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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO______________
COMMISSION FILE NUMBER 000-31167
GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 16-1362385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 846-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS
YES |X| NO | |
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
| |
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES |X| NO | |
THE AGGREGATE MARKET VALUE (BASED UPON THE CLOSING PRICE ON THE NASDAQ
STOCK MARKET ON JUNE 30, 2002) OF THE 8,120,561 SHARES OF VOTING STOCK HELD BY
NON-AFFILIATES AS OF JUNE 30, 2002 WAS APPROXIMATELY $79,500,292.
AS OF MARCH 14, 2003, THERE WERE 58,576,827 SHARES OF COMMON STOCK, PAR
VALUE $0.01 PER SHARE, OUTSTANDING.
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE ISSUED IN
CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE REGISTRANT TO BE HELD
ON MAY 29, 2003 HAVE BEEN INCORPORATED BY REFERENCE INTO PART III, ITEMS 10, 11,
12 AND 13 OF THIS REPORT.
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Business......................................................................................... 3
Item 2. Properties....................................................................................... 21
Item 3. Legal Proceedings................................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 21
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................... 22
Item 6. Selected Financial Data.......................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 37
Item 8. Financial Statements and Supplementary Data...................................................... 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 68
PART III.
Item 10. Directors and Executive Officers of the Registrant............................................... 68
Item 11. Executive Compensation........................................................................... 68
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 68
Item 13. Certain Relationships and Related Transactions................................................... 69
Item 14. Controls and Procedures.......................................................................... 69
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 69
SIGNATURES..................................................................................................... 71
CERTIFICATIONS................................................................................................. 72
INDEX to EXHIBITS.............................................................................................. 74
2
This Report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. These include statements concerning
plans, objectives, goals, strategies, future events or performance and all other
statements which are other than statements of historical fact, including without
limitation, statements containing the words "believes," "anticipates,"
"expects," "estimates," "projects," "will," "may," "might" and words of a
similar nature. The forward-looking statements contained in this Report reflect
the Company's current beliefs and expectations on the date of this Report.
Actual results, performance or outcomes may differ materially from those
expressed in the forward-looking statements. Some of the important factors
which, in the view of the Company, could cause actual results to differ from
those expressed in the forward-looking statements are discussed in Items 1, 7,
and 7A of this Report. The Company disclaims any obligation to update any
forward-looking statement to reflect facts or circumstances after the date
hereof.
Unless otherwise specified, all references to the "Company", "we", "us", "our",
and "ourselves" refer to Genencor International, Inc. or Genencor International,
Inc. and its subsidiaries collectively, as appropriate in the context of the
disclosure.
PART I.
ITEM 1. BUSINESS
OVERVIEW AND CERTAIN RECENT DEVELOPMENTS
We are a diversified biotechnology company that develops and delivers
products and services for the industrial, consumer, and agri-processing markets,
which we refer to as our bioproducts business. In addition, we are developing
products for the health care market. Using an integrated set of technology
platforms, including gene discovery and functional genomics, molecular evolution
and design, and human immunology, we develop products that deliver innovative
and sustainable solutions to many of the problems of everyday life.
Our strategy is to apply our proven and proprietary technologies and
manufacturing capabilities to expand sales in our existing markets and to
address new opportunities in bioproducts and health care. Our product
formulations contain enzymes that are used in applications as diverse as
removing stubborn stains from clothing, converting corn starch to the sweetener
used in many soft drinks and certain foods, and enhancing the nutritional value
of grains for animal feed. We currently manufacture and market these products
through our global supply chain of 15 global distribution locations on four
continents, which includes eight manufacturing facilities. In addition, we are
developing a number of other products independently as well as through
collaborations.
We have a strong commitment to research as an essential component of our
product development effort. We focus our research and development activities in
our technology platforms to discover, optimize, produce and deliver products to
our target markets. An important part of our research and development effort is
undertaken through third-party collaborations that contribute significant
technology and other resources to the development and commercialization of
products. We believe this aspect of our research and development effort will be
important as we expand into health care and other new markets.
Our initiatives in 2002 concerning the bioproducts business included the
acquisition in February of Enzyme Bio-Systems Ltd. (EBS) from Corn Products
International, Inc., a leading agri-processor. We have since changed the name of
EBS to Genencor International Wisconsin, Inc. and incorporated its Beloit,
Wisconsin manufacturing facility into our global supply chain. As part of this
transaction, we also entered into a seven-year supply agreement for a majority
of Corn Products International, Inc.'s North American enzyme requirements. As a
result of the acquisition of the Beloit facility, as well as economic conditions
in Latin America and the devaluation of the Argentine peso, we restructured our
overall supply infrastructure in 2002 by ceasing operations at our Elkhart,
Indiana plant (consisting of one manufacturing facility and two distribution
locations) and downsized our Argentine facilities.
In 2002, we filed more patent applications than at any time in our
history, submitting 85 new and continuation in part utility applications.
Forty-one of the new filings are directed at technology in the bioproducts
arena, 28 in the basic technology arena and 16 in the health care field. In
addition, as evidence of the emphasis we place on the protection of our
intellectual property, in 2002 we owned or controlled 40 newly granted patents
from the U.S. Patent and Trademark Office and 15 from the European Patent
Office.
Also on the bioproducts front, we successfully completed the first year of
our two-year alliance with Dow Corning Corporation to create a new proprietary
Silicon Biotechnology platform with the achievement of milestones and the
establishment of the alliance's first business venture to pursue opportunities
for biosensors in the fields of consumer in-home medical tests, drug discovery,
biowarfare threat analysis, veterinary diagnostics, and environmental and home
monitoring of air, water and food.
3
Most recently, we acquired the brewing and enzyme business of Rhodia Food
UK Limited in December 2002 in an acquisition that included technology, product
lines and personnel and will broaden our bioproducts portfolio and technical
service capabilities in the food, feed and specialty enzyme market sectors. No
facilities were included in this transaction.
During 2002, we also continued to pursue a health care strategy built upon
our current capabilities in modifying, optimizing and manufacturing proteins.
Our health care initiative currently focuses on protein therapeutics, which
includes drug discovery, drug optimization, and immunotherapeutics, also known
as therapeutic vaccines. Consistent with our health care strategy, we entered
into a therapeutic vaccine collaboration with The Johns Hopkins University in
January 2002. In February, we announced a collaboration with Seattle Genetics,
Inc. relating to targeted enzyme prodrug therapy for treating cancer. These
collaborations involved certain up front license fees paid by us as well as the
potential for additional milestone payments. We also purchased a minority
interest in the common stock of Seattle Genetics. We expect these collaborations
to add technology and potential products to our therapeutics program.
We also began construction of a facility for the clinical-scale
manufacture of human therapeutic proteins at the site of our manufacturing
facility in Rochester, New York. The facility is designed to produce
pharmaceutical grade materials for pre-clinical and clinical studies, and we
expect facility start up and validation to occur in the first quarter of 2004.
The Company traces its history to 1982 when Genencor, Inc. was formed as a
joint venture between Genentech, Inc. and Corning, Inc. In 1987, Eastman Kodak
Company acquired a 25% interest in Genencor, Inc. The Company was incorporated
in Delaware in 1989 and commenced operations 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
the Company to Eastman Chemical Company. In 1999, Danisco A/S acquired Cultor
Ltd., which is now known as Danisco Finland OY. After the Company's initial
public offering and continuing to the present, Eastman Chemical Company and its
affiliates and Danisco and its affiliates each own in excess of 40% of our
outstanding common stock.
OUR MARKETED PRODUCTS
In 2002, we realized $329.3 million in product revenues through the sale
of approximately 250 products in more than 85 countries. We group our existing
products into three general functional categories: enzymes that break down
protein, enzymes that break down starch and enzymes that break down cellulose.
These products are then marketed to the industrial, consumer and agri-processing
markets through our direct sales organization and other distribution channels.
Industrial and consumer market applications include fabric care, cleaning and
textile processing, as well as the emerging market of personal care. The
agri-processing market applications include classes of enzymes utilized in the
grain processing, animal feed and specialties areas. Along with these
applications, we are currently evaluating products acquired with the brewing and
enzyme business of Rhodia Food UK Limited in December of 2002 to effectively
incorporate them into our bioproducts portfolio.
INDUSTRIAL AND CONSUMER MARKETS
Cleaning Products
Our products include protein degrading enzymes, such as proteases, starch
degrading enzymes, such as amylases, and cellulose degrading enzymes, such as
cellulases. These enzymes are formulated in granular, liquid, tablet and gel
forms. Commercially available products include:
- Purafect: A family of high alkaline protease enzymes used in laundry
and dishwashing products to clean stains and soils containing
proteins, such as blood, grass, milk, gravy and tomato sauce;
- Properase: A high alkaline protease enzyme available in a variety of
formulations used in low temperature wash conditions to clean stains
and soils, containing proteins, such as blood, grass, egg, milk,
gravy and tomato sauce;
- Purastar: A series of amylase enzyme containing products used in
laundry and dishwashing products to remove starch-based stains and
soils such as chocolate, gravy, baby food, rice and pasta; and
- Puradax: A high alkaline cellulase enzyme product used in laundry
products to provide fabric care such as removing fuzz and pills and
providing color brightening.
Textile Products
Our products include cellulase, amylase and protease enzymes for
applications such as denim finishing, biofinishing of cotton and cellulosics,
and desizing and treatment of wool and silk. Additionally, we market catalase
enzymes used to remove hydrogen peroxide during the textile dyeing process.
These products are available in a variety of formulations, including liquid and
granular forms, and at various concentrations useful under altered conditions,
such as high or low temperature and high or low pH conditions. Commercially
available products include:
4
- IndiAge: A family of cellulase products used for denim finishing and
processing of high-performance cellulosic fibers, such as lyocell;
- Primafast: An acid cellulase used in the processing of
high-performance cellulosic fibers, such as lyocell;
- Optisize: A family of amylase products for low or high temperature
desizing processes;
- OxyGone Catalase: A family of catalase products used by fabric dyers
to eliminate residual hydrogen peroxide in the dyeing process; and
- Protex: A family of protease products used in denim processing and
the treatment of wool and silk.
Personal Care Products
We currently market a high-performance protease used in Dawn Special Care,
a hand dish care product sold by The Procter & Gamble Company offering
skin-softening benefits to consumers.
AGRI-PROCESSING MARKETS
Grain Processing Products
We market our grain processing products to customers who process
agricultural raw materials such as barley, corn, wheat and soybeans to produce
animal feed, food ingredients, industrial products, sweeteners and renewable
fuels. Our grain processing products are used to make products as diverse as
beer, sweeteners and fuel ethanol. Commercially available grain processing
products include:
- Spezyme: A broad family of alpha amylase enzymes useful in high and
low temperature liquefaction of starch;
- Optidex and Optimax: A series of glucoamylase and debranching
enzymes and their blends used in the hydrolysis of starch to
glucose;
- Gensweet: A family of isomerase enzymes in both soluble and
immobilized form used in the production of high fructose corn syrup;
- Optimalt and Clarase: Maltogenic enzymes used in the production of
maltose syrups;
- Distillase: A glucoamylase enzyme used in the hydrolysis of starch
to glucose for the production of alcohol;
- Fermenzyme: A product line of glucoamylase and protease enzyme
blends used in the production of alcohol; and
- G-Zyme: A line of alpha amylases and glucoamylases for starch
processing to produce sweeteners, ethanol and other products.
Specialties Products
Our specialties products are used in the food industry for such purposes
as to improve baking, to process proteins more efficiently and to preserve
foods. Additionally, we sell products to improve animal feed and pet food, to
treat animal hides in the leather industry, to recover silver residue in
photographic film processing, and to improve pulp and paper processing.
Commercially available specialties products include:
- Multifect, Protex, Laminex and Multifresh: A full product line of
protease, beta-glucanase, cellulase and xylanase enzymes used for
such diverse applications as brewing, contact lens cleaning, the
production of potable alcohol, waste processing, protein processing
and pet food; and
- OxyGO and Fermcolase: A line of catalase and glucose oxidase enzymes
used in industrial and food processing.
PRODUCTS IN DEVELOPMENT
The continued success of our business depends on our ability to develop
innovative products that meet our customers' needs in our target markets. We are
developing products for the industrial, consumer, and agri-processing markets as
well as products for the health care market. While we have product development
programs underway in each of our target markets, we have not yet marketed any
products for the health care market. Our ability to develop products for our
targeted markets, including health care, may be limited by our resources, our
ability to develop and maintain strategic alliances, and the licensing and
development of necessary technology. To date, we have financed operations and
product development from the sale of products, the sale of stock, research and
development funding from our strategic partners, government grants, and
short-term and long-term borrowings.
Bioproducts
We currently have numerous product development programs ongoing in the
target markets associated with our bioproducts effort.
5
Industrial and Consumer Markets
Silicon Biotechnology. The Company's alliance with the Dow Corning
Corporation seeks to combine the organizations' expertise in their respective
fields of biotechnology and silicon chemistry to create a new, proprietary
Silicon Biotechnology platform. Dow Corning and Genencor plan to jointly
commercialize products developed by the alliance. In its first year of a
two-year agreement, the alliance filed important patent applications in three
broad areas and established a business unit to pursue its biosensor market
opportunities. Patent applications were filed in 2002 in three strategic areas
that we expect to define the initial fields of alliance activity. The first is
in biotransformations, where the tools of biotechnology are used to modify
silicon to create new materials with unique attributes or to create new, more
environmentally efficient processes for existing silicon-based materials. The
second area covers delivery systems where silicon and biological materials are
combined to deliver active ingredients for application in a wide spectrum of
markets, i.e., cleaning, health care and personal care. The third area covers
nano-scale systems for biosensing devices and performance materials. The
alliance also established its first business venture to pursue opportunities for
biosensors in the fields of consumer in-home medical tests, drug discovery,
biowarfare threat analysis, veterinary diagnostics, and environmental and home
monitoring of air, water and food. The business venture is expected to pursue
commercialization opportunities alone and in partnership with market leaders in
these target markets.
Personal Care. Using our i-biotech approach, we are developing a family of
reduced allergenic enzymes and proteins for the personal care market, including
skin care, oral care and hair care.
Polymer Intermediates. The chemical industry currently manufactures a
polyester intermediate, 1,3 propanediol, using a chemical process. Propanediol
is a critical component of a high-performance polyester, Sorona, which E.I. du
Pont de Nemours and Company has announced plans to commercialize. The potential
benefits of Sorona include improved fit and comfort, softness of touch,
dyeability, resilience and stretch recovery. This polyester has potential
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. This process is currently in pilot scale testing.
Repeat Sequence Protein Polymers. We have an exclusive license agreement
with Protein Polymer Technologies, Inc. for use of its proprietary protein
polymer design and production technology to develop novel biomaterials for
non-medical applications. We believe this technology and intellectual property
combined with our expertise in gene expression and molecular evolution and
design will lead to the development of biomaterials including high-performance
fibers, electronic chips, optical switches and other materials.
Ascorbic Acid. Together with Eastman Chemical Company, we have announced
our intent to commercialize an advanced process for the production of ascorbic
acid, or vitamin C, from glucose. We believe our biotechnology-driven process
will deliver the world's lowest cost ascorbic acid production process as it
eliminates several steps from the traditional chemical synthesis.
Prion Infectivity. In August 2001, we announced an exclusive collaboration
with the United Kingdom's Centre for Applied Microbiology & Research to develop
technology to eliminate prions, the infectious agent thought to cause mad cow
disease as well as the human form of that disease. The two-year collaboration is
focused on developing an enzyme-based method for treating surgical equipment,
rendered animal material and blood products to eliminate prion infectivity. Six
proprietary proteases from Genencor's extensive protease library have been
tested for in vitro efficacy. Two candidate enzymes from this group have been
selected for further evaluation. The parties also intend to investigate
developing an effective rapid detection test.
Other new products in development in this market include a new proprietary
protease engineered for improved performance in dish care products, an oxidase
enzyme used in the fabric care market, a novel enzyme acting on synthetic fibers
and cloths for improved fabric care and manufacturing, a novel amylase which
simplifies the starch conversion process, and a new enzyme targeting the feed,
brewing and protein processing sectors.
Agri-processing
Biomass Conversion to Ethanol. The agricultural industry produces a vast
amount of waste product known as biomass. Currently, the agricultural industry
cannot economically convert biomass on a large scale to useful chemicals such as
ethanol. In 2000, we were awarded a three-year $17.0 million partial matching
funds contract by the National Renewable Energy Laboratory of the Department of
Energy (NREL) to continue our efforts in developing a low cost enzyme system for
the economic conversion of biomass to ethanol. In October of 2002, Genencor
announced it has made significant progress toward our second year goal in the
three-year program. Specifically, we are using our integrated technology
platforms in an effort to deliver a 10-fold improvement in the economics of
breaking down biomass into fermentable sugars.
6
Bioingredients for Use in the Food Industry. In October 2000, we entered a
four-year minimum term research and development agreement with Danisco A/S, one
of the world's leading food ingredients companies, providing us up to $20.0
million in funding. An initial product candidate is being developed. Activities
relating to additional product targets are also underway.
Animal Feed and Nutrition. We are exploring a number of key enzymes and
production systems for application in this market. Some of the enzymes being
evaluated include enhanced xylanase, phytase and other enzymes for use in animal
feed to increase the nutritional value of animal feed or to minimize pollution
in animal waste. We have identified and are evaluating a proprietary enzyme with
improved properties for feed applications from one of our collaborations.
Also in the agri-processing market, we have initiated discussions with
major agricultural companies as well as the U.S. Food and Drug Administration
(FDA) to use our i-mune assay for the identification of potentially allergenic
components of foods.
Health Care
In 2001, we commenced implementation of our health care business strategy.
Since this is a recent initiative for the Company, our product pipeline is not
as mature as in the bioproducts area. We expect to continue investing in
internal research programs, external collaborations and other strategic
investments in order to increase our development pipeline. We are currently
focusing our efforts in two major areas: immunology and protein therapeutics.
Immunology. One area of our development efforts in immunology is
therapeutic vaccines, which we have identified as a potentially important market
opportunity for us. Of particular interest is the development of candidates
targeting the most serious oncogenic viruses. Our highest priority is the
hepatitis B virus, a critical human pathogen that is poorly treated with
available therapeutics. Significant progress has been made in this project, and
a construct has been selected and manufactured for pre-clinical testing. The
possibility of using a prime/heterologous boost strategy in conjunction with our
deoxyribonucleic acid (DNA) hepatitis B vaccine construct is under evaluation
and the outcome will determine whether an Investigational New Drug (IND) is
filed in 2003 or 2004. As therapeutic vaccines today represent a new class of
drugs rather than entries into an existing market, the business path forward has
not yet been determined. We believe that the Company has several key scientific
contributions to make in this new field, including our i-mune assay, which can
play a central role in optimizing the elements of a vaccine construct to
appropriately up-regulate the immune system and enhance a cytotoxic T lymphoctye
(CTL) response. An important aspect of our business strategy has been to form
strategic collaborations during the initial discovery phase before entering
vaccine candidates into clinical trials. We have two such relationships that we
believe will enhance our vaccine platform. First, we have formed a strategic
alliance with Epimmune Inc., including an exclusive license to Epimmune's
epitope and PADRE technologies and related intellectual property rights for
vaccines to treat hepatitis B, hepatitis C and human papilloma virus, and the
Company has taken an equity stake in Epimmune. In addition, we have entered into
a collaboration with The Johns Hopkins University that includes a license to
proprietary technologies related to antigen targeting and dendritic cell
activation, including co-stimulatory genes.
Protein Therapeutics. The protein therapeutics market is growing
significantly and is expected to represent as much as 50% of all new
pharmaceuticals introduced by 2010. We have identified opportunities to use our
molecular biology, immunology, protein engineering and manufacturing skills to
address key problems typically associated with protein therapeutics and to
discover and develop new protein therapeutics.
