOWANCES> 1,814
<INVENTORY> 50,716
<CURRENT-ASSETS> 158,498
<PP&E> 373,579
<DEPRECIATION> 158,361
<TOTAL-ASSETS> 512,120
<CURRENT-LIABILITIES> 76,084
<BONDS> 142,486
147,925
0
<COMMON> 1,000
<OTHER-SE> 116,956
<TOTAL-LIABILITY-AND-EQUITY> 512,120
<SALES> 305,637
<TOTAL-REVENUES> 316,602
<CGS> 176,756
<TOTAL-COSTS> 176,756
<OTHER-EXPENSES> 106,158
<LOSS-PROVISION> 1,500
<INTEREST-EXPENSE> 10,487
<INCOME-PRETAX> 23,201
<INCOME-TAX> 5,294
<INCOME-CONTINUING> 17,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,907
<EPS-BASIC> 0.11<F1>
<EPS-DILUTED> 0.11<F1>
<FN>
<F1>BASIC AND DILUTED EPS REFLECTS DEDUCTION OF $7,275 OF PREFERRED STOCK DIVIDENDS
ACCRUED TO ARRIVE AT EARNINGS PER COMMON SHARE.
</FN>
</TABLE>