The Company is leveraging its key capabilities and technologies in an
important area of focus, protein drug discovery. In one program, we are using
our expertise in exploiting natural and synthetic diversity to develop new
methods for targeting therapeutics to cancer cells as opposed to healthy cells.
For example, pursuant to our collaboration with Seattle Genetics, we are
developing tumor-targeted enzymes that convert relatively non-toxic prodrugs
into cytotoxic drugs; such an enzyme is concentrated specifically at the tumor
site through either an antibody or a novel protein that targets a specific
antigen expressed on the tumor cells. The catalytic activity of the enzyme then
leads to a significantly increased concentration of the cytotoxic moiety and
increased cell death at the tumor site. In a second research program, we are
exploiting our deep knowledge of the structure and function of proteases and
protease inhibitors - proteins critically involved in regulating activities of
both normal and disease cells - for the development of new drugs for
inflammatory diseases and other indications. Toward this goal, we are exploiting
our expertise in protein expression, protein engineering and bioinformatics in
an effort to discover natural molecules and create novel molecules that may be
used as therapeutics.
We are also exploring opportunities to leverage our expertise in protein
expression and manufacturing for production of protein therapeutics. We believe
that our history of process design and manufacturing will enable us to produce
proteins at cost structures that are lower than the norm for the
biopharmaceutical industry. We have made substantial progress in the
construction of a clinical manufacturing facility designed to satisfy the U.S.
Food and Drug Administration's current Good Manufacturing Practice (cGMP)
regulations in order to meet the needs of our health care drug discovery
portfolio and to provide strategic partnering opportunities. We are also
leveraging our expertise in expression systems and process design to develop
novel manufacturing methods for protein therapeutics including monoclonal
antibodies.
7
Another area of activity is protein drug optimization, which addresses
problems ranging from immunogenicity to pharmacokinetics. For example, by
identifying epitopes in a protein that initiate an immune response using our
proprietary i-mune assay, we can evaluate the immunogenic potential of a
protein. Through protein engineering, these problematic epitopes can be
modified, thereby reducing the risk of an adverse immune response prior to human
testing. We are applying such approaches to internal protein therapeutic
candidates and developing collaborations to apply these approaches to existing
drugs and lead compounds in development by third parties. In 2002, for example,
we signed an agreement with a pharmaceutical partner for Genencor to evaluate an
existing proprietary molecule using the i-mune assay.
RESEARCH AND DEVELOPMENT
The Company has a strong commitment to research as an essential component
of its product development effort. Technology developed in collaborations with
third parties, as well as technologies licensed from third parties, are also
sources of potential products.
We have developed several related technology platforms that we apply in an
integrated approach we call i-biotech to the discovery, optimization, production
and delivery of our products. Our technology platforms supported the development
of current commercial products, and we believe that application of these
technology platforms may potentially generate new product candidates in our
target markets. Our technology platforms include:
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 or treating a
target disease. We identify genes in two ways, either on the basis of their
sequence or on the basis of the function of their encoded protein products. With
this information, we identify and develop potential products. Identifying genes
of interest can start with the analysis of genes found in diverse culture
collections, analysis of genes that are expressed under differentially defined
conditions or direct analysis of the proteins expressed in a cell or culture. We
apply all three approaches to gene discovery.
Our internal culture and gene collection allows us to access individual
microorganisms, microbial consortia and genes representing a wide range of
environmental niches. In combination with our extensive academic and
governmental research collaborations, we can access biodiversity from
environments ranging from Antarctic ice floes to the Soda Lakes of Kenya. As an
example of our continuing interest in this area we have recently been selected
as the sole industrial partner of a European Union (EU) funded program on
microbial discovery. Included as non-industrial partners in the collaboration
are the Chinese Academy of Sciences, University of Seville, Spain, University of
Leicester, UK, and University of the Western Cape, RSA.
Analysis of gene expression via transcriptional profiling using
microarrays allows us to identify genes that may be transiently or
differentially expressed under different growth conditions. Using these
approaches in combination with our bacterial and fungal genome databases, we
have identified key genes that are important for protein expression or
regulation of gene expression during fermentation and production. As part of our
NREL funded program to convert biomass for fuel, we have employed fungal arrayed
transcriptional analysis to identify novel genes expressed during high-level
protein production in our Trichoderma fungal host system.
As a third approach to gene discovery, we use our state of the art fully
integrated proteomics capability to isolate and identify proteins of interest.
Our proprietary two-dimensional protein analysis systems allow us to identify
proteins that are differentially expressed during cell culture growth cycles.
Using automated handling systems and high-resolution mass spectrometer analysis,
we can rapidly identify the proteins of interest against any proteins in either
our proprietary or the publicly available genomic databases. By applying these
same tools to our protein therapeutics area, we have been able to identify
potential target proteins for controlling inflammatory responses.
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 their intended use, including in industrial and consumer
market applications as well as second-generation biopharmaceuticals. We continue
to expand our high-throughput screening capabilities in Leiden, the Netherlands,
by both capital investment and data management systems for automated data
collection and analysis. Using integrated tools for assay development, library
generation, and robotic sample handling, we can rapidly develop and screen
diversity libraries for activities or gene expression. These technologies are
being applied to ongoing projects within the Company, including, for
8
example, the Destigen targeted products for personal care, the Seattle Genetics
collaboration for cancer therapeutics, and our biomass conversion to ethanol
project.
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 we identify in the discovery process. We optimize a gene by changing or
mutating its DNA sequence to produce a variant protein with a modified function.
This process is known as mutagenesis. We alter proteins 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. We insert these altered genes into our proprietary host
production organisms so that we can screen the variant proteins they produce for
the identification of product leads.
Generally, we can evaluate the properties of variant proteins generated
through single and multiple site mutation 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 improved protein variants
survive. We then evaluate the surviving organisms using high throughput screens
to determine which variant is best. We have applied these evolution techniques
along with a proprietary screening method to develop a production host with
improved efficiency of production for a commercial protease.
In the case where the desired product is a small molecule or a chemical
produced by a metabolic pathway, optimization of the organism may require the
simultaneous modification of a larger number of proteins in the pathway. Since
conventional mutagenesis techniques target one, or at most a few genes, of an
organism at one time, these techniques are not appropriate for creating and
evaluating such a large number of variants simultaneously. We have developed
Mutator Technology 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 potential for human allergic response limits the application of some
engineered enzymes in the health care, agri-processing and industrial and
consumer markets. To address this limitation, we have developed our human
immunology, or i-mune, platform. This platform centers on an assay that
determines the human immune response to proteins.
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 an automated assay format. We take a target protein and
divide it into a series of small, easily synthesized pieces. Using our assay, we
determine if the protein contains any pieces capable of causing an immune
response. We then use the tools of our molecular evolution and design platform
to modulate the response. We have shown that we can decrease the allergenic
potential of specific proteases and have in vivo evidence that the in vitro
assay accurately predicts human allergenic results.
Using this tool, we can determine allergenic risk and reduce it without
human testing. Recently we have applied this technique to the evaluation of a
known allergen in food, Brazil nut protein, and the Bacillus thuringensis (Bt)
insecticidal proteins Cry1Aa and Cry3Ab. The i-mune assay correctly identified
Brazil nut 2S storage protein as a potential allergen while indicating that the
Bt insecticidal proteins were of lower immune potential. This result is
consistent with the published information regarding the relative immunogenicity
of these three proteins.
We believe the human immunology platform will allow us to determine the
allergenic potential of proteins, including those of therapeutic value, to
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. We believe these technology platforms
may potentially lead to products in our target markets.
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 host production organisms that we have
adapted to accept genes from other organisms, or foreign genes, and produce the
proteins encoded by these foreign genes together with a proprietary process for
growing our host production organisms, which we refer to as our proprietary
fermentation processes. We grow, or ferment, our host production organisms under
controlled conditions, allowing these organisms to grow, divide and efficiently
produce optimized proteins. We have developed numerous host production organisms
backed by patented technology and process know-how.
9
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. Using a combination of advanced molecular biology and functional
genomics tools, we have demonstrated that we can improve the productivity of
existing production hosts as well as designing de novo host systems. In October
2002, we announced significant progress toward our second year goal in our
Department of Energy funded NREL three-year program to develop an economically
viable enzymatic process for converting biomass to ethanol. Specifically, we are
using our integrated technology platforms in an effort to deliver a 10-fold
improvement in the economics of breaking down biomass into fermentable sugars.
Metabolic Pathway Engineering
Metabolic pathway engineering is a process we use to modify 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
new genes, identified through our gene discovery and functional genomics
platform and optimized through our molecular evolution and design platform.
Continued progress towards commercialization of ascorbic acid, the 1,3
propanediol research program with E. I. du Pont de Nemours and Company, and our
accelerating collaboration with Dow Corning Corporation for the development of
silicon-based biotechnology reaffirms our belief in the commercial viability of
producing biomaterials that compete with existing chemical processes.
Additionally, we are applying these tools to develop more efficient production
hosts by designing strains that have better carbon utilization and less
by-product formation during the fermentation cycle. These programs integrate our
discovery technologies into a powerful solution to improving expression levels
of products and utilization of raw materials.
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.
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 with our predecessor company 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 involving
their flagship detergent products Tide and Ariel.
Our alliance with The Procter & Gamble Company is based upon four
agreements. We are party to a research agreement and a technology transfer
agreement, each dated June 30, 2000. These two agreements expire on June 30,
2003. Together, the agreements provide a framework for cooperation in numerous
areas as mutually agreed, particularly laundry and cleaning products. We are
currently engaged in negotiations regarding the possible extension or
replacement of this framework. We are also party to a commercialization
agreement, dated April 25, 2000, relating to the development of proteins with
reduced allergic potential for skin-care products. This agreement provides for
up to $15.0 million in milestone payments and royalties as well as product sales
contingent on the successful development and commercialization of one or more
products. This agreement remains in effect through execution of a supply
agreement for such products or expiration of cooperative product development
efforts. In November 2001, we announced the signing of a five-year worldwide
supply contract with The Procter & Gamble Company to provide protease enzymes
for laundry and dish detergents. The contract extends the companies' almost two
decade long relationship and
10
further solidifies our position with respect to the innovation and
commercialization of protease enzymes for liquid and dry formulation.
Epimmune Inc. In July 2001, we acquired a 10% equity stake in Epimmune
Inc. We also entered into a 30-month collaboration with Epimmune focused on the
development of therapeutic vaccines for oncogenic viruses, including research
funding and milestone payments. Additionally, we exclusively licensed certain
Epimmune technologies and related intellectual property rights on a worldwide
basis for the development of vaccines to treat or prevent hepatitis C (HCV),
hepatitis B (HBV) and human papilloma virus (HPV). In December 2001, we
increased our equity stake in Epimmune and made our first milestone payment. In
January 2002, the alliance announced the identification of an EpiGene clinical
product candidate for the lead program in the collaboration, a therapeutic
hepatitis B vaccine. This candidate has been optimized, and manufacturing for
good laboratory practice (GLP) animal studies has been completed.
Dow Corning Corporation. In October 2001, we entered into an agreement
with Dow Corning Corporation seeking to combine our expertise in biotechnology
with Dow Corning's expertise in silicon chemistry. The program is attempting to
develop unique materials combining the inorganic and biological worlds and
address customer needs in markets we serve today as well as create opportunities
in the nanotechnology, photonics and electronics markets. Initially, the
companies intend to explore product opportunities in markets both companies
serve and anticipate that the alliance will see some of its first successes
through the introduction of new, biologically mediated silicon-based products
for the life sciences, personal care, cleaning and fabric care markets. In the
first year of our two-year alliance to create a new proprietary Silicon
Biotechnology Platform, we achieved certain milestones and the alliance
established its first business venture to pursue opportunities for biosensors in
the fields of consumer in-home medical tests, drug discovery, biowarfare threat
analysis, veterinary diagnostics, and environmental and home monitoring of air,
water and food.
Seattle Genetics, Inc. In January 2002, we formed a strategic alliance
with Seattle Genetics, Inc. to jointly discover and develop a class of cancer
therapeutics based on tumor-targeted enzymes that activate prodrugs. Under terms
of the alliance, the companies will each contribute proprietary technology,
share preclinical and clinical development costs and have the right to jointly
commercialize any resulting products. We have made an equity investment in
Seattle Genetics and agreed to pay certain fees and milestone payments. Seattle
Genetics has also agreed to make certain milestone payments to us. In July 2002,
we made our first milestone payment to Seattle Genetics in accordance with the
agreement.
E.I. du Pont de Nemours and Company. On September 1, 1995, we entered into
a collaborative research and development agreement with E.I. du Pont de Nemours
and Company to develop and commercialize biologically derived 1,3 propanediol, a
key intermediate for the production of a high-performance polyester. The
agreement provides for research funding and technical milestone payments up to
$17.0 million over the term of the agreement as well as commercial terms,
including royalties and commercial milestones, contingent on the success of the
research program and commercialization of the product. Under the terms of this
agreement, we have received research and development funding and milestone
payments. In June 2002, we successfully completed the final phase of the
collaboration achieving the milestones for yield and productivity of 1,3
propanediol. We are continuing to work with DuPont to enable commercialization
of this biobased materials product. Upon commercialization by DuPont, we would
earn royalties on product sales.
NREL. In April 2000, the National Renewable Energy Laboratory of the
Department of Energy awarded us a $17.0 million partial matching funds contract
to develop enabling enzyme systems essential for the enzymatic conversion of
biomass to ethanol. A three-year contract, with yearly renewals subject to
termination, was executed in June 2000. In 2001, we met our first technical
milestone under this contract. In 2002, we met with continued progress towards
our target to deliver a 10-fold improvement in the economics of breaking down
biomass into fermentable sugars.
Danisco A/S. In October 2000, we entered into a four-year minimum term
research and development agreement with Danisco A/S, one of the world's leading
food ingredients companies, providing us up to $20.0 million in funding. The
collaboration is directed at the development and production of innovative
biotechnology derived products for use in the food industry. The first joint
project target has been identified and a joint project team has been initiated.
Progress on our first joint project continues with improved performance of our
candidate enzyme. A second funded research stage feasibility project was
initiated in the third quarter of 2002.
The Johns Hopkins University. In January 2002, we announced the formation
of a collaboration with The Johns Hopkins University for the research of
therapeutic vaccines and other immunotherapies targeting cancers and oncogenic
viruses. We work closely with and support ongoing research in the laboratories
of Drs. Drew Pardol and T. C. Wu, who have conducted extensive preclinical
animal studies on a number of advanced molecular vaccine constructs. As part of
the alliance, we have received worldwide licenses to proprietary technologies
related to antigen targeting and dendritic cell activation, including
co-stimulatory genes.
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RESEARCH EXPENSES
A major portion of our operating expenses has been related to the research
and development of products. During 2002, 2001, and 2000, our total research and
development expenses were $70.2 million, $60.1 million and $50.9 million,
respectively. Of these expenses, an estimated $15.4 million, $11.4 million and
$13.2 million, respectively, represent total expenses incurred in conjunction
with research collaborations partially funded by our various partners.
Our research and development efforts have been the primary source of our
products and represent an essential component of our business strategy. As of
December 31, 2002, we had 246 employees involved full-time in our research and
development efforts, 101 of whom hold Ph.D. degrees and one of whom holds an
M.D. degree. A year earlier, we had 247 individuals employed full time in
research and development, 94 of whom held Ph.D. degrees and one of whom held an
M.D. degree.
COMPETITION
We face significant competition in the industrial, consumer and
agri-processing markets in which we currently compete. As we develop products
for the health care market and new segments of the agri-processing, industrial
and consumer markets, we face a host of new competitors, including, for example,
biotechnology and pharmaceutical companies.
In the industrial and consumer markets, some competitors may have a
stronger market position and greater financial resources than we do.
Specifically, in cleaning enzymes, Novozymes A/S, our largest competitor, has
more product offerings and a greater market share than we do. In specialty
enzymes, DSM N.V. and Novozymes A/S have greater market shares and more product
offerings than we do.
Our products and development programs target the industrial, consumer,
agri-processing and health care markets. There are many commercially available
products for each of these markets and for the specific consumer problems and
the specific diseases we may attempt to address in product development. A large
number of companies and institutions are spending considerable amounts of money
and resources to develop products in our target markets.
Competition in our current and target markets is primarily 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.
Any product we make in the future will also likely compete with products
offered by our competitors. If our competitors introduce data that show improved
characteristics of their products, improve or increase their marketing efforts
or lower the price of their products, sales of our products could decrease. We
cannot be certain that any products we develop in the future will compare
favorably to products offered by our competitors or that our existing or future
products will compare favorably to any new products that are developed by our
competitors. Our ability to be competitive also depends upon our ability to
attract and retain qualified personnel, obtain patent protection and otherwise
develop proprietary products or processes.
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 December 31, 2002,
our worldwide intellectual property portfolio included 437 issued U.S. patents
and 354 pending U.S. patent applications. Our intellectual property portfolio
includes rights in technologies ranging from
12
specific enzyme and health care products to host production organisms and
technology covering research tools such as high-throughput gene discovery,
molecular evolution, immunological screens and metabolic pathway engineering.
Despite our existing portfolio we may not be able to obtain the patents or
licenses to technologies that we will need to develop products for our target
markets. Patents may 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. Patent applications
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 of which we are not currently aware.
RAW MATERIALS
The raw materials that we use are commercially available products from a
number of independent sources; greater than 65%, based on total raw material
expenditures, have alternate sources of supply, with the remaining supply base
being commercially available and interchangeable. Greater than 50% of all
purchases are on one-year contracts, and the remainder are on either 30, 90, or
180 day fixed pricing structures.
MANUFACTURING AND SUPPLY CAPABILITIES
We have a global supply chain consisting of 15 distribution locations
around the globe, which include eight manufacturing facilities on four
continents. During 2002, we completed our planned closure of our Elkhart,
Indiana facility as part of the restructuring announced in connection with the
acquisition of EBS in February. Our supply organization 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.
TRADEMARKS
The following are trademarks of the Company and its subsidiaries:
GENENCOR, GENENCOR INTERNATIONAL, LOWGEN, INDIAGE, PRIMAFAST, OPTISIZE,
PURAFECT, PROPERASE, PURASTAR, PURADAX, SPEZYME, G-ZYME, OPTIDEX, DISTALLASE,
OPTIMAX, FERMENZYME, GENSWEET, OPTIMALT, CLARASE, MULTIFECT, MULTIFRESH,
FERMCOLASE, LAMINEX, OXYGO, I-MUNE, I-BIOTECH, MUTATOR TECHNOLOGY, DESIGNPATH,
DESTIGEN, OXYGONE, PROTEX and ENZOGUARD. SILICON BIOTECHNOLOGY is a trademark of
the Company and the Dow Corning Corporation. The following trademarks are owned
by the individual companies: SORONA (E. I. du Pont de Nemours and Company); DAWN
SPECIAL CARE, TIDE and ARIEL (The Procter & Gamble Company); PADRE and EPIGENE
(Epimmune Inc.).
MAJOR CUSTOMERS
Our five largest customers collectively accounted for approximately 51% of
our 2002 product revenues, with our largest customer, The Procter & Gamble
Company, accounting for over 35% of such revenues. Our five largest customers in
2002 were Benckiser N.V., Cargill, Incorporated, Danisco Animal Nutrition - the
feed ingredients business unit of Danisco A/S, which was formerly known as
Finnfeeds, The Procter & Gamble Company, and Unilever N.V.
GEOGRAPHICAL AND PRODUCT CLASS INFORMATION
The financial information concerning geographical areas and product class
revenues set forth in footnote 13 of the financial statements contained in Item
8 is incorporated herein by reference.
REGULATORY ENVIRONMENT
Product Regulation - Current Products
Regulatory agencies regulate our products according to their intended use.
The U.S. Food and Drug Administration (FDA) regulates food, feed, cosmetic and
pharmaceutical products based on their application. The FDA and the U.S.
Environmental Protection Agency (EPA) regulate non-drug biologically derived
products. The U.S. Department of Agriculture regulates plant, plant pest and
animal products. The EPA regulates biologically derived chemicals not within the
FDA's jurisdiction or the
13
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 (EU)
attempts to replace national regulatory procedures with a consistent EU
regulatory standard. Some national regulatory oversight remains. Regulation of
enzymes used as processing aids is currently through such national oversight;
however, the EU Commission is presently discussing the idea of regulating all
food use enzymes at the EU level.
Regulatory review of our products in Pacific Rim and Asian countries
having approval or registration processes ranges from three months to two years.
Currently, enzymes used in food require approval in Japan, Korea and
Australia/New Zealand, and registrations in several other countries.. Certain
Asian countries and some in Latin America rely on United States and European
product registrations.
Product Regulation - Health Care
In the United States, all phases of the development and commercialization
of pharmaceuticals are regulated primarily under federal law and subject to
rigorous FDA review and approval processes. Before a pharmaceutical candidate
can be tested in humans, it must be studied in laboratory experiments and in
animals to provide data to support its potential safety and supplies must be
produced under the FDA's current GMP regulations that satisfy for clinical
trials. These data are submitted to the FDA in an IND for review and
authorization to test the pharmaceutical product in humans. Only after the FDA
finds the IND to be acceptable, can a company commence with clinical trials in
humans designed to demonstrate that a pharmaceutical product is safe and
effective for its intended use.
These clinical trials are subject to extensive regulations, are very
expensive and usually take many years. These studies are divided into three
separate phases. In Phase 1, studies are conducted with a relatively small
number of healthy human subjects or patients to assess the safety of the
product, dose tolerance, pharmacokinetics, metabolism, distribution and
excretion. In Phase 2, the product is given to a limited target patient
population to further assess safety and to begin to assess efficacy and dose
safety. If the results of these first two phases are favorable, then Phase 3
studies are conducted in the target patient population with a number of subjects
large enough to statistically establish safety and efficacy of the product.
Concurrent to the clinical development, the company needs to also generate data
on the manufacture and controls of the pharmaceutical product. Upon the
successful completion of Phase 3 and demonstration of the ability to produce the
product under cGMP conditions, a New Drug Application (NDA) or a Biologics
License Application (BLA) is submitted to the FDA. The clinical and
manufacturing information submitted with the application is reviewed by the FDA,
which will approve the product for marketing if it judges that, pursuant to
current regulations, the data contained in the application support the safety
and efficacy claims and the manufacturing and controls data demonstrate the
quality, purity, safety and identity of the product. On average, it takes the
FDA six to twelve months to review and approve a new drug or biologic
application. Significant changes in manufacturing and controls of the product or
additional labeling claims, pursued after approval for the initial application
is obtained, will require submission of additional data to the FDA for review
and approval.
Regulatory procedures for licensing drug products in Europe are comparable
to those in the United States. Biologic products are reviewed through a
centralized procedure that leads to a single license for the entire European
Union. In addition, each product must receive individual pricing approvals
before it can be marketed.
Environmental Regulation
We are subject to national, state, and local 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, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of an
accident, we could be held liable for resulting damages. We do not expect that
compliance with the environmental 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. We design our production organisms and processes
to comply with regulatory principles
14
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.
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 that is involved
in projects from the earliest stage.
Animal Welfare Act
The Animal Welfare Act governs the humane handling, care, treatment and
transportation of certain animals used in research activities in the United
States. Mice 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, including specifications for the safe handling, care, treatment and
transport of animals covered. Currently, we house no animals at our facilities.
We believe that our housing facility vendors and external toxicology
laboratories are in compliance with the Animal Welfare Act.
EMPLOYEES
As of December 31, 2002, we had 1,098 employees in Genencor International,
Inc. and its wholly owned entities, plus 155 active 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. With the closure of our Elkhart, Indiana
facility, none of our United States employees were represented by a labor union
as of December 31, 2002. Employees at several of our foreign locations, however,
are 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.
Website Access To Reports
Through our Internet website, we make available free of charge our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the U.S. Securities and Exchange Commission. Our website address is
www.genencor.com. By including our website address in this Annual Report on Form
10-K, we do not intend to include or incorporate by reference the information on
our website into this Annual Report on Form 10-K, and under no circumstances
shall such information be deemed to be included in or incorporated by reference
into this Annual Report on Form 10-K.
RISK FACTORS
If any of the following risks actually occur, they could harm our
business, financial condition, and/or results of operations.
IF WE FAIL TO DEVELOP PRODUCTS FOR THE HEALTH CARE AND BIOPRODUCTS MARKETS WE
ARE TARGETING, THEN WE MAY NEVER ACHIEVE A RETURN ON OUR RESEARCH AND
DEVELOPMENT EXPENDITURES OR REALIZE PRODUCT REVENUES FROM THESE MARKETS.
A key element of our business strategy is to utilize our technologies for
the development and delivery of new products to the health care market and new
segments of the bioproducts market. We intend to significantly increase our
investment in research and development to develop products for these markets.
The successful development of products is highly uncertain and is dependent on
numerous factors, many of which are beyond our control, and may include the
following:
- The product may be ineffective or have undesirable side effects in
preliminary and commercial testing or, specifically in the health care
area, in preclinical and clinical trials;
15
- The product may fail to receive necessary governmental and regulatory
approvals, or the government may delay regulatory approvals significantly;
- The product may not be economically viable because of manufacturing costs
or other factors;
- The product may not gain acceptance in the marketplace; or
- The proprietary rights of others or competing products or technologies for
the same application may preclude us from commercializing the product.
Due to these factors we may never achieve a return on our research and
development expenditures or realize product revenues from the health care and
new bioproducts markets that we are targeting.
IF WE FAIL TO ENTER INTO STRATEGIC ALLIANCES WITH PARTNERS IN OUR TARGET MARKETS
OR INDEPENDENTLY RAISE ADDITIONAL CAPITAL, WE WILL NOT HAVE THE RESOURCES
NECESSARY TO CAPITALIZE ON ALL OF THE MARKET OPPORTUNITIES AVAILABLE TO US.
We do not currently possess the resources necessary to independently
develop and commercialize products for all of the market opportunities that may
result from our technologies. We intend to form strategic alliances with
industry leaders in our target markets to gain access to funding for research
and development, expertise in areas we lack and distribution channels. We may
fail to enter into the necessary strategic alliances or fail to commercialize
the products anticipated from the alliances. Our alliances could be harmed if:
- We fail to meet our agreed upon research and development objectives;
- We disagree with our strategic partners over material terms of the
alliances, such as intellectual property or manufacturing rights; or
- Our strategic partners become competitors or enter into agreements with
our competitors.
New strategic alliances that we enter into, if any, may conflict with the
business objectives of our current strategic partners and negatively impact
existing relationships. In addition, to capitalize on the market opportunities
we have identified, we may need to seek additional capital, either through
private or public offerings of debt or equity securities. Due to market and
other conditions beyond our control, we may not be able to raise additional
capital on acceptable terms or conditions, if at all.
IF THE DEMAND FOR PROTEIN DEGRADING ENZYMES DECREASES OR IF MAJOR CUSTOMERS
REDUCE OR TERMINATE BUSINESS WITH US, OUR REVENUES COULD SIGNIFICANTLY DECLINE.
Our largest selling family of products, protein degrading enzymes, or
proteases, accounted for approximately 52% of our 2002 revenue. If the demand
for proteases decreases or alternative proteases render our products
noncompetitive, our revenues could significantly decline.
In addition, our five largest customers collectively accounted for over
51% of our 2002 product revenues, with our largest customer, The Procter &
Gamble Company, accounting for over 35% of such revenues. Our five largest
customers in 2002 were Benckiser N.V., Cargill, Incorporated, Danisco Animal
Nutrition - the feed ingredients business unit of Danisco A/S which was formerly
known as Finnfeeds, The Procter & Gamble Company, and Unilever N.V. Any one of
these customers may reduce their level of business with us. Should any of our
largest customers decide to reduce or terminate business with us, our revenues
and profitability could decline significantly.
We have arrangements of various durations with our major customers and are
routinely involved in discussions regarding the status of these relationships.
These discussions may lead to extensions or new commercial arrangements, or may
be unsuccessful. Our customer relationships involve uncertainty by virtue of
economic conditions, customer needs, competitive pressures, our production
capabilities and other factors. Consequently, our customer base will change over
time as will the nature of our relationships with individual customers,
including major customers. For example, we currently expect that our business
with Corn Products International, Inc., combined with decreased volume with
Unilever N.V., may cause Corn Products to qualify as one of our five largest
customers.
WE INTEND TO ACQUIRE BUSINESSES, TECHNOLOGIES AND PRODUCTS, BUT WE MAY FAIL TO
REALIZE THE ANTICIPATED BENEFITS OF SUCH ACQUISITIONS AND WE MAY INCUR COSTS
THAT COULD SIGNIFICANTLY NEGATIVELY IMPACT OUR PROFITABILITY.
In the future, we may acquire other businesses, technologies and products
that we believe are a strategic fit with our business. If we undertake any
transaction of this sort, we may not be able to successfully integrate any
businesses, products, technologies or
16
personnel that we might acquire without a significant expenditure of operating,
financial and management resources, if at all. Further, we may fail to realize
the anticipated benefits of any acquisition. Future acquisitions could dilute
our stockholders' interest in us and could cause us to incur substantial debt,
expose us to contingent liabilities and could negatively impact our
profitability.
IF WE FAIL TO SECURE ADEQUATE INTELLECTUAL PROPERTY PROTECTION OR BECOME
INVOLVED IN AN INTELLECTUAL PROPERTY DISPUTE, IT COULD SIGNIFICANTLY HARM OUR
FINANCIAL RESULTS AND ABILITY TO COMPETE.
The patent positions of biotechnology companies, including our patent
positions, can be highly uncertain and involve complex legal and factual
questions, and, therefore, enforceability is uncertain. We will be able to
protect our proprietary rights from unauthorized use by third parties only to
the extent that we protect our technologies with valid and enforceable patents
or as trade secrets. We rely in part on trade secret protection for our
confidential and proprietary information by entering into confidentiality
agreements and non-disclosure policies with our employees and consultants.
Nonetheless, confidential and proprietary information may be disclosed, and
others may independently develop substantially equivalent information and
techniques or otherwise gain access to our trade secrets.
We file patent applications in the United States and in foreign countries
as part of our strategy to protect our proprietary products and technologies.
The loss of significant patents or the failure of patents to issue from pending
patent applications that we consider significant could impair our operations. In
addition, third parties could successfully challenge, invalidate or circumvent
our issued patents or patents licensed to us so that our patent rights would not
create an effective competitive barrier. Further, we may not obtain the patents
or licenses to technologies that we will need to develop products for our target
markets. The laws of some foreign countries may also not protect our
intellectual property rights to the same extent as United States law.
Extensive litigation regarding patents and other intellectual property
rights is common in the biotechnology industry. In the ordinary course of
business, we periodically receive notices of potential infringement of patents
held by others and patent applications that may mature to patents held by
others. The impact of such claims of potential infringement, as may from time to
time become known to us, are difficult to assess. In the event of an
intellectual property dispute, we may become involved in litigation.
Intellectual property litigation can be expensive and may divert management's
time and resources away from our operations. The outcome of any such litigation
is inherently uncertain. Even if we are successful, the litigation can be costly
in terms of dollars spent and diversion of management time.
If a third party successfully claims an intellectual property right to
technology we use, it may force us to discontinue an important product or
product line, alter our products and processes, pay license fees, pay damages
for past infringement or cease certain activities. Under these circumstances, we
may attempt to obtain a license to this intellectual property; however, we may
not be able to do so on commercially reasonable terms, or at all. In addition,
regardless of the validity of such a claim, its mere existence may affect the
willingness of one or more customers to use or continue to use our products and,
thereby, materially impact us.
Those companies with which we have entered or may enter into strategic
alliances encounter similar risks and uncertainties with respect to their
intellectual property. To the extent that any such alliance companies suffer a
loss or impairment of their respective technologies, we may suffer a
corresponding loss or impairment that may materially and adversely affect our
investments.
FOREIGN CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL CONDITIONS IN FOREIGN
COUNTRIES COULD CAUSE OUR REVENUES AND PROFITS TO DECLINE.
In 2002, we derived approximately 50% of our product revenues from our
foreign operations. Our foreign operations generate sales and incur expenses in
local currency. As a result, we are exposed to market risk related to
unpredictable 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 cause our revenues and profits to
decline.
Product revenues denominated in Euros account for approximately 34% of
total product revenues, and the fluctuations in the currency exchange rate
against the U.S. dollar can have a significant impact on our reported product
revenues.
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. As such, we are subject to certain risks arising from our
international business operations that could be costly in terms of dollars
spent, the diversion of management's time, and revenues and profits, including:
17
- 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;
- Changes in our international distribution network and direct sales forces;
- Political trade restrictions and exchange controls;
- Political, social, or economic unrest including armed conflict and acts of
terrorism;
- Labor disputes including work stoppages, strikes and embargoes;
- Inadequate and unreliable services and infrastructure;
- Import or export licensing or permit requirements; and
- Greater risk on credit terms and long accounts receivable collection
cycles in some foreign countries.
IF THE OWNERSHIP OF OUR COMMON STOCK CONTINUES TO BE HIGHLY CONCENTRATED, IT MAY
PREVENT OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND
MAY RESULT IN CONFLICTS OF INTEREST THAT COULD CAUSE OUR STOCK PRICE TO DECLINE.
After our initial public offering and continuing to the present, Eastman
Chemical Company and Danisco A/S and their affiliates, referred to as our
majority stockholders, each own in excess of 40% our outstanding common stock.
The majority stockholders 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. The concentration of ownership of
our common stock may have the effect of either delaying or preventing a change
to our control favored by our other stockholders or accelerating or approving a
change to our control opposed by our other stockholders. In addition, the
majority stockholders' control over our management could create conflicts of
interest between the majority stockholders and us with respect to the allocation
of corporate opportunities and between the majority stockholders and other
stockholders.
IF EXISTING STOCKHOLDERS SELL LARGE NUMBERS OF SHARES OF OUR COMMON STOCK, OUR
STOCK PRICE COULD DECLINE.
The market price of our common stock could decline as a result of sales by
our existing stockholders or holders of stock options of a large number of
shares of our common stock in the public market or the perception that these
sales could occur. Our two majority stockholders, for example, hold over 80% of
our common stock, and all of these shares are subject to registration rights. In
addition, we issued stock options to our officers, directors and employees
pursuant to our 2002 Omnibus Incentive Plan, approved by our stockholders in May
2002, and its predecessor plan.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, PARTICULARLY VOLATILE.
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,
including ours, have been highly volatile in the period since our initial public
offering in July 2000 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;
- Conditions or trends in the biotechnology industry;
- Announcements of technological innovations or new products by us or our
competitors;
- Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- Developments in patent or other intellectual proprietary rights or
announcements relating to these matters;
18
- Investor concern regarding the public acceptance of the safety of
biotechnology products or announcements relating to these matters;
- Litigation or governmental proceedings or announcements relating to these
matters;
- Economic and other external factors or other disaster or crisis;
- Future royalties from product sales, if any, by our licensees;
- Sales of our common stock or other securities in the open market; and
- Period-to-period fluctuations in our operating results.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed. Accordingly, if product revenue
declines or does not grow as we anticipate or non-product revenue declines due
to the expiration or termination of strategic alliance agreements or the failure
to obtain new agreements or grants, we may not be able to correspondingly reduce
our operating expenses in any particular quarter. Our quarterly revenue and
operating results have fluctuated in the past and are likely to do so in the
future. If our operating results in some quarters fail to meet the expectations
of stock market analysts and investors, our stock price would likely decline.
Some of the factors that could cause our revenue and operating results to
fluctuate include:
- The ability and willingness of strategic partners to commercialize
products derived from our technology or containing our products on
expected timelines;
- Our ability to successfully commercialize products developed independently
and the rate of adoption of such products;
- Fluctuations in consumer demand for products containing our technologies
or products, such as back to school sales of blue jeans and other denim
products, resulting in an increase in the use of textile processing
enzymes, and fluctuations in laundry detergent use due to promotional
campaigns run by consumer products companies; and
- Fluctuations in geographic conditions including currency and other
economic conditions such as economic crises in Latin America or Asia and
increased energy and related transportation costs.
We also have incurred significant infrequently occurring charges within
given quarters, such as those incurred in conjunction with restructuring
activities, and recognized investment income from sales of available-for-sale
marketable securities.
CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD RESULT IN OUR INABILITY TO
COMMERCIALIZE PRODUCTS.
We produce a significant amount of our products from genetically modified
microorganisms. We cannot predict public attitudes and acceptance of existing or
future products made from genetically modified microorganisms. 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, the general public may
not accept our products and this may prevent us from commercializing 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.
IF WE ARE SUBJECT TO A COSTLY PRODUCT LIABILITY DAMAGE CLAIM OR AWARD, OUR
PROFITS COULD DECLINE.
We may be held liable if any product we develop, or any product that a
third party makes 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 liability
claims could prevent or inhibit the commercialization of products developed by
us or our strategic partners. If a third party sues us for any injury caused by
our products, our liability could exceed our insurance coverage amounts and
total assets and our profits could decline.
19
IF WE ARE SUBJECT TO COSTLY ENVIRONMENTAL LIABILITY DUE TO THE USE OF HAZARDOUS
MATERIALS IN OUR BUSINESS, OUR PROFITS COULD DECLINE.
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. Third parties may sue us for any injury or contamination
that results from our use or the third party's use of these materials. Any
accident could partially or completely shut down our research and manufacturing
facilities and operations. In addition, if we are required to comply with any
additional applicable environmental laws and regulations, we may incur
additional costs, and any such current or future environmental regulations may
impair our research, development or production efforts.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO
ACHIEVE OUR STATED CORPORATE OBJECTIVES.
Our ability to manage our anticipated growth, if realized, effectively
depends on our ability to attract and retain highly qualified executive officers
and technology and business personnel. In particular, our product development
programs depend on our ability to attract and retain highly skilled researchers.
Competition for such individuals is intense. If we fail to attract and retain
qualified individuals, we will not be able to achieve our stated corporate
objectives.
20
ITEM 2. PROPERTIES
We lease or own 25 facilities throughout the world. Our eight global
manufacturing facilities which are located in Cedar Rapids, Iowa; Rochester, New
York; Beloit, Wisconsin; Hanko and Jamsankoski, Finland; Brugge, Belgium;
Jiangsu Province, China and Province De Cordoba, Argentina, provide the base for
our 15 global distribution centers. Our ten remaining facilities are
administrative and sales offices. We lease our principal offices located in
154,000, 43,944, and 29,000 square feet of space in Palo Alto, California,
Rochester, New York, and Leiden, the Netherlands, respectively. The leases for
these facilities expire in 2017, 2009 and 2019, respectively. We believe our
facilities are in good operating condition and all real property owned or leased
are adequate for all present and near term uses.
Information concerning each of our manufacturing facilities is as follows:
SITE OWNERSHIP SQUARE FOOTAGE
---- --------- --------------
CEDAR RAPIDS Owned 135,000 sq. ft.
Genencor International, Inc.
Cedar Rapids, Iowa
HANKO Owned 178,000 sq. ft.
Genencor International Ltd.
Hanko, Finland
BRUGGE Owned 251,000 sq. ft.
Genencor International BVBA
Brugge, Belgium
JAMSANKOSKI Owned 94,000 sq. ft.
Genencor International Ltd.
Jamsankoski, Finland
ARROYITO Owned 96,000 sq. ft.
Genencor International Argentina, S.A.
Prv. De Cordoba, Argentina
ROCHESTER CENTER FOR DEVELOPMENT Leased, 50 year term,
AND COMMERCIALIZATION expiring 2040, with 70,000 sq. ft.
Genencor International, Inc. right to purchase for
Rochester, New York $1.00
WUXI Governmental land use 361,000 sq. ft.
Genencor (Wuxi) Bio-Products Co., Ltd. rights to use land
Jiangsu Province, P.R. of China
BELOIT Owned 128,500 sq. ft.
Genencor International Wisconsin, Inc.
Beloit, Wisconsin
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Report, we are not engaged in any legal proceeding
that we expect to have a material adverse effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq Stock Market on July 28, 2000
under the symbol "GCOR." The following table sets forth the high and low sale
prices per share of common stock, as reported on the Nasdaq Stock Market, during
the periods indicated.
Price
-------------------
High Low
Year ended December 31, 2000:
Third Quarter (commencing July 28) ............ $36.63 $18.00
Fourth Quarter ................................ $30.00 $12.00
Year ended December 31, 2001:
First Quarter .................................. $20.37 $ 8.00
Second Quarter ................................. $17.90 $ 6.75
Third Quarter .................................. $17.99 $ 8.60
Fourth Quarter ................................. $18.10 $ 9.34
Year ended December 31, 2002:
First Quarter .................................. $16.34 $ 9.54
Second Quarter ................................. $12.10 $ 8.30
Third Quarter .................................. $12.43 $ 6.74
Fourth Quarter ................................. $12.40 $ 7.88
The number of shares of our common stock outstanding as of March 14, 2003
was 58,576,827. As of such date there were approximately 6,900 holders of our
common stock. Our two largest stockholders, Eastman Chemical Company and Danisco
A/S, owned 50,000,000 shares.
We paid cash dividends to our common stockholders of $10.0 million in
1998. We did not pay any dividends on our common stock in 1999, 2000, 2001 or
2002. We currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying cash
dividends to our common stockholders in the foreseeable future.
On April 28, 2000, we allowed our executive officers to accelerate the
exercise of 1,856,500 stock options granted under the Genencor International,
Inc. Stock Option and Stock Appreciation Right Plan (SOAR Plan) and purchase
restricted shares of common stock at a price of $9.70 per share. The restricted
shares were purchased through the use of notes from the officers that totaled
$18.0 million. The vesting provisions included in the restricted common stock
agreements were the same as those of the original stock options granted to the
officers under the SOAR Plan.
On November 30, 2001, we allowed our executive officers to surrender
349,910 vested, restricted shares to us at a value of $16.09 per share, to pay
principal and interest due on the notes on January 27, 2002 by each respective
officer. The surrendered shares were recorded as treasury shares. The remaining
principal balance of the notes receivable for restricted common stock at
December 31, 2001 was $14.6 million.
On August 21, 2002, in order to eliminate all stock-related loans, our
executive officers surrendered approximately 1.4 million restricted shares to us
at a value of $10.77 per share, to make full payment of the outstanding
principal of $14.6 million and accrued interest of $0.6 million on their
obligations under notes issued in connection with their purchase of restricted
common stock at $9.70 per share in April 2000. Also included in the value of the
surrendered shares was a cash payment to cover an estimated $0.2 million of net
capital gain tax incurred by the executive officers. We are holding the
surrendered shares as treasury shares.
See Item 12 below for the Equity Compensation Plan Information table.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements, the notes to our
consolidated financial statements, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report. We derived the statement of operations and balance sheet data for the
five-year period ended December 31, 2002 from our audited consolidated financial
statements. Historical results are not necessarily indicative of future results.
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Product revenue ............................... $ 329,337 $ 311,110 $ 300,978 $ 305,637 $ 279,492
Fees and royalty revenues ..................... 20,741 14,908 15,252 10,965 9,619
--------- --------- --------- --------- ---------
Total revenues ................................ 350,078 326,018 316,230 316,602 289,111
Operating expenses:
Cost of products sold ......................... 186,383 172,986 172,265 176,756 167,604
Research and development ...................... 70,190 60,103 50,858 43,955 40,205
Sales, marketing and business development ..... 33,027 28,845 27,539 24,564 24,394
General and administrative .................... 34,635 29,913 25,818 22,984 22,940
Amortization of intangible assets ............. 5,563 9,966 10,478 10,032 9,554
Restructuring and related charges ............. 16,427 -- -- 7,500 --
Other (income)/expense ........................ (3,409) (507) (2,391) (845) (342)
--------- --------- --------- --------- ---------
Total operating expenses ...................... 342,816 301,306 284,567 284,946 264,355
--------- --------- --------- --------- ---------
Operating income ................................ 7,262 24,712 31,663 31,656 24,756
Non operating expenses/(income):
Investment expense/(income) ................... 1,500 -- (16,577) -- (990)
Interest expense .............................. 8,587 10,433 10,474 10,487 10,727
Interest income ............................... (5,207) (10,069) (7,752) (750) (557)
Other (income)/expense ........................ -- -- -- -- (1,442)
--------- --------- --------- --------- ---------
Total non operating expenses/(income) ......... 4,880 364 (13,855) 9,737 7,738
--------- --------- --------- --------- ---------
Income before income taxes ...................... 2,382 24,348 45,518 21,919 17,018
(Benefit from)/provision for income taxes ....... (3,415) 6,574 14,108 5,294 3,279
--------- --------- --------- --------- ---------
Net income .................................... $ 5,797 $ 17,774 $ 31,410 $ 16,625 $ 13,739
========= ========= ========= ========= =========
Net (loss applicable)/income available to
holders of common stock ..................... $ (1,478) $ 10,499 $ 24,135 $ 9,350 $ 6,464
========= ========= ========= ========= =========
(Loss)/earnings per common share:
Basic ....................................... $ (0.02) $ 0.18 $ 0.44 $ 0.19 $ 0.13
========= ========= ========= ========= =========
Diluted ..................................... $ (0.02) $ 0.17 $ 0.42 $ 0.19 $ 0.13
========= ========= ========= ========= =========
Weighted average common shares:
Basic ....................................... 59,257 59,888 54,504 50,000 50,000
========= ========= ========= ========= =========
Diluted ..................................... 59,575 61,069 56,855 50,000 50,000
========= ========= ========= ========= =========
Dividends per common share .................... -- -- -- -- $ 0.20
========= ========= ========= ========= =========
DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents ...................... $169,001 $215,023 $200,591 $ 39,331 $ 12,792
Working capital ................................ 203,043 233,511 248,236 82,414 84,871
Total assets ................................... 654,922 648,998 642,932 499,300 496,478
Total long-term debt and capital leases ........ 90,887 117,735 150,215 146,080 158,000
Total liabilities .............................. 216,915 240,767 238,706 246,239 243,515
Redeemable preferred stock ..................... 169,750 162,475 155,200 147,925 140,650
Total stockholders' equity ..................... 268,257 245,756 249,026 105,136 112,313
23
A number of items impact the comparability of the selected consolidated
financial data:
- In 2002, we implemented a plan to restructure our supply infrastructure
which included our manufacturing facilities in Elkhart, Indiana and
Argentina which resulted in restructuring and related charges of $16.4
million.
- In 2002, we acquired Genencor International Wisconsin, Inc. formerly
known as Enzyme Bio-Systems Ltd. (EBS) for $35.8 million. We also acquired
the brewing and enzyme business of Rhodia Food UK Limited for $8.9
million.
- In 2002, our executive officers surrendered 1.4 million restricted
shares with a value $10.77 per share to eliminate all stock- related
loans.
- In 2002, our first annual installment of $28.0 million on long-term debt
was paid on March 30.
- In 2001, $28.0 million of long-term debt which was due March 30, 2002
was reclassified to current maturities of long-term debt.
- In 2000, we completed an initial public offering of 8.05 million shares
of common stock at a price of $18.00 per share, including 7.0 million
shares of common stock issued July 28, 2000 in the initial offering and
1.05 million shares of common stock issued August 25, 2000 pursuant to the
exercise of the underwriters' over-allotment option. The combined net
proceeds raised from the initial offering and the over-allotment option
were $132.7 million.
- In 2000, we realized a gain on the sale of marketable equity securities
of $16.6 million, $10.2 million tax-effected, and recognized back
royalties in connection with a settlement of patent infringement claims of
$3.5 million, $2.1 million tax-effected.
- In 1999, we acquired an 80% ownership interest in Genencor (Wuxi)
Bio-Products Co. Ltd. We accounted for this transaction by the purchase
method of accounting. As of December 31, 2002, we increased our ownership
interest to 85% through contributions of cash and technology.
- In 1999, we implemented a plan to restructure our manufacturing facility
in Belgium.
24
ITEM 7. 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 notes to those statements included in Item 8 of this report.
OVERVIEW
We are a diversified biotechnology company that develops and delivers
products and services to the industrial, consumer, agri-processing and health
care markets. Our current revenues result primarily from the sale of enzyme
products to the cleaning, grain processing and textile industries, with the
remainder of our revenues from research funding, 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, agri-processing, industrial, and consumer markets. We have formed,
and plan to continue to form, strategic alliances with market leaders to
collaborate with us to develop and launch products.
We manufacture our products at our eight manufacturing facilities which
are 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, China and
Argentina and through distributors in selected markets and geographies. In 2002,
2001, and 2000 we derived approximately 50% of our revenues from our foreign
operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparation of those financial statements, we apply various accounting
policies. We also 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. Although our accounting policies and certain estimates and
assumptions are disclosed within the notes to our consolidated financial
statements, the following is a discussion of the accounting policies, estimates
and assumptions we believe are most critical.
Principles of Consolidation
Our consolidated financial statements include the accounts of all
majority-owned subsidiaries. Investments in affiliates in which we have the
ability to exercise significant influence, but not control, are accounted for by
the equity method, which means that our investment in those entities is adjusted
at each balance sheet date to reflect capital contributions made, dividends
received and our respective share of such affiliate's earnings or losses. All
other investments in affiliates, which are not material to our financial
statements, are carried at cost. In the normal course of business, we engage in
transactions among our affiliated entities. These intercompany transactions are
eliminated in our consolidated financial statements. All of our investments are
in operating or corporate holding companies, some of which may qualify under the
definition of variable interest entities as defined in Financial Accounting
Standards Board Interpretation No. 46 "Consolidation of Variable Interest
Entities." While we have no material investments in variable interest entities,
all such investments have been appropriately reflected in the consolidated
financial statements or otherwise disclosed in the notes thereto.
Revenue Recognition
Our revenue recognition policies comply with the guidance contained in the
provisions of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." Our revenues consist of product revenues and fees and
royalty revenues. Fees and royalty revenues consist primarily of funded
research, technology and license fees and royalties. Our revenues are heavily
influenced by business with our major customers. Please refer to the discussion
of major customers included in Item 1 of this report.
Product Revenue
Revenue from product sales is recognized upon shipment to customers.
We group our existing products into three general categories: enzymes that
break down protein, enzymes that break down starch and enzymes that break
down cellulose.
25
Funded Research
Research funding revenues result from collaborative agreements with
various parties, including the U.S. Government, whereby we perform
research activities and receive revenues that partially reimburse expenses
incurred. Under such agreements we retain a proprietary interest in the
products and technology developed. These expense reimbursements primarily
consist of direct expense sharing arrangements and milestone payments.
Revenues related to expense sharing arrangements are recorded as the
underlying expenses are incurred. Milestone payments are contingent upon
successful completion of research activities and are recognized upon
satisfaction of those contingencies. Upfront research funding payments are
recognized as revenues on a straight-line basis over the term of the
underlying research agreement. Our funded research revenues are fully
dependent upon our progress on the underlying collaborative research
projects and can vary from period to period.
Technology and License Fees
Fees from the sale of technology are recognized upon completion of
the required technology transfer and substantial satisfaction of any
performance related responsibilities. License fees are recognized on a
straight-line basis over the term defined in the license agreement. In the
event there is no defined term, such as with permanent licenses, license
fees are recognized upon substantial satisfaction of any performance
related responsibilities. Our technology and license fees can vary from
period to period as a result of the number and timing of such
transactions.
Royalty Revenue
Royalty revenue is recognized in accordance with the underlying
contract terms.
Research and Development
We expense research and development costs as incurred. Research and
development expenses include, but are not limited to, expenses for services
rendered related to our funded research activities. Accordingly, in the event
our funded research revenues fluctuate from period to period, the related
research and development expenses may also fluctuate.
Investments In Equity Securities
We hold minority interests in equity securities of certain publicly traded
and privately held companies having operations or technology within our
strategic area of focus. While we are selective in making such investments, once
we have obtained the securities, we are at risk for fluctuations in their fair
market value. If these securities experience declines in value which we consider
to be other-than-temporary, we will record an impairment charge to the extent of
that decline in value. Poor operating results experienced by these entities or
adverse changes in market conditions in the future may cause losses or an
inability to recover our carrying value of these investments. In 2002, we
recorded an investment loss of $1.5 million as a result of such circumstances.
Long-Lived Assets
Our long-lived assets consist primarily of property, plant and equipment,
goodwill, and other intangible assets. Other intangible assets primarily include
patents, licenses, technology, and customer lists. Investments in long-lived
assets are initially recorded at acquisition cost. We recognize depreciation on
all property, plant and equipment, except land, using the straight-line method
over the estimated useful lives of the assets, which range from 3-40 years. We
also amortize our other intangible assets, except technology, on a straight-line
basis over estimated lives of 4-20 years. Land, goodwill and technology are
considered to have indefinite useful lives and are therefore not subject to
depreciation or amortization. At least annually, we evaluate whether the
remaining useful lives of our depreciable and amortizable assets are
appropriate. Changes in these useful lives can result in either increases or
decreases in the amount of depreciation and amortization expense recorded in our
statement of operations, reflecting shorter or longer lives, respectively.
In addition, we regularly assess all of our long-lived assets for
impairment when events or circumstances indicate their carrying amounts may not
be recoverable. This is accomplished by comparing the expected undiscounted
future cash flows of the assets with the respective carrying amount as of the
date of assessment. Should aggregate future cash flows be less than the carrying
value, a write-down would be required, measured as the difference between the
carrying value and the fair value of the asset. Fair value is estimated either
through independent valuation or as the present value of expected discounted
future cash flows. If the expected undiscounted future cash flows exceed the
respective carrying amount as of the date of assessment, no impairment is
recognized.
26
Our judgments related to the expected useful lives of long-lived assets
and the ability of the Company to realize undiscounted cash flows in excess of
the carrying amounts of such assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic conditions and
changes in operating performance. While we believe the long-lived asset amounts
recorded in our balance sheet are properly stated as of December 31, 2002, as we
make future assessments of the ongoing expected cash flows and carrying amounts
of our long-lived assets, these factors could cause us to realize material
impairment charges. During 2002, we recognized an impairment charge of $9.5
million for certain assets in connection with our restructuring activities.
Please refer to the discussion under the subheading "Restructuring Activities"
included later in this section.
Defined Benefit Pension and Post-Retirement Plans
As part of our overall employee benefits program, we have defined benefit
pension plans and a defined benefit postretirement plan. The assets, liabilities
and related expense of these plans are determined on an actuarial basis and are
affected by the estimated market-related value of plan assets, estimates of the
expected return on plan assets, discount rates, rates of increase of health care
costs, rates of future compensation increases and other assumptions inherent in
these valuations. Our actuarial consultants also use subjective factors such as
withdrawal and mortality rates. The actuarial assumptions used may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants. We annually review the assumptions underlying the actuarial
calculations and makes changes to these assumptions as necessary.
Stock-Based Compensation
The Genencor International, Inc. 2002 Omnibus Incentive Plan (the OI Plan)
became effective on May 30, 2002 upon approval by the stockholders at our Annual
Meeting of Stockholders. Employees, outside directors, consultants, advisors and
independent contractors retained by the Company are eligible to participate in
the OI Plan. The Plan allows for the grant, at not less than 100% of the
estimated market value as of the date of grant, of non-qualified and incentive
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. The
OI Plan also allows for the grant of restricted and unrestricted stock awards,
performance shares (stock or stock-based awards contingent upon attaining
performance objectives) or performance units (units valued by reference to
chosen criteria). Under the terms of the OI Plan, the Company has the ability to
grant awards representing up to 6.8 million shares of common stock. In addition,
any shares remaining, or shares that become available under the predecessor plan
will be available for grant of awards under the OI Plan. Generally, stock
options and SARs vest and become exercisable, and the restrictions, if any, on
stock awards shall expire, ratably over a three-year period and expire 10 years
from their grant date.
We use the intrinsic value method to account for stock-based employee
compensation in accordance with Accounting Principles Board (APB) Opinion No. 25
" Accounting for Stock Issued to Employees" and have no current plans to convert
to the fair value method. Under the intrinsic value method, no compensation
expense is recorded for grants of stock-based awards when the grants have an
exercise price equal to the fair market value of our common stock at the date of
grant. Should the exercise price be below the fair market value on the date of
grant, we record this difference as a component of stockholders' equity and
amortize it as a charge to operations over the vesting period of the stock-based
award. For more information regarding our stock-based awards, including pro
forma disclosures of compensation expense had we employed the fair value method
under SFAS No. 123 "Accounting for Stock-Based Compensation," please refer to
Note 11 - Employee Benefit Plans included within Item 8 of this report.
Income Taxes
The (benefit from)/provision for income taxes included within our
statement of operations is based upon pretax financial accounting income/(loss)
and is calculated using the liability method. Deferred tax assets and
liabilities are determined based on differences between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Significant estimates
are required in determining our (benefit from)/provision for income taxes.
Various internal and external factors may have favorable or unfavorable effects
on our future consolidated effective tax rate. These factors include, but are
not limited to, changes in tax laws, regulations and/or rates, changing
interpretations of existing laws or regulations, future acquisitions or mergers,
future levels of research and development spending, future levels of capital
expenditures, and changes in overall levels of pretax earnings. Furthermore, we
operate within multiple taxing jurisdictions and are subject to audit by
regulatory authorities in these jurisdictions. These tax audits can involve
complex issues, which may require an extended period of time to resolve. We
believe that we have appropriately calculated our (benefit from)/provision for
income taxes in light of these uncertainties.
27
SUMMARY OF RESULTS
In 2002, we reported a net loss applicable to common stockholders of $1.5
million, or a loss of $0.02 per diluted share, compared to net income available
to common stockholders of $10.5 million, or $0.17 per diluted share for 2001.
During the year ended December 31, 2002, we recorded restructuring and related
charges of $16.4 million, or $10.3 million on an after-tax basis. Before these
charges, we would have reported net income available to common stockholders of
$8.9 million, or $0.15 per diluted share for the year ended December 31, 2002.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2002 and 2001
Revenues. Total revenues for the year ended December 31, 2002 increased
$24.1 million, or 7%, to $350.1 million from the year ended December 31, 2001,
due to an increase in product revenues and fees and royalty revenues.
Product Revenues. Product revenues for the year ended December 31, 2002
increased $18.2 million, or 6%, to $329.3 million from the year ended December
31, 2001. Without the impact of foreign currency translation, primarily the Euro
and the Argentine Peso against the U.S. Dollar, product revenues in 2002 would
have increased to $330.7 million. In 2002, unit volume/mix grew 8%, while
average prices fell 2%. Volume/mix increased primarily due to increased textile
sales and increased sales volume to our grain processing markets, including fuel
ethanol.
Regionally, North American product revenues for the year ended December
31, 2002 increased $9.3 million, or 6%, to $156.7 million from the year ended
December 31, 2001, driven primarily by increased sales to our grain processing
markets, partially offset by decreased sales to a major customer. Product
revenues in Europe, Africa and the Middle East for the year ended December 31,
2002 increased $9.6 million, or 9%, to $118.1 million from the year ended
December 31, 2001, driven primarily by increased sales to a major customer and
increased sales to our grain processing markets, partially offset by decreased
sales to our cleaning and fabric care markets. Our product revenues for the year
ended December 31, 2002 in Latin America declined $6.1 million, or 32%, to $12.9
million from the year ended December 31, 2001, due primarily to decreased sales
to our cleaning and fabric care markets, partially offset by increased sales to
a major customer and increased sales to our grain processing markets. Product
revenues in the Asia Pacific region for the year ended December 31, 2002
increased $5.4 million, or 15%, to $41.6 million from the year ended December
31, 2001, driven primarily by increased sales to our grain processing markets
and increased sales to our textile markets.
Fees and Royalty Revenues. Fees and royalty revenues increased $5.8
million, or 39%, to $20.7 million for the year ended December 31, 2002 from the
year ended December 31, 2001.
Funded research revenues for the year ended December 31, 2002 increased
$7.3 million, or 60%, to $19.5 million from the year ended December 31, 2001.
Revenues generated by research funding result from collaborative agreements with
various parties, including the U.S. Government, whereby we perform research
activities and receive revenues that partially reimburse us for expenses
incurred. Under such agreements, we retain a proprietary interest in the
products and technology developed. Our funded research revenues of $3.7 million
for the year ended December 31, 2002, as it relates to U.S. Government
collaborations did not change from the year ended December 31, 2001. Funded
research revenues provided by customers increased $7.3 million, or 86%, to $15.8
million for the year ended December 31, 2002 from the year ended December 31,
2001 primarily due to an increase in strategic collaborative research and
development agreements.
Royalties for the year ended December 31, 2002 increased $0.2 million, or
22%, to $1.1 million from the year ended December 31, 2001
License fees for the year ended December 31, 2002 decreased $1.7 million
or 94% to $0.1 million from the year ended December 31, 2001. The 2001 fees
related to the sale of rights to a third party for the use of our technology and
patents to manufacture products.
Operating Expenses
Cost of Products Sold. Cost of products sold for the year ended December
31, 2002 increased $13.4 million, or 8%, to $186.4 million from the year ended
December 31, 2001. Our expanded sales volume/mix increased costs $8.8 million
along with the sale of
28
higher cost inventories of approximately $11.2 million, which was offset by the
impact of the stronger U.S. dollar against foreign currencies of $6.6 million.
Gross Profit and Margins from Products Sold. Gross profit from products
sold increased $4.8 million, or 3%, to $142.9 million for the year ended
December 31, 2002 from the year ended December 31, 2001. This overall increase
was caused by significant product revenue related factors including an 8%
increase in volume/mix being processed through our plants, partially offset by
an average price decline of 2%. This net increase in gross profit was also
driven by a $5.2 million increase due to the impact of the weaker U.S. dollar
against foreign currencies. As a result of these factors however, gross margin
on product revenue decreased to 43.4% in 2002 from 44.4% in 2001, primarily
driven by operating both Elkhart, Indiana and Beloit, Wisconsin facilities since
the acquisition. Production ceased at our Elkhart, Indiana facility in September
2002.
Research and Development. Research and development expenses primarily
consist of the personnel-related, consulting, and facilities costs incurred in
connection with our research activities in Palo Alto, California, and Leiden,
the Netherlands. These expenses increased $10.1 million, or 17%, to $70.2
million for the year ended December 31, 2002 from the year ended December 31,
2001 as we increased our investment in technology and product development for
new markets and established additional outside collaborations to support our
health care and other initiatives. As a part of total research and development
expenses, estimated expenses related to research collaborations partially funded
by customers increased approximately $4.0 million, or 35%, to $15.4 million for
the year ended December 31, 2002 from the year ended December 31, 2001.
Sales, Marketing and Business Development. Sales, marketing and business
development expenses primarily consist of the personnel-related and marketing
costs incurred by our global sales force. These expenses increased $4.2 million,
or 15%, to $33.0 million for the year ended December 31, 2002 from the year
ended December 31, 2001, due primarily to increased personnel-related costs,
including salaries, benefits, commissions and travel expenses, of $3.3 million,
incentive compensation costs of $0.8 million, employee programs of $0.3 million,
partially offset by a decrease in outside services of $0.3 million.
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 $4.7 million, or 16%, to $34.6 million for the year ended December 31,
2002 from the year ended December 31, 2001 due primarily to increased
personnel-related costs, including salaries, benefits, and travel expenses of
$1.5 million, outside services of $3.0 million, and incentive compensation costs
of $0.5 million partially offset by a decrease in employee programs and other
miscellaneous expenses.
Amortization of Intangible Assets. We amortize our definite-lived
intangible assets, consisting of patents, licenses and other contractual
agreements, on a straight-line basis over their estimated useful lives.
Amortization expense decreased $4.4 million, or 44%, to $5.6 million for the
year ended December 31, 2002 from the year ended December 31, 2001 due primarily
to the implementation of SFAS No. 142, "Goodwill and Other Intangible Assets."
Other Expense and Income. Other expense and income relates primarily to
foreign currency exchange gains and losses on transactions denominated in other
than the functional currency of the entity in which the transaction occurred.
Other income for the year ended December 31, 2002 increased $2.9 million to $3.4
million from the year ended December 31, 2001 due primarily to an increase in
foreign currency transaction gains.
Deferred Compensation. We measure deferred compensation for options
granted to employees as the difference between the grant price and the estimated
fair value of our common stock on the date we granted the options. In connection
with the grant of stock options to employees during 2000, amortization of
deferred compensation expense for the year ended December 31, 2002 was $3.3
million, which included the acceleration of certain amortization as discussed
under the heading " Related Party Transactions," and for the year ended December
31, 2001 was $2.0 million.
On November 6, 2002, we granted 0.075 million shares of restricted common
stock to our chief executive officer and president. These restricted shares were
granted at estimated fair market value at the date of grant and the restrictions
on the award expire three years from the date of grant. Deferred compensation
expense of $0.8 million was recorded in connection with the award and was
determined based on the number of granted restricted shares and the estimated
fair market value on the grant date. This amount was recorded as a component of
stockholders' equity and will be amortized as a charge to operations over the
vesting period of the award.
During the fourth quarter of 2001, we converted previously issued stock
appreciation rights (SARs) to stock options. As a result, the SARs were canceled
and new stock options were granted at the exercise price and with vesting
beginning as of the grant date of the previously issued SARs. For the new stock
options, stock-based compensation was then calculated as the difference between
the
29
exercise price and the estimated fair value of the new stock options on the
conversion date. We recognized compensation expense of $0.3 million in 2002
related to this conversion of SARs to stock options.
In total, amortization of deferred stock-based compensation expense was
$3.7 million and $3.3 million in 2002 and 2001, respectively, and was reported
in our Consolidated Statement of Operations as follows (in millions):
2002 2001
---- ----
Cost of products sold ......................................... $0.4 $0.3
Research and development ...................................... 0.7 1.0
Sales, marketing and business development ..................... 1.3 1.1
General and administrative .................................... 1.3 0.9
---- ----
Total amortization of deferred compensation expense ........... $3.7 $3.3
==== ====
Non Operating Expense and Income
Investment Expense/Income. Investment loss was $1.5 million for the year
ended December 31, 2002, resulting from an impairment loss recorded on certain
preferred stock. There was no such investment income or loss in the year ended
December 31, 2001.
Interest Income. Interest income decreased $4.9 million, or 49%, to $5.2
million for the year ended December 31, 2002 from the year ended December 31,
2001 due mainly to lower cash balances and lower interest rates.
Income Taxes. The effective income tax rate for the year ended December
31, 2002 was a 143% tax benefit, compared to a 27% tax expense for the year
ended December 31, 2001. The effective rate for the year ended December 31, 2002
was driven by anticipated tax benefits from operating losses in high tax
jurisdictions, partially offset by taxes on operating income generated in low
tax jurisdictions. Factors that affect our estimated annual effective income tax
rate include increased research and development expenditures in the United
States, the statutory income tax rates in foreign jurisdictions, amortization of
certain intangible assets, other operating expense increases, other items which
are not deductible for tax purposes, and research and development tax credits.
The rate also included the effect of the restructuring and related charges. The
tax benefit related to these restructuring and related charges is approximately
$6.1 million for the year ended December 31, 2002. During the year ended
December 31, 2002 and 2001, we were subject to a tax ruling in the Netherlands
that reduces the local effective income tax rate from 35.0% to 17.5%. This
ruling will expire in 2005.
Comparison of the Years Ended December 31, 2001 and 2000
Revenues. Total revenues for the year ended December 31, 2001 increased
$9.8 million, or 3%, to $326.0 million from the year ended December 31, 2000,
primarily due to an increase in product revenues.
Product Revenues. Product revenues for the year ended December 31, 2001
increased $10.1 million, or 3%, to $311.1 million from the year ended December
31, 2000. Without the impact of the stronger U.S. dollar against foreign
currencies, primarily the Euro, product revenues in 2001 would have increased by
approximately 5%, to $314.5 million. In 2001, unit volume/mix grew 8%, while
average prices fell 3%. Volume increased primarily due to increased protease
enzyme sales to a major customer and increased sales volume with our grain
processing markets.
Regionally, North American product revenues for the year ended December
31, 2001 increased $2.4 million, or 2%, to $147.4 million from the year ended
December 31, 2000 driven primarily by increased protease enzyme sales and
increased sales to our grain processing markets, partially offset by decreased
sales to cleaning and fabric care markets. Product revenues in Europe, Africa
and the Middle East for the year ended December 31, 2001 increased $8.0 million,
or 8%, to $108.5 million from the year ended December 31, 2000 driven primarily
by increased protease enzyme sales and increased sales to our grain processing
markets, partially offset by decreased sales to cleaning and fabric care
markets. Our product revenues for the year ended December 31, 2001 in Latin
America declined $1.7 million, or 8%, to $19.0 million from the year ended
December 31, 2000 due primarily to decreased sales to our cleaning and fabric
care markets, partially offset by increased protease enzyme sales and increased
sales to our grain processing markets. Product revenues in the Asia Pacific
region for the year ended December 31, 2001 increased $1.3 million, or 4%, to
$36.2 million from the year ended December 31, 2000 driven primarily by
increased protease enzyme sales and increased sales to our cleaning and fabric
care markets, partially offset by decreased sales to textile and grain
processing markets.
30
Fees and Royalty Revenues. Fees and royalty revenues decreased $0.4
million, or 3%, to $14.9 million for the year ended December 31, 2001 from the
year ended December 31, 2000.
Funded research revenues for the year ended December 31, 2001 increased
$1.4 million, or 13%, to $12.2 million from the year ended December 31, 2000.
Revenues generated by research funding result from collaborative agreements with
various parties, including the U.S. Government, whereby we perform research
activities and receive revenues that partially reimburse us for expenses
incurred. Under such agreements, we retain a proprietary interest in the
products and technology developed. Our funded research revenue, as it relates to
U.S. Government collaborations, decreased $1.5 million, or 29%, to $3.7 million
for the year ended December 31, 2001 from the year ended December 31, 2000
primarily due to the completion of a program with the Advanced Technology
Program/National Institute of Standards and Technology to develop ascorbic acid
technology. Funded research revenues provided by customers increased $2.9
million, or 52%, to $8.5 million for the year ended December 31, 2001 from the
year ended December 31, 2000 primarily due to an increase in strategic
collaborative research and development agreements.
Royalties for the year ended December 31, 2001 decreased $3.5 million, or
80%, to $0.9 million from the year ended December 31, 2000 due primarily to
one-time royalties of $3.5 million received during the year 2000 as a result of
the successful resolution of a patent infringement issue with a customer. These
one-time royalties pertained to previous sales, using patented technology, made
by the customer to third parties. The related intellectual property agreement
provides for future royalties, of which $0.8 million and $0.7 million were
received during 2001 and 2000, respectively.
License fees for the year ended December 31, 2001 were $1.8 million. There
were no license fees for the year ended December 31, 2000. These fees relate to
the sale of rights to a third party for the use of our technology and patents to
manufacture products.
Operating Expenses
Cost of Products Sold. Cost of products sold for the year ended December
31, 2001 increased $0.7 million, to $173.0 million from the year ended December
31, 2000. Our expanded sales volume/mix increased costs $4.7 million, which was
offset by reductions due to the impact of the stronger U.S. dollar against
foreign currencies of $1.9 million and the sale of lower cost inventories of
approximately $2.1 million.
Gross Profit and Margins from Products Sold. Gross profit from products
sold increased $9.4 million, or 7%, to $138.1 million for the year ended
December 31, 2001 from the year ended December 31, 2000. This overall increase
was caused by significant product revenue related factors including an 8%
increase in volume/mix being processed through our plants, partially offset by
an average price decline of 3%. This net increase in gross profit was partially
offset by a $1.5 million decrease due to the impact of the stronger U.S. dollar
against foreign currencies, primarily the Euro. As a result of these factors,
gross margin on product revenue increased to 44.4% in 2001 from 42.8% in 2000.
Research and Development. These expenses increased $9.2 million, or 18%,
to $60.1 million for the year ended December 31, 2001 from the year ended
December 31, 2000 as we increased our investment in technology and product
development for new markets hired additional internal staff, and established
additional outside collaborations to support our health care and other
initiatives. As a part of total research and development expenses, estimated
expenses related to research collaborations partially funded by customers
decreased approximately $1.8 million, or 14%, to $11.4 million for the year
ended December 31, 2001 from the year ended December 31, 2000.
Sales, Marketing and Business Development. Sales, marketing and business
development expenses primarily consist of the personnel-related and marketing
costs incurred by our global sales force. These expenses increased $1.3 million,
or 5%, to $28.8 million for the year ended December 31, 2001 from the year ended
December 31, 2000, due primarily to increased personnel-related costs, including
salaries, benefits, commissions and travel expenses, of $2.5 million, partially
offset by decreases in consulting and outside services of $0.4 million and
incentive compensation of $0.4 million.
General and Administrative. These expenses increased $4.1 million, or 16%,
to $29.9 million for the year ended December 31, 2001 from the year ended
December 31, 2000 due primarily to increased personnel-related costs, including
salaries, benefits, employee programs and travel expenses of $3.6 million and
public relation costs of $0.5 million.
Amortization of Intangible Assets. Amortization expense decreased $0.5
million, or 5%, to $10.0 million for the year ended December 31, 2001 from the
year ended December 31, 2000 due primarily to the 2000 release of an income tax
valuation allowance that was relocated to reduce goodwill.
31
Other Expense and Income. Other income decreased $1.9 million, or 79%, to
$0.5 million for the year ended December 31, 2001 from the year ended December
31, 2000 due primarily to a decrease in foreign currency transaction gains.
Deferred Compensation. We measure deferred compensation for options
granted to employees as the difference between the grant price and the estimated
fair value of our common stock on the date we granted the options. In connection
with the grant of stock options to employees during 2000, we recorded deferred
compensation expense of approximately $7.1 million. We recorded this amount as a
component of stockholders' equity and will amortize it as a charge to operations
over the vesting period of the options.
During the fourth quarter of 2001, we converted previously issued SARs to
stock options. As a result, the SARs were canceled and new stock options were
granted at the exercise price and with vesting beginning as of the grant date of
the previously issued SARs. For the new stock options, stock-based compensation
was then calculated as the difference between the exercise price and the
estimated fair value of the new stock options on the conversion date. For the
vested portion of the stock options, we recognized compensation expense of $0.7
million in 2001. For the unvested portion, deferred stock-based compensation
expense of $0.3 million was recorded in a separate component of stockholders'
equity and will be amortized as a charge to operations over the remaining
vesting period of the options.
In total, including the 2001 SARs conversion, amortization of deferred
stock-based compensation expense was $3.3 million and $1.6 million in 2001 and
2000, respectively, and was reported in our Consolidated Statement of Operations
as follows (in millions):
2001 2000
------ ------
Cost of products sold ..................................... $ 0.3 $ 0.1
Research and development .................................. 1.0 0.3
Sales, marketing and business development ................. 1.1 0.6
General and administrative ................................ 0.9 0.6
------ ------
Total amortization of deferred compensation expense ....... $ 3.3 $ 1.6
====== ======
Non Operating Expense and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities. During 2000, we realized a $16.6 million gain on
the sale of marketable equity securities. There were no sales of marketable
equity securities during the year ended December 31, 2001.
Interest Income. Interest income increased $2.3 million, or 29%, to $10.1
million for the year ended December 31, 2001 from the year ended December 31,
2000 due mainly to earnings on proceeds from our initial public offering,
partially offset by lower interest rates.
Income Taxes. Several factors affected our effective income tax rate for
the year ended December 31, 2001, including the statutory income tax rate in
foreign jurisdictions, amortization of intangible assets and other items that
are not deductible for tax purposes, and research and experimentation tax
credits. The effective income tax rate for the year ended December 31, 2001 was
27% compared with 31% for the year ended December 31, 2000. The effective rate
for the year ended December 31, 2000 included the effect of two one-time events.
During the year ended December 31, 2000, we realized $16.6 million of pre-tax
gains from the sale of marketable equity securities and a $3.5 million pre-tax
gain from the settlement of certain patent infringement issues, both in the
United States and tax effected at a marginal rate of 38.6%. During both periods
we were subject to a tax ruling in the Netherlands that reduces the local
effective income tax rate from 35.0% to 17.5%. This ruling will expire in 2005.
ACQUISITION
On December 31, 2002, we acquired the brewing and enzyme business of
Rhodia Food UK Limited for a total cash purchase price of $8.9 million. The
acquisition includes technology, product lines and personnel, and expands our
bioproducts portfolio and technical service capabilities in the food, feed and
specialty enzyme market sector. No facilities were included in the transaction.
The acquisition has been accounted for under the purchase method in accordance
with SFAS No. 141, "Business Combinations." The results of operations of the
acquired business will be consolidated with our results of operations beginning
January 1, 2003. We are continuing to evaluate the allocation of the purchase
price for the acquisition, including the segregation of separately identifiable
intangible assets. We anticipate that this process will be completed prior to
June 30, 2003. According to our preliminary allocation of
32
the purchase price, the net assets acquired consist of the following as December
31, 2002 (in millions):
Intangible assets ...................... $ 8.9
=======
During February 2002, we acquired Enzyme Bio-Systems Ltd. (EBS), now known
as Genencor International Wisconsin, from Corn Products International, Inc. for
a total cash purchase price of $35.8 million and the assumption of $1.0 million
in debt. As part of this transaction, we entered into a seven-year supply
agreement for a majority of Corn Products International, Inc.'s North American
enzyme requirements. The acquisition has been accounted for under the purchase
method in accordance with SFAS No. 141, "Business Combinations." The acquired
entity's results of operations have been consolidated with our results of
operations since the acquisition date. Our purchase price allocation of the net
assets acquired consists of the following as of December 31, 2002 (in millions):
Working capital ........................ $ 3.9
Property, plant and equipment .......... 21.1
Intangible assets ...................... 1.7
Goodwill ............................... 9.8
Long-term liabilities .................. (0.7)
-------
$ 35.8
=======
Included in working capital acquired is a provision to restructure the
entity of $1.1 million, which primarily consists of the employee-related costs
to eliminate 22 positions. All affected employees were notified immediately of
the restructuring plan. As of December 31, 2002, all costs had been charged to
this restructuring provision and all 22 employees had terminated their
employment with us.
RESTRUCTURING ACTIVITIES
During February 2002, as a result of the acquisition of EBS and general
economic conditions in Latin America, including the devaluation of the Argentine
peso, we engaged in a plan to restructure our overall supply infrastructure by
ceasing operations at our Elkhart, Indiana plant and downsizing our Argentine
facilities. There were 119 positions to be eliminated as a result of this
restructuring. All affected employees were notified immediately of the
restructuring plan. As of December 31, 2002, all 119 employees had terminated
their employment with us.
As a result of the plan, restructuring and related charges of $16.4
million were recorded in our operating earnings in the year ended December 31,
2002. These charges were primarily driven by employee severance and related
costs of approximately $3.8 million, costs to dismantle portions of the
restructured facilities of $1.0 million, costs to terminate long-term utility
agreements of $0.3 million, other costs totaling $0.2 million, and $9.5 million
for property, plant and equipment that was deemed impaired as it would no longer
be utilized by us after the restructuring. The impairment charge was determined
based on remaining book value, as we believe there is no active market in which
to sell the specific assets. Full implementation was completed in the fourth
quarter of 2002. In addition, we recorded costs related to the restructuring,
such as those related to the transition of activities between Elkhart and
Beloit, of $1.6 million as incurred during the year ended December 31, 2002. At
December 31, 2002, we had a remaining liability of $0.8 million related to this
restructuring.
RELATED PARTY TRANSACTIONS
Danisco A/S and its affiliates purchased approximately $11.0 million
during 2002, $9.0 million in 2001 and $8.0 million in 2002 of products from us.
We purchased products from and/or through these related parties for
approximately $3.0 million in 2002 and $4.0 million in 2001 and 2000. Also, we
received approximately $0.4 million in fees and royalty revenues from a Danisco
affiliate during 2002 and 2000, and no such fees and royalty revenues in 2001.
These revenues were received under a collaboration agreement for the development
and commercialization of enzymes for the animal feed market. In October 2000, we
signed an exclusive agreement with Danisco A/S for the development of innovative
bioingredients for the food industry. The four-year minimum term agreement
provides
33
for up to $20.0 million in funding to us. During 2002 and 2001, we received
approximately $1.1 million and $1.3 million, respectively, in fees and royalty
revenues under this agreement.
On April 28, 2000, we allowed our executive officers to accelerate the
exercise of 1,856,500 stock options granted under the SOAR Plan and purchase
restricted shares of common stock at a price of $9.70 per share. The restricted
shares were purchased through the use of notes from the executive officers that
totaled $18.0 million. The vesting provisions included in the restricted common
stock agreements were the same as those of the original stock options granted to
the executive officers under the SOAR Plan.
On November 30, 2001, we allowed our executive officers to surrender
349,910 vested, restricted shares to us at a value of $16.09 per share, to pay
principal and interest due on the notes on January 27, 2002 by each respective
officer. The surrendered shares were recorded as treasury shares. The remaining
principal balance of the notes receivable for restricted common stock at
December 31, 2001 was $14.6 million.
On August 21, 2002, in order to eliminate all stock-related loans, our
executive officers surrendered approximately 1.4 million restricted shares to us
at a value of $10.77 per share, to make full payment of the outstanding
principal of $14.6 million and accrued interest of $0.6 million on their
obligations under notes issued in connection with their purchase of restricted
common stock at $9.70 per share in April 2000. Also included in the value of the
surrendered shares was a cash payment to cover an estimated $0.2 million of net
capital gain tax incurred by the executive officers. The surrendered shares were
recorded as treasury shares.
In connection with this transaction, we accelerated the vesting of
approximately 0.6 million restricted shares. Accordingly, we incurred
incremental compensation expense of $0.5 million in 2002. In addition, we
accelerated the recognition of previously deferred compensation charges, of
which $0.4 million would otherwise have been recognized in the first half of
2003.
We also granted the executive officers 1.8 million stock options at $10.77
per share under our 2002 Omnibus Incentive Plan approved by stockholders on May
30, 2002, of which 0.6 million were fully vested upon issuance.
LIQUIDITY AND CAPITAL RESOURCES
Our funding needs consist primarily of capital expenditures, research and
development activities, sales and marketing expenses, and expenses for general
corporate purposes. We have financed our operations primarily through cash from
the sale of products, the sale of stock, research and development funding from
partners, government grants, and short-term and long-term borrowings.
During the third quarter of 2000, we completed an initial public offering
of 8,050,000 shares of common stock at $18.00 per share. This included 7,000,000
shares of common stock issued July 28, 2000 in the initial offering and
1,050,000 shares of common stock issued August 25, 2000 pursuant to the
underwriters' exercise of the over-allotment option. The combined net proceeds
from the initial offering and the over-allotment option exercise were
approximately $132.7 million. We have used and expect to continue using the net
proceeds from the offering for research and development activities, capital
expenditures, financing possible acquisitions, working capital and other general
corporate purposes.
We believe that our current cash and cash equivalent balances plus funds
to be provided from our current year operating activities, together with those
available under our line of credit, will satisfy our funding needs for at least
the next twelve months. 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 December 31, 2002, cash and cash equivalents totaled $169.0 million.
The funds were invested primarily in short-term instruments, including A1-P1
rated commercial paper, institutional money market funds, auction rate preferred
securities and bank deposits.
Cash provided by operations was $38.5 million, $51.1 million and $47.3
million for the years ended December 31, 2002, 2001, and 2000, respectively. The
decrease of $12.6 million for the year ended December 31, 2002 from the year
ended December 31, 2001, and the increase of $3.8 million for the year ended
December 31, 2001 from the year ended December 31, 2000, were generated
principally by operating earnings, net of non-cash items such as depreciation
and amortization, and changes in operating assets and liabilities.
34
Cash used in investing activities was $68.5 million, $33.8 million, and
$9.0 million for the years ended December 31, 2002, 2001, and 2000,
respectively. Spending in each of these years was driven by capital
expenditures, which totaled $19.6 million, $24.7 million and $25.6 million for
the years ended December 31, 2002, 2001, and 2000, respectively. A significant
portion of this spending included process improvement projects at our
manufacturing and research and development facilities and information technology
enhancements. We also began construction of a facility for the clinical-scale
manufacture of human therapeutic proteins in Rochester, New York during 2002.
Capital projects in process at December 31, 2002 relate primarily to further
manufacturing process improvements and information technology system
enhancements, as well as the construction of the human therapeutic proteins
manufacturing facility.
Cash used in investing activities increased $34.7 million for the year
ended December 31, 2002 from the year ended December 31, 2001. This was driven
primarily by the 2002 acquisitions of EBS and the brewing and enzyme business of
Rhodia Food UK Limited totaling $44.7 million offset by the decrease in capital
expenditures coupled with the 2001 purchase of intangible assets of $4.1
million. Cash used in investing activities increased $24.8 million for the year
ended December 31, 2001 from the year ended December 31, 2000. This was driven
primarily by the 2001 purchases of intangible assets of $4.1 million and
marketable equity securities of $5.1 million, coupled with the proceeds from the
sale of marketable equity securities of $17.6 million in 2000.
Cash used in financing activities increased $26.7 million for the year
ended December 31, 2002 from the year ended December 31, 2001. This increase was
primarily a result of our payment of the first installment of $28.0 million on
our senior debt made March 30, 2002, partially offset by the cash provided by
our Employee Stock Purchase Plan of $1.5 million. Cash provided by financing
activities was $123.7 million for the year ended December 31, 2000, which
resulted primarily from the initial public offering of our common stock of
$132.7 million, partially offset by the payment of a long-term note of $10.0
million to Gist-Brocades (G-b) related to the 1995 acquisition of the G-b
industrial enzyme business. No dividends were paid to common stockholders during
2002, 2001, and 2000. While we are permitted to pay dividends, we currently
intend to retain future earnings to finance the expansion of our business. Any
future determination to pay cash dividends to our common stockholders will be at
the discretion of our board of directors and will depend upon our financial
condition, results of operations, capital requirements, general business
conditions and other factors that the board of directors may deem relevant,
including covenants in our debt instruments that may limit our ability to
declare and pay cash dividends on our capital stock. Covenants in our senior
note agreement restrict the payment of dividends or other distributions in cash
or other property to the extent the payment puts us in default of these
covenants. Such covenants include, but are not limited to, maintaining a debt to
total capitalization of no greater than 55% and a maximum ratio of debt to
earnings before interest, taxes, depreciation and amortization (EBITDA) of
3.5:1.
At December 31, 2002, we had a $40.0 million revolving credit facility
with a syndicate of banks, which is available for general corporate purposes.
The facility, which consists of a credit agreement, makes available to the
Company $40.0 million of committed borrowings, which expires on January 31,
2004. The facility carries fees of 0.35% on the amount of unborrowed principal
under the agreement. As of December 31, 2002, there were no borrowings under the
facility.
Our long-term debt consists primarily of the 6.82% senior notes issued in
1996 to certain institutional investors. The remaining principal amount of these
notes is $112.0 million. Annual installment payments of $28.0 million commenced
on March 30, 2002. We are currently in compliance with all of the material
financial covenants included in the senior note agreement.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other
Intangible Assets." We adopted this statement as of January 1, 2002. This
statement requires the recognition of separately identifiable intangible assets.
Furthermore, it establishes amortization requirements based upon the ability of
the intangible assets to provide cash flows. For those intangible assets with
readily identifiable useful lives, amortization will be recorded in the
statement of operations over such lives. Intangible assets, such as goodwill,
which have indefinite lives, will not result in periodic amortization, but must
be tested at least annually for impairment.
With the adoption of SFAS No. 142, we reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, goodwill and certain
previously acquired technology were determined to have indefinite useful lives.
Also, there were no adjustments made to the amortization periods or residual
values of other intangible assets. Accordingly, certain reclassifications were
made to previously issued financial statements to conform to the presentation
required by SFAS No. 142. We completed the first step of the transitional
goodwill and indefinite-lived intangible
35
impairment tests and have determined that no potential impairment exists. As a
result, we recognized no transitional impairment loss in fiscal 2002 in
connection with the adoption of SFAS No. 142.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that
obligations associated with the retirement of a tangible long-lived asset be
recorded as a liability when those obligations are incurred, with the amount of
the liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period and
the capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. The provisions of
SFAS No. 143 will be required to be adopted by us in fiscal 2003. The Company
does not expect the adoption of SFAS No. 143 to have a material impact on our
financial position or our results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 addresses the
accounting for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires the measurement of long-lived
assets at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 as of January 1, 2002. There was no
financial statement impact as a result of the adoption. We will apply its
provisions to future impairments or disposals of long-lived assets as they
occur.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
and amends SFAS No. 13, "Accounting for Leases." This statement updates,
clarifies and simplifies existing accounting pronouncements. As a result of
rescinding SFAS No. 4 and SFAS No. 64, the criteria in Accounting Principles
Board Opinion No. 30 will be used to classify gains and losses from
extinguishment of debt. This statement is effective for financial statements
issued for fiscal years beginning after May 15, 2002. We believe the adoption of
SFAS No. 145 will not have a material impact on our financial position or our
results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes costs related to
terminating a contract that is not a capital lease and certain termination
benefits provided to employees under the terms of one-time benefit arrangements.
SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002.
In November 2002, the Financial Accounting Standards Board issued
Interpretation (FIN) No. 45 "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Others Indebtedness." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. We believe that the adoption of FIN 45
will not have a material impact on our financial position or our results of
operations.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123." This statement amends FSAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 does not permit the use of
36
the original SFAS No. 123 prospective method of transition for changes to the
fair value based method made in fiscal years after December 15, 2003. We
currently apply the intrinsic value method and have no plans to convert to the
fair value method.
In December 2002, the Financial Accounting Standards Board issued
Interpretation No. 46 "Consolidation of Variable Interest Entities." This
interpretation requires companies to reevaluate their accounting for certain
investments in variable interest entities. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
A variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company.
Variable interest entities are to be consolidated if the company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. We have
no material investments in variable interest entities, all such investments have
been appropriately reflected in the consolidated financial statements or
otherwise disclosed in the notes thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency risk and interest rate risk are the primary sources of
our market risk. To date foreign operations, mainly denominated in Euros,
accounted for approximately 50% of our 2002 revenues. We believe that we
partially mitigate this risk by locating our manufacturing facilities so that
the costs are denominated in the same currency as our product revenues. We may
manage the foreign currency exposures that remain through the use of foreign
currency forward contracts, currency options and off-setting currency loans
where deemed appropriate. We do not use these instruments for speculative
purposes. At December 31, 2002, there were no forward contracts or option
contracts outstanding. We recorded $0.2 million in foreign currency gains
related to forward contracts in the statement of operations for the year ended
December 31, 2002.
As of December 31, 2002, cash and cash equivalents totaled $169.0 million.
Of this amount, $44.6 million was denominated in Euros. The remainder or $124.4
million was primarily denominated in U.S. dollars. Other than the second
installment of $28.0 million due in March 30, 2003 under our 6.82% senior notes
discussed under the heading "Liquidity and Capital Resources," in Item 7 of this
report, short-term debt outstanding at December 31, 2002 was not significant. To
the extent U.S. dollar and Euro interest rates fluctuate either up or down, the
return on the cash investments will also fluctuate. To the extent such Euro cash
investments remain outstanding, we will be subject to the risks of future
foreign exchange fluctuations and the impact on the translation of these cash
investments into U.S. dollars.
Interest Rates
Our interest income is sensitive to changes in the general level of
short-term interest rates primarily in the United States and Europe. In this
regard, changes in the U.S. dollar and Euro currency rates affect the interest
earned on our cash equivalents, short-term investments, and long-term
investments. Our interest expense is generated primarily from fixed rate debt,
which consists of $112.0 million 6.82% senior notes outstanding at December 31,
2002, maturing in four remaining annual installments of $28.0 million from March
30, 2003 through March 30, 2006.
On January 31, 2002, we entered into an interest rate swap contract to pay
a variable rate of interest based on the six month London Interbank Offered Rate
(LIBOR) and receive fixed rates of interest at 6.82% on a $28.0 million notional
amount of our long-term indebtedness. On May 14, 2002, we entered into another
interest rate swap contract to pay a variable rate of interest based on the six
month LIBOR and receive fixed rates of interest at 6.82% on an additional $28.0
million notional amount of our long-term indebtedness. On July 31, 2002 we sold
both swap contracts for approximately $1.0 million in cash. The gain on the sale
will be amortized against interest expense over the original maturity date of
the swaps. In accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", these interest rate swap contracts that
hedged the senior notes had an immaterial effect on the statement of operations
and were not material to the balance sheet as of the date of their sale.
Foreign Currency Exposure
We conduct business throughout the world. To date, we have derived
approximately 50% of our 2002 revenues and approximately all of our 2002
operating income from foreign operations. Economic conditions in countries where
we conduct business
37
and changing foreign currency exchange rates affect our financial position and
results of operations. We are exposed to changes in exchange rates in Europe,
Latin America, and Asia. The Euro presents our most significant foreign currency
exposure risk. Changes in foreign currency exchange rates, especially the
strengthening of the U.S. dollar, may have an adverse effect on our financial
position and results of operations as they are expressed in U.S. dollars. We
recorded a $1.0 million gain from U.S. dollar/Euro transactions through the year
ended December 31, 2002 due to the strengthening of the Euro.
Our manufacturing and administrative operations for Latin America are
located in Argentina. Severe economic conditions, resulted in a 2001 year-end
devaluation of the Argentine Peso. As a result, our subsidiary, which has an
Argentine Peso functional currency, reported lower U.S. dollar net assets due to
the translation impact resulting from the devaluation. Due to the fact that a
significant part of our Latin American revenues were denominated in U.S.
dollars, our statement of operations reflected a $2.1 million foreign currency
gain from the remeasurement of related accounts receivable through the year
ended December 31, 2002.
Management monitors foreign currency exposures and may in the ordinary
course of business enter into foreign currency forward contracts or options
contracts related to specific foreign currency transactions or anticipated cash
flows. These contracts generally cover periods of nine months or less and are
not material. We recorded a gain of $0.2 million in the statement of operations
for the year ended December 31, 2002 from foreign currency contracts. We do not
hedge the translation of financial statements of consolidated subsidiaries that
maintain their local books and records in foreign currencies.
Other
The Risk Factors discussed in Item 1 of this Report are incorporated
herein by reference to the degree they address market risk.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders 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, 2002 and December 31, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the consolidated
financial statements. 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 of America, 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 our opinion.
As discussed in Notes 1 and 7 of the consolidated financial statements, as
of January 1, 2002, the Company ceased amortization of goodwill to conform with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 31, 2003
39
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 169,001 $ 215,023
Trade accounts receivable (less allowance for doubtful accounts of $2,770 in
2002 and $2,628 in 2001) ................................................................. 51,576 47,577
Inventories ................................................................................ 54,215 48,382
Prepaid expenses and other current assets .................................................. 19,551 15,312
Deferred income taxes ...................................................................... 8,018 8,179
--------- ---------
Total current assets .................................................................. 302,361 334,473
Property, plant and equipment, net ........................................................... 217,110 207,199
Investments and other assets ................................................................. 50,142 47,272
Goodwill ..................................................................................... 29,384 19,313
Intangible assets, net ....................................................................... 45,898 37,832
Deferred income taxes ........................................................................ 10,027 2,909
--------- ---------
Total assets .......................................................................... $ 654,922 $ 648,998
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .............................................................................. $ 7,942 $ 8,512
Current maturities of long-term debt ....................................................... 28,291 28,000
Accounts payable and accrued expenses ...................................................... 47,549 47,908
Interest payable on long-term debt ......................................................... 1,910 2,387
Accrued employee benefits .................................................................. 12,704 12,780
Deferred income taxes ...................................................................... 922 1,375
--------- ---------
Total current liabilities ............................................................. 99,318 100,962
Long-term debt ............................................................................... 84,897 112,419
Capital lease obligation ..................................................................... 5,990 5,316
Deferred income taxes ........................................................................ 14,090 13,093
Other long-term liabilities .................................................................. 12,372 8,436
Minority interest ............................................................................ 248 541
--------- ---------
Total liabilities ..................................................................... 216,915 240,767
--------- ---------
Commitments and contingencies ................................................................ -- --
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par value, authorized
1 shares, 1 shares issued and outstanding ............................................... 169,750 162,475
--------- ---------
Stockholders' equity:
Common stock, par value $0.01 per share, 200,000
shares authorized, 60,251 and 59,941 shares issued
at December 31, 2002 and 2001, respectively ............................................. 602 599
Additional paid-in capital ................................................................. 349,579 345,655
Treasury stock, 1,780 and 350 shares at cost
at December 31, 2002 and 2001, respectively ............................................. (21,030) (5,630)
Deferred stock-based compensation .......................................................... (1,164) (3,517)
Notes receivable for common stock .......................................................... -- (14,647)
Accumulated deficit ........................................................................ (14,944) (13,466)
Accumulated other comprehensive loss ....................................................... (44,786) (63,238)
--------- ---------
Total stockholders' equity ............................................................ 268,257 245,756
--------- ---------
Total liabilities, redeemable preferred stock and stockholders' equity ................ $ 654,922 $ 648,998
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
40
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
---------- ---------- ----------
Revenues:
Product revenue ................................................ $ 329,337 $ 311,110 $ 300,978
Fees and royalty revenues ...................................... 20,741 14,908 15,252
--------- --------- ---------
Total revenues ............................................ 350,078 326,018 316,230
Operating expenses:
Cost of products sold .......................................... 186,383 172,986 172,265
Research and development ....................................... 70,190 60,103 50,858
Sales, marketing and business development ...................... 33,027 28,845 27,539
General and administrative ..................................... 34,635 29,913 25,818
Amortization of intangible assets .............................. 5,563 9,966 10,478
Restructuring and related charges .............................. 16,427 -- --
Other (income)/expense ......................................... (3,409) (507) (2,391)
--------- --------- ---------
Total operating expenses .................................. 342,816 301,306 284,567
--------- --------- ---------
Operating income ................................................. 7,262 24,712 31,663
Non operating expenses/(income):
Investment expense/(income) .................................... 1,500 -- (16,577)
Interest expense ............................................... 8,587 10,433 10,474
Interest income ................................................ (5,207) (10,069) (7,752)
--------- --------- ---------
Total non operating expenses/(income) ..................... 4,880 364 (13,855)
--------- --------- ---------
Income before income taxes ....................................... 2,382 24,348 45,518
(Benefit from)/provision for income taxes ........................ (3,415) 6,574 14,108
--------- --------- ---------
Net income ....................................................... $ 5,797 $ 17,774 $ 31,410
========= ========= =========
Net (loss applicable)/income available to
holders of common stock ...................................... $ (1,478) $ 10,499 $ 24,135
========= ========= =========
(Loss)/earnings per common share:
Basic ..................................................... $ (0.02) $ 0.18 $ 0.44
========= ========= =========
Diluted ................................................... $ (0.02) $ 0.17 $ 0.42
========= ========= =========
Weighted average common shares:
Basic ....................................................... 59,257 59,888 54,504
========= ========= =========
Diluted ..................................................... 59,575 61,069 56,855
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
41
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
NOTES ACCUMULATED
ADDITIONAL DEFERRED RECEIVABLE OTHER TOTAL
COMMON PAID-IN TREASURY STOCK-BASED FOR COMMON ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL STOCK COMPENSATION STOCK DEFICIT LOSS EQUITY
------ -------- --------- ------------ -------- ----------- ------------ -------------
Balances, December 31, 1999....... $500 $186,326 $ -- $ -- $ -- $(48,100) $(33,590) $105,136
Comprehensive income:
Net Income....................... 31,410 31,410
Other comprehensive loss:
Foreign currency translation..... (10,299) (10,299)
Unrealized holding gains
($3,050 pre-tax)............... 1,645 1,645
Adjustment for gains included
in earnings (($9,589) pre-tax).. (5,888) (5,888)
--------
Other comprehensive loss......... (14,542)
--------
Comprehensive income.............. 16,868
Exercise of employee stock
options ........................ 19 17,989 (18,008) --
Issuance of common stock.......... 80 132,665 132,745
Deferred stock-based
compensation.................... 7,112 (7,112) --
Amortization of deferred
stock-based compensation........ 1,552 1,552
Preferred stock dividend accrued.. (7,275) (7,275)
----- -------- -------- ------- -------- -------- -------- --------
Balances, December 31, 2000....... 599 344,092 -- (5,560) (18,008) (23,965) (48,132) 249,026
----- -------- -------- ------- -------- -------- -------- --------
Comprehensive income:
Net Income....................... 17,774 17,774
Other comprehensive loss:
Foreign currency translation..... (14,239) (14,239)
Unrealized holding losses
($1,763 pre-tax)................ (867) (867)
--------
Other comprehensive loss......... (15,106)
--------
Comprehensive income.............. 2,668
Surrender of restricted shares.... (5,630) (5,630)
Exercise of employee stock options -- 341 341
Deferred stock-based
compensation.................... 1,222 (1,222) --
Payment of notes receivable for
common stock.................... 3,361 3,361
Amortization of deferred
stock-based compensation........ 3,265 3,265
Preferred stock dividend accrued.. (7,275) (7,275)
----- -------- -------- ------- -------- -------- -------- --------
Balances, December 31, 2001....... 599 345,655 (5,630) (3,517) (14,647) (13,466) (63,238) 245,756
----- -------- -------- ------- -------- -------- -------- --------
Comprehensive income:
Net Income....................... 5,797 5,797
Other comprehensive income:
Foreign currency translation..... 23,399 23,399
Unrealized holding losses
($4,480 pre-tax)................ (2,824) (2,824)
Minimum pension liability
adjustment ($2,572 pre-tax)..... (2,123) (2,123)
--------
Other comprehensive income....... 18,452
--------
Comprehensive income.............. 24,249
Surrender of restricted shares.... 503 (15,400) (503) 14,647 (753)
Employee Stock Purchase Plan...... 2 1,539 1,541
Exercise of employee stock
options......................... 1 791 792
Deferred stock-based
compensation.................... 807 (807) --
Amortization of deferred
stock-based compensation........ 3,746 3,746
Conversion of stock appreciation
rights to stock options......... 83 (83) --
Stock options granted to
non-employees................... 201 201
Preferred stock dividend accrued.. (7,275) (7,275)
----- -------- -------- -------- -------- -------- -------- --------
Balances, December 31, 2002....... $602 $349,579 $(21,030) $(1,164) $ -- $(14,944) $(44,786) $268,257
===== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
42
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income .............................................................. $ 5,797 $ 17,774 $ 31,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................... 33,191 36,174 35,038
Amortization of deferred stock-based compensation ................... 3,746 3,265 1,552
Loss on disposition of property, plant and
equipment ........................................................ 488 329 406
Gain on sale of marketable equity securities ........................ -- -- (16,577)
Loss from impairment of investment in equity securities ............. 1,500 -- --
Non-cash portion of restructuring and related charges ............... 9,495 -- --
(Increase) decrease in operating assets:
Trade accounts receivable ........................................ 699 (4,246) (571)
Inventories ...................................................... 1,096 (4,678) 1,892
Prepaid expenses and other current assets ........................ (4,495) (2,473) (4,664)
Investments and other assets ..................................... (7,386) (2,239) (5,842)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ............................ (6,717) 6,688 5,207
Interest payable on long-term debt ............................... (473) -- (5)
Accrued employee benefits ........................................ (808) 3,749 (1,637)
Other ............................................................ 2,333 (3,234) 1,074
--------- --------- ---------
Net cash provided by operating activities ........................ 38,466 51,109 47,283
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment .............................. (19,550) (24,725) (25,592)
Purchases of intangible assets .......................................... (100) (4,098) (1,100)
Proceeds from the sale of property, plant and equipment ................. 414 74 88
Proceeds from the sale of marketable equity securities .................. -- -- 17,568
Acquisition of businesses, net of cash acquired ......................... (44,734) -- --
Payment to acquire equity securities .................................... (4,500) (5,065) --
--------- --------- ---------
Net cash (used in) investing activities .......................... (68,470) (33,814) (9,036)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock .............................. -- -- 132,745
Proceeds from employee stock purchase plan .............................. 1,507 -- --
Surrender of restricted shares .......................................... (198) (314) --
Net (payments) proceeds on notes payable of foreign affiliate ........... (565) (9) 968
Payment of long-term debt ............................................... (28,277) (48) (10,000)
Proceeds from exercise of stock options ................................. 791 341 --
--------- --------- ---------
Net cash (used in) provided by financing activities .............. (26,742) (30) 123,713
--------- --------- ---------
Effect of exchange rate changes on cash ................................... 10,724 (2,833) (700)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ...................... (46,022) 14,432 161,260
Cash and cash equivalents -- beginning of year ............................ 215,023 200,591 39,331
--------- --------- ---------
Cash and cash equivalents -- end of year .................................. $ 169,001 $ 215,023 $ 200,591
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
43
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1 -- DESCRIPTION OF THE COMPANY AND ACCOUNTING POLICIES
Genencor International, Inc. and subsidiaries (the Company) is a
diversified biotechnology company that develops and delivers products and/or
services to the industrial, consumer, agri-processing and health care markets.
The Company's current products include novel enzymes used in industrial,
consumer and agri-processing applications. The principal geographical markets
for these products are North America, Latin America, Europe and Asia.
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. All investments in variable
interest entities are accounted for in accordance with Financial Accounting
Standards Board Interpretation No. 46 "Consolidation of Variable Interest
Entities." The Company has no material investments in variable interest entities
and all such investments have been appropriately reflected in the consolidated
financial statements or otherwise disclosed in the notes thereto.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
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 No. 101, "Revenue
Recognition in Financial Statements." Revenues consist of product revenues and
fees and royalty revenues. Fees and royalty revenues consist primarily of funded
research, technology and license fees and royalties.
Product Revenue
Revenue from product sales is recognized upon shipment to customers.
Funded Research
Research funding revenues result from collaborative agreements with
various parties, including the U.S. Government, whereby the Company
performs research activities and receives revenues that partially
reimburse expenses incurred. Under such agreements the Company retains a
proprietary interest in the products and technology developed. These
expense reimbursements primarily consist of direct expense sharing
arrangements and milestone payments. Revenues related to expense sharing
arrangements are recorded as the underlying expenses are incurred.
Milestone payments are contingent upon successful completion of research
activities and are recognized upon satisfaction of those contingencies.
Upfront research-funding payments are recognized as revenues on a
straight-line basis over the term of the underlying research agreement.
44
Technology and License Fees
Fees from the sale of technology are recognized upon completion of
the required technology transfer and substantial satisfaction of any
performance related responsibilities. License fees are recognized on a
straight-line basis over the term defined in the license agreement. In the
event there is no defined term, such as with permanent licenses, license
fees are recognized upon substantial satisfaction of any performance
related responsibilities.
Royalty Revenue
Royalty revenue is recognized in accordance with the underlying
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.
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, with a weighted
average estimated useful life of 20 years, and machinery and equipment over 3-15
years, with a weighted average estimated life of 13 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. Included in machinery and equipment is computer hardware and
software developed or obtained for internal use which is amortized over 3-5
years.
Goodwill
Goodwill consists of the excess of cost over the net assets of acquired
businesses. Goodwill is not amortized, but is tested annually for impairment.
Other Intangible Assets
Other intangible assets consist primarily of patents, licenses, technology
and customer lists. Definite-lived intangibles are amortized on a straight-line
basis over their remaining useful lives. Indefinite-lived intangibles are not
amortized and are tested for impairment on an annual basis. Patents, licenses
and customer lists are amortized over 4-20 years with a weighted average
estimated useful life of 10 years. During 2002 technology was determined to have
an indefinite life and is no longer amortized.
Impairment of Long-Lived Assets
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected undiscounted future
cash flows of the assets with the respective carrying amount as of the date of
assessment. Should aggregate future cash flows be less than the carrying value,
a write-down would be required, measured as the difference between the carrying
value and the fair value of the asset. Fair value is estimated either through
independent valuation or as the present value of expected discounted future cash
flows. If the expected undiscounted future cash flows exceed the respective
carrying amount as of the date of assessment, no impairment is recognized.
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 the average of the daily exchange rates in effect
during each month.
45
The Company, on occasion, may use 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, 2002 and 2001, the Company had no options or forward exchange
contracts outstanding.
Foreign currency transaction net gains are included in other operating
income/expense. Total foreign currency transaction net gains were $3,107 in
2002, $23 in 2001, and $2,837 in 2000.
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, 2002 and 2001, the fair value of these financial
instruments approximated carrying value.
Investments in Marketable Equity Securities
All of the Company's investments in marketable equity securities are
considered available-for-sale and are recorded at fair value within prepaid and
other current assets or other assets. Unrealized gains and losses, calculated as
the difference between fair value and cost of the security on a specific
identification basis, are recorded as a component of comprehensive income, net
of tax.
Gross unrealized losses on available-for-sale securities were $5,504 at
December 31, 2002 and $1,021 at December 31, 2001. The fair market value of
available-for-sale securities was $4,136 at December 31, 2002 and $4,120 at
December 31, 2001. The deferred tax asset related to these unrealized losses was
$2,037 at December 31, 2002 and $378 at December 31, 2001.
Investment Expense/Income
During the fourth quarter of 2002, the Company recorded an impairment loss
of $1,500 on its investment in certain preferred stock. During 2000, the Company
realized a gain on the sale of marketable equity securities of $16,577. These
amounts are included in investment expense/income as part of total non-operating
income for the period. There were no sales of marketable equity securities
during 2002 and 2001.
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.
Major Customers
In 2002, two customers accounted for 41% of sales and 39% of accounts
receivable. In 2001, two customers accounted for 45% of sales and 34% of
accounts receivable. In 2000, two customers accounted for 42% of sales and 39%
of accounts receivable.
Comprehensive Income
The provisions of SFAS No. 130, "Reporting Comprehensive Income,"
establish 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 stockholders' equity from non-stockholder sources.
The Company has chosen to display comprehensive income in the Consolidated
Statements of Changes in Stockholders' Equity.
Stock-Based Compensation
The Company uses the intrinsic value method to account for stock-based
employee compensation in accordance with Accounting Principles Board (APB)
Opinion No. 25 " Accounting for Stock Issued to Employees" and has no current
plans to convert to the fair
46
value method. See Note 11 for the pro forma amounts, had compensation cost for
the Company's stock option plans been determined based on the fair value method.
Guarantees
The Company assesses its contracts in accordance with Financial Accounting
Standards Board Interpretation No. 45 " Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." Guarantees and claims arise during the ordinary course of business from
relationships with suppliers, customers and strategic partners when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could trigger an
obligation of the Company. These potential claims include actions based upon
alleged exposures to products, intellectual property and environmental matters,
and other indemnifications. The ultimate effect on future financial results is
not subject to reasonable estimation because considerable uncertainty exists as
to the final outcome of these claims. However, while the ultimate liabilities
resulting from such claims may be significant to results of operations in the
period recognized, management does not anticipate they will have a material
adverse effect on the Company's consolidated financial statements.
Earnings Per Share
The provisions of SFAS No. 128, "Earnings per Share," require the
disclosure of basic and diluted earnings per share. Basic (loss)/earnings per
share is computed based on the weighted average number of common shares
outstanding during the period. In arriving at (loss applicable)/income available
to common stockholders, undeclared and unpaid cumulative preferred stock
dividends of $7,275 are deducted for each year presented.
Diluted (loss)/earnings per share reflects the potential dilution that
could occur if dilutive securities and other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the net (loss applicable)/income available to
common stockholders of the Company. As a result of stock options outstanding
under the Company's 2002 Omnibus Incentive Plan, successor to the Company's
Stock Option and Stock Appreciation Right Plan (SOAR Plan), there were dilutive
securities in 2002, 2001 and 2000. The weighted-average impact of these has been
reflected in the calculation of diluted (loss)/earnings per share for the
respective periods presented.
The following table reflects the calculation of basic and diluted
(loss)/earnings per common share for the years ended December 31:
2002 2001 2000
-------- -------- --------
Net income .............................................. $ 5,797 $ 17,774 $ 31,410
Less: Accrued dividends on preferred stock ........... (7,275) (7,275) (7,275)
-------- -------- --------
Net (loss applicable)/ income available
to holders of common stock ........................... $ (1,478) $ 10,499 $ 24,135
======== ======== ========
Weighted average common shares:
Basic ................................................ 59,257 59,888 54,504
Effect of stock options .............................. 318 1,181 2,351
-------- -------- --------
Diluted .............................................. 59,575 61,069 56,855
======== ======== ========
(Loss)/earnings per common share:
Basic ................................................ $ (0.02) $ 0.18 $ 0.44
======== ======== ========
Diluted .............................................. $ (0.02) $ 0.17 $ 0.42
======== ======== ========
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." The Company adopted this statement as of January 1, 2002. This
statement requires the recognition of separately identifiable intangible assets.
Furthermore, it establishes amortization requirements based upon the ability of
the intangible assets to provide cash flows. For those intangible assets with
readily identifiable useful lives, amortization will be recorded in the
statement of operations over such lives. Intangible assets, such as goodwill,
which have indefinite lives, will not result in periodic amortization, but must
be tested at least annually for impairment.
47
With the adoption of SFAS No. 142, the Company reassessed the useful lives
and residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, goodwill and certain
previously acquired technology were determined to have indefinite useful lives.
There were no adjustments made to the amortization periods or residual values of
other intangible assets. Accordingly, certain reclassifications were made to
previously issued financial statements to conform to the presentation required
by SFAS No. 142. The Company completed the first step of the transitional
goodwill and indefinite-lived intangible impairment tests and has determined
that no potential impairment exists. As a result, the Company recognized no
transitional impairment loss in fiscal 2002 in connection with the adoption of
SFAS No. 142.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
that obligations associated with the retirement of a tangible long-lived asset
be recorded as a liability when those obligations are incurred, with the amount
of the liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period and
the capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. The provisions of
SFAS No. 143 will be required to be adopted by the Company in fiscal 2003. The
Company does not expect the adoption of SFAS No. 143 to have a material impact
on the Company's financial position or its results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 addresses the
accounting for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires the measurement of long-lived
assets at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 as of January 1, 2002. There
was no financial statement impact as a result of the adoption. The Company will
apply its provisions to future impairments or disposals of long-lived assets as
they occur.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
and amends SFAS No. 13, "Accounting for Leases." This statement updates,
clarifies and simplifies existing accounting pronouncements. As a result of
rescinding SFAS No. 4 and SFAS No. 64, the criteria in Accounting Principles
Board Opinion No. 30 will be used to classify gains and losses from
extinguishment of debt. This statement is effective for financial statements
issued for fiscal years beginning after May 15, 2002. The Company believes that
the adoption of SFAS No. 145 will not have a material impact on our financial
position or our results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes costs related to
terminating a contract that is not a capital lease and certain termination
benefits provided to employees under the terms of one-time benefit arrangements.
SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Others Indebtedness." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company believes that the adoption
of FIN 45 will not have a material impact on our financial position or our
results of operations.
48
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123." This statement amends FSAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 does not permit the use of the original SFAS No. 123
prospective method of transition for changes to the fair value based method made
in fiscal years after December 15, 2003. The Company currently applies the
intrinsic value method and has no plans to convert to the fair value method.
In December 2002, the Financial Accounting Standards Board issued
Interpretation No. 46 "Consolidation of Variable Interest Entities." This
Interpretation requires companies to reevaluate their accounting for certain
investments in "variable interest entities." A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
A variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company.
Variable interest entities are to be consolidated if the Company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. We have
no material investments in variable interest entities, all such investments have
been appropriately reflected in the consolidated financial statements or
otherwise disclosed in the notes thereto.
New Chief Executive Officer
In October 2002, the Company announced the hiring of Jean-Jacques Bienaime
to succeed W. Thomas Mitchell as Chief Executive Officer and President in
November 2002. Mr. Mitchell currently continues to serve as Chairman of the
Company's Board of Directors while Mr. Bienaime serves as a director.
2 -- ACQUISITION
On December 31, 2002, the Company acquired the brewing and enzyme business
of Rhodia Food UK Limited for a total cash purchase price of $8,925. The
acquisition includes technology, product lines and personnel, and expands the
Company's bioproducts portfolio and technical service capabilities in the food,
feed and specialty enzyme market sector. No facilities were included in the
transaction. The acquisition has been accounted for under the purchase method in
accordance with SFAS No. 141, "Business Combinations." The results of operations
of the acquired business will be consolidated with the Company's results of
operations beginning January 1, 2003. The Company is continuing to evaluate the
allocation of the purchase price for the acquisition, including the segregation
of separately identifiable intangible assets. The Company anticipates that this
process will be completed prior to June 30, 2003. According to the Company's
preliminary allocation of the purchase price, the net assets acquired consist of
the following at December 31, 2002:
Intangible assets.......................... $ 8,925
=========
49
During February 2002, the Company acquired Enzyme Bio-Systems Ltd. (EBS),
now known as Genencor International Wisconsin, Inc., from Corn Products
International, Inc. for a total cash purchase price of $35,809 and the
assumption of $974 in debt. As part of this transaction, the Company entered
into a seven-year supply agreement for a majority of Corn Products
International, Inc.'s North American enzyme requirements. The acquisition has
been accounted for under the purchase method in accordance with SFAS No. 141,
"Business Combinations." The acquired entity's results of operations have been
consolidated with the Company's results of operations since the acquisition
date. The Company's purchase price allocation of the net assets acquired
consists of the following at December 31, 2002:
Working capital .......................... $ 3,879
Property, plant and equipment ............ 21,085
Intangible assets ........................ 1,729
Goodwill ................................. 9,807
Long-term liabilities .................... (691)
--------
$ 35,809
========
Included in working capital acquired is a provision to restructure the
entity of $1,119, which primarily consists of the employee-related costs to
eliminate 22 positions. All affected employees were notified immediately of the
restructuring plan. As of December 31, 2002, all costs had been charged to this
restructuring provision and all 22 employees had terminated their employment
with the Company.
3 -- RESTRUCTURING AND RELATED CHARGES
During February 2002, as a result of the acquisition of EBS and general
economic conditions in Latin America, including the devaluation of the Argentine
peso, the Company engaged in a plan to restructure its overall supply
infrastructure by ceasing operations at its Elkhart, Indiana plant and
downsizing its Argentine facilities. There were 119 positions to be eliminated
as a result of this restructuring. All affected employees were notified
immediately of the restructuring plan. As of December 31, 2002, all 119
employees had terminated their employment with the Company.
As a result of the plan, restructuring and related charges of $16,427 were
recorded in the Company's operating earnings in the year ended December 31,
2002. These charges were primarily driven by employee severance and related
costs of approximately $3,762, costs to dismantle portions of the restructured
facilities of $1,000, costs to terminate long-term utility agreements of $319,
other costs totaling $239, and $9,495 for property, plant and equipment that was
deemed impaired as it would no longer be utilized by the Company after the
restructuring. The impairment charge was determined based on remaining book
value, as the Company believes there is no active market in which to sell the
specific assets. Full implementation was completed in the fourth quarter of
2002. In addition, the Company recorded costs related to the restructuring, such
as those related to the transition of activities between Elkhart and Beloit, of
$1,612 as incurred during the year ended December 31, 2002. At December 31,
2002, the Company had a remaining liability of $805 related to this
restructuring.
4 -- FEES AND ROYALTY REVENUES
Fees and royalty revenues included the following for the years ended
December 31:
2002 2001 2000
------- ------- -------
Funded research ................................ $19,533 $12,152 $10,848
License fees ................................... 75 1,825 --
Royalties ...................................... 1,133 931 4,404
------- ------- -------
Fees and royalty revenues .................... $20,741 $14,908 $15,252
======= ======= =======
In October 2001, the Company, entered into a strategic alliance with Dow
Corning Corporation to create a new proprietary technology platform for the
development of new biomaterials. For the year ended December 31, 2002, the
Company recorded $11,554 in research funding revenues from this alliance.
50
5 -- INVENTORIES
Inventories consisted of the following at December 31:
2002 2001
--------- ---------
Raw materials .............................................. $ 8,373 $ 7,526
Work-in-progress ........................................... 8,003 7,454
Finished goods ............................................. 37,839 33,402
--------- ---------
Inventories .............................................. $ 54,215 $ 48,382
========= =========
6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
2002 2001
--------- ---------
Land and buildings ......................................... $ 134,968 $ 124,039
Machinery and equipment .................................... 275,255 260,375
Construction-in-progress ................................... 10,058 6,772
--------- ---------
420,281 391,186
Less: Accumulated depreciation ............................. (203,171) (183,987)
--------- ---------
Property, plant and equipment, net ....................... $ 217,110 $ 207,199
========= =========
Depreciation expense was $27,628 in 2002, $26,208 in 2001, and $24,560 in
2000.
Construction-in-progress at December 31, 2002 and 2001, includes process
improvement projects at our manufacturing and research and development
facilities as well as information technology enhancements. The Company also
began construction of a facility for the clinical-scale manufacture of human
therapeutic proteins at the site of our manufacturing facility in Rochester, New
York during 2002. The facility is designed to produce pharmaceutical grade
materials for pre-clinical and clinical studies.
In December 2000, the Company leased a wastewater treatment plant to
service its Belgian manufacturing facility. The agreement is being accounted for
as a capital lease.
Assets under capital lease are included in property, plant and equipment
as follows at December 31:
2002 2001
--------- ---------
Land and buildings ......................................... $ 14,172 $ 13,113
Less: Accumulated depreciation ............................. (3,284) (2,652)
--------- ---------
Capital lease assets, net ................................ $ 10,888 $ 10,461
========= =========
The Company leases certain facilities and equipment under operating
leases.
51
Rent expense relating to all operating leases was $4,657 for 2002, $4,014
for 2001 and $3,478 for 2000. Non-cancelable future minimum rental payments
under significant leases consist of the following for the years ending December
31:
OPERATING CAPITAL
--------- ---------
2003 ....................................................... $ 3,107 $ 610
2004 ....................................................... 2,965 607
2005 ....................................................... 2,940 607
2006 ....................................................... 2,910 607
2007 ....................................................... 2,897 607
Thereafter ................................................. 20,986 6,176
--------- ---------
Total minimum lease payments ............................... $ 35,805 9,214
=========
Less: Amount representing interest ......................... (3,224)
---------
Capital lease obligation ................................... $ 5,990
=========
7 --GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 1 above, the Company adopted the provisions of SFAS
No. 142 effective as of January 1, 2002. Accordingly, the Company no longer
amortizes goodwill or other intangible assets with indefinite useful lives. The
Company has identified such other indefinite-lived intangible assets to include
certain previously acquired technology. The Company will periodically evaluate
its indefinite-lived intangible assets for impairment in accordance with the
provisions of SFAS No. 142. The Company also has other intangible assets, such
as patents, licenses, and customer lists, which will continue to be amortized
over a weighted average useful life of 10 years using the straight-line method.
These assets are expected to have no residual value once they are fully
amortized.
The following table summarizes the changes in each major class of
intangible assets from January 1, 2002 through December 31, 2002:
INTANGIBLE ASSETS GOODWILL
------------------------------------------ --------
OTHER
AMORTIZABLE
TECHNOLOGY ASSETS TOTAL
---------- ------------- -----
Balances, January 1, 2002 .............. $15,617 $ 50,822 $ 66,439 $19,313
Acquired intangible assets ........... -- 11,496 11,496 9,807
Foreign currency translation
and other adjustments .............. -- 3,111 3,111 264
------- -------- -------- -------
Balances: December 31, 2002 ............ 15,617 65,429 81,046 $29,384
=======
Less: Accumulated
amortization ....................... -- (35,148) (35,148)
------- -------- --------
Intangible assets, net ............... $15,617 $ 30,281 $ 45,898
======= ======== ========
In January 2002, the Company entered into a license agreement for $842,
which will be amortized over a period of approximately 6 years.
In conjunction with the acquisitions discussed in Note 2, the Company
acquired certain intangible assets during the year ended December 31, 2002. The
Company has assessed that the intangibles assets associated with the EBS
acquisition consist of $1,729 of amortizable intangibles, which will be
amortized over a period of approximately 7 years. The remaining $9,807 is the
excess of cost over net assets of the acquired business and will be tested for
impairment on an annual basis.
The Company is currently in the process of segregating the intangible
assets associated with the acquired brewing and enzyme business of Rhodia Food
UK Limited among the major classes. As such, the estimated value of $8,925 has
been included in other intangible assets as of December 31, 2002 and will be
reclassified among the major classes upon completion of the purchase price
allocation.
52
The following table reflects the comparative net (loss applicable)/income
available to holders of common stock and (loss)/earnings per common share as
though the provisions of SFAS No. 142 were in effect for the years ended
December 31, 2002, 2001 and 2000:
FOR THE YEAR
ENDED DECEMBER 31,
------------------
2002 2001 2000
---------- ---------- ----------
Net (loss applicable)/income available
to holders of common stock as reported ............. $ (1,478) $ 10,499 $ 24,135
Add back amortization:
Goodwill ($0, $928 and $1,641 pre-tax) ............. -- 707 1,238
Technology ($0, $3,485 and $3,485 pre-tax) ......... -- 2,161 2,161
---------- ---------- ----------
Net (loss applicable)/income available
to holders of common stock as adjusted ............. $ (1,478) $ 13,367 $ 27,534
========== ========== ==========
Basic (loss)/earnings per share:
As reported ....................................... $ (0.02) $ 0.18 $ 0.44
Amortization ...................................... -- 0.05 0.06
---------- ---------- ----------
As adjusted ....................................... $ (0.02) $ 0.23 $ 0.50
========== ========== ==========
Diluted (loss)/earnings per share:
As reported ....................................... $ (0.02) $ 0.17 $ 0.42
Amortization ...................................... -- 0.05 0.06
---------- ---------- ----------
As adjusted ....................................... $ (0.02) $ 0.22 $ 0.48
========== ========== ==========
Estimated fiscal year amortization expense is as follows:
2003 .......................... $ 4,700
2004 .......................... 3,000
2005 .......................... 2,500
2006 .......................... 2,100
2007 .......................... 1,200
Intangible assets, including goodwill, consisted of the following at December
31:
2002 2001
--------- --------
Patents, licenses and other ......................................... $ 65,655 $ 50,431
Technology .......................................................... 15,617 15,617
Excess of cost over net assets of acquired businesses ............... 29,384 19,313
--------- --------
110,656 85,361
Less: Accumulated amortization ...................................... (35,374) (28,216)
--------- --------
Intangible assets, net ............................................ $ 75,282 $ 57,145
========= ========
Amortization expense was $5,563 in 2002, $9,966 in 2001 and $10,478 in 2000.
53
8 -- NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at December
31:
2002 2001
--------- ---------
6.82% senior notes with payments of $28,000 due annually,
commenced March 30, 2002 ........................................... $ 112,000 $ 140,000
Notes payable of the Company's Chinese affiliate with
principal payments due in 2003. Interest rates on
the notes range from 5.04% to 5.84% ................................ 7,942 8,488
Other ................................................................ 1,188 443
--------- ---------
121,130 148,931
Less: Current maturities ............................................. (36,233) (36,512)
--------- ---------
Long-term debt ..................................................... $ 84,897 $ 112,419
========= =========
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 material financial covenants.
At December 31, 2002, principal obligations on notes payable and long-term
debt are as follows:
2003 .................................................................. $ 36,233
2004 .................................................................. 28,374
2005 .................................................................. 28,277
2006 .................................................................. 28,067
2007 .................................................................. 70
Thereafter ............................................................ 109
--------
Total ................................................................. $121,130
========
At December 31, 2002, the Company had a $40,000 revolving credit facility
with a syndicate of banks, which is available for general corporate purposes.
The facility, which consists of a credit agreement, makes available to the
Company $40,000 of committed borrowings, which expires on January 31, 2004. The
facility carries facility fees of 0.35% on the amount of unborrowed principal
under the agreement. As of December 31, 2002 and 2001, there were no borrowings
under the facility.
9 -- REDEEMABLE PREFERRED STOCK
On December 1, 1991, the Company and its stockholders agreed to exchange
$97,000 of advances from stockholders (including interest payable of $12,604)
for 0.97 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 2002, 2001 and 2000 in determining net
(loss applicable)/income available to common stockholders. 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 at any time 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, 2002 and 2001 in the amounts of $169,750 and $162,475,
respectively, is classified on the Company's balance sheet as Redeemable
Cumulative Series A Preferred Stock and includes $72,750 and $65,475 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.
10 -- STOCKHOLDERS' EQUITY
In addition to the Series A preferred stock, the Company has the authority
to issue 1,000 shares of preferred stock having a par value of $.01 per share.
No such shares have been issued as of December 31, 2002.
54
While the Company is permitted to pay dividends, certain covenants of the
Company's 6.82% Senior Notes restrict the payment of dividends or other
distributions in cash or other property to the extent the payment puts the
Company in default of these covenants. Such covenants include, but are not
limited to, the maintenance of debt to total capitalization of no greater than
55% and the maintenance of a maximum ratio of debt to EBITDA of 3.5:1.
No dividend was declared or paid to common stockholders in 2002, 2001 or
2000.
Accumulated other comprehensive loss consists of the following:
FOREIGN MARKETABLE ACCUMULATED
CURRENCY SECURITIES MINIMUM OTHER
TRANSLATION VALUATION PENSION COMPREHENSIVE
ADJUSTMENT ADJUSTMENT LIABILITY LOSS
---------- ---------- --------- -------------
Balances, December 31, 1999 .......... $(38,061) $ 4,471 $ -- $(33,590)
Current period change .............. (10,299) (4,243) -- (14,542)
-------- ------- ------- --------
Balances, December 31, 2000 .......... (48,360) 228 -- (48,132)
Current period change .............. (14,239) (867) -- (15,106)
-------- ------- ------- --------
Balances, December 31, 2001 .......... (62,599) (639) -- (63,238)
Current period change .............. 23,399 (2,824) (2,123) 18,452
-------- ------- ------- --------
Balances, December 31, 2002 .......... $(39,200) $(3,463) $(2,123) $(44,786)
======== ======= ======= ========
The change in the marketable equity securities valuation adjustment for
2002 of $2,824 ($4,480 pre-tax) relates to unrealized holding losses on the
Company's available-for-sale securities.
On July 25, 2000, the Company increased the authorized number of shares of
common stock to 200,000 with a par value of $0.01.
The Company completed its initial public offering of 8,050 shares of
common stock at a price of $18.00 per share, including 7,000 shares of common
stock issued July 28, 2000 in the initial offering and 1,050 shares of common
stock issued August 25, 2000 pursuant to the underwriters' exercise of the
over-allotment option. The combined net proceeds raised by the Company from the
initial offering and the over-allotment option were $132,745.
Majority stockholders of the Company are Eastman Chemical Company and
Danisco A/S (Danisco), with each holding approximately 43% of the common stock
outstanding and 50% each of the Series A preferred stock.
On November 30, 2001, executive officers of the Company surrendered 350
vested, restricted shares to the Company at a value of $16.09 per share, to pay
principal and interest due on notes receivable for restricted common stock on
January 27, 2002 by each respective officer. The surrendered shares were
recorded as treasury shares, accounted for under the cost method.
On August 21, 2002, in order to eliminate all stock-related loans,
executive officers of the Company surrendered approximately 1,430 restricted
shares at a value of $10.77 per share, to make full payment of the outstanding
principal and interest on obligations under notes issued in connection with
their purchase of restricted common stock. The Company recorded the surrendered
shares as treasury shares, accounted for under the cost method. As of December
31, 2002 there is no outstanding balance on these notes.
11 -- EMPLOYEE BENEFIT PLANS
2002 Omnibus Incentive Plan
On March 12, 2002, the Company adopted the Genencor International, Inc.
2002 Omnibus Incentive Plan (the OI Plan). The OI Plan became effective on May
30, 2002 upon approval by the stockholders at the Annual Meeting. The OI Plan
serves as a successor plan to the SOAR Plan. Employees, outside directors,
consultants, advisors and independent contractors retained by the Company are
eligible to participate in the OI Plan. The OI Plan allows for the grant, at not
less than 100% of the estimated market value as of the date of grant, of
non-qualified and incentive 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. The OI Plan also allows for the grant of restricted and
unrestricted stock awards, performance shares (stock or stock-based awards
contingent upon attaining performance objectives) or performance units (units
valued by reference to chosen criteria). Under the terms of the OI Plan, the
Company has the ability to grant awards representing up to 6,800 shares of
common stock. In addition, any shares remaining, or shares that become available
under the SOAR Plan will be available for grant of
55
awards under the OI Plan. Generally, stock options and SARs vest and become
exercisable, and the restrictions, if any, on stock awards shall expire, ratably
over a three-year period. These options expire 10 years from their grant date.
Stock Option and Stock Appreciation Right Plan
On December 9, 1999, the Company adopted the SOAR Plan. Employees, outside
directors, consultants and advisors of the Company were eligible to participate
in the SOAR Plan. The SOAR Plan allowed for the grant, generally at estimated
market 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 SOAR Plan, the Company had the ability to grant stock options and
SARs representing up to 9,000 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. The OI Plan replaced the SOAR Plan.
The following table summarizes the stock option activity for the years
ending:
WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
Options outstanding at
December 31, 1999 .................... 5,465 $ 9.70 -- N/A
Granted ............................ 1,318 13.93 --
Exercised .......................... (1,857) 9.70 --
Forfeited .......................... (37) 9.91 --
------
Options outstanding at
December 31, 2000 .................... 4,889 10.84 -- N/A
Granted ............................ 1,384 12.50 --
Exercised .......................... (35) 9.84 --
Forfeited .......................... (107) 12.77 --
------
Options outstanding at
December 31, 2001 .................... 6,131 11.19 1,841 $10.97
Granted ............................ 3,012 10.98 --
Exercised .......................... (82) 9.70 --
Forfeited .......................... (205) 11.13 --
------
Options outstanding at
December 31, 2002 .................... 8,856 $11.13 4,359 $11.02
======
The following table summarizes additional information about stock options
outstanding as of December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Number Remaining Contract Life Exercise Price Number Exercise Price
--------------- ------ ----------------------- -------------- ------ --------------
$ 8.00 - $10.00 4,626 7.20 $ 9.70 3,012 $ 9.70
$10.01 - $15.00 3,375 9.43 $ 11.29 909 $ 11.62
$15.01 - $20.00 736 7.42 $ 17.32 358 $ 17.73
$20.01 - $25.00 100 7.82 $ 23.14 67 $ 23.14
$25.01 - $34.00 19 7.77 $ 28.91 13 $ 28.90
----- -----
8,856 8.08 $ 11.13 4,359 $ 11.02
===== =====
On April 28, 2000, the Board of Directors of the Company allowed the
executive officers to accelerate the exercise of 1,857 stock options granted
under the SOAR Plan and purchase restricted shares of common stock. The
restricted shares were purchased through the use of notes from the executive
officers.
56
The vesting provisions included in the restricted common stock agreements were
the same as those of stock options under the SOAR Plan. In conjunction with the
elimination of all stock-related loans as discussed in Note 10, the Company
accelerated the vesting of 620 restricted shares. Accordingly, the Company
incurred incremental compensation expense of $503 in 2002. In addition, the
Company accelerated the recognition of previously deferred compensation charges.
None of these restricted shares remain outstanding as of December 31, 2002.
Under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 " Accounting for Stock-Based
Compensation-Transition and Disclosure," the Company has elected to continue to
account for stock options in accordance with the provisions of APB Opinion No.
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, the weighted average grant date fair value of options granted in 2002,
2001 and 2000 is summarized below (amounts in dollars):
2002 2001 2000
------------------- ------------------- ------------------
Fair Exercise Fair Exercise Fair Exercise
Value Price Value Price Value Price
----- ----- ----- ----- ----- -----
Options whose exercise price
equaled grant date market value ......... $ 4.46 $10.99 $ 5.71 $13.46 $ 8.24 $19.77
Options whose exercise price was
less than grant date market value ....... N/A N/A 5.53 10.19 10.54 11.29
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
2002 2001 2000
------- ------- -------
Expected life ....................... 4 years 4 years 4 years
Interest rate ....................... 3.31% 4.05% 6.39%
Volatility .......................... 47.3% 48.2% 0%-44.7%
Dividend yield ...................... N/A N/A N/A
Volatility assumed to be zero for options granted prior to July 28, 2000
in accordance with the minimum value method.
On a pro forma basis, had compensation cost for the Company's stock option
plans been determined based on the weighted average fair value at the grant
date, the Company's net (loss)/income and (loss)/earnings per share would have
been reduced to the pro forma amounts shown below:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
------- ------- -------
Net (loss applicable)/income available
to holders of common stock as reported ................... $(1,478) $10,499 $24,135
Add: Stock-based employee compensation expense
included in reported net (loss applicable)/income
available, net of related tax ............................ 981 1,169 330
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effect .................... (7,407) (4,707) (2,662)
------- ------- -------
Pro forma net (loss)/income ................................. $(7,904) $ 6,961 $21,803
======= ======= =======
(Loss)/earnings per share:
Basic - as reported ....................................... $ (0.02) $ 0.18 $ 0.44
Basic - pro forma ......................................... (0.13) 0.12 0.40
Diluted - as reported ..................................... (0.02) 0.17 0.42
Diluted - pro forma ...................................... $ (0.13) $ 0.11 $ 0.38
The pro forma figures in the preceding table may not be representative of
pro forma amounts in future years.
SARs are accounted for under the provisions of APB Opinion No. 25 as
interpreted by Financial Interpretation No. 28 "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans, an
interpretation of APB Opinions No. 15 and 25."
57
FIN 28 requires that compensation expense be recognized over the vesting period
for any increase in the estimated market value of the underlying stock.
Decreases in the estimated market value of the underlying stock in subsequent
periods would cause compensation expense to be reduced in that period although
the related accrued liability would never be reduced below zero. In 2002 and
2001, the Company recorded compensation income of $47 and $593, respectively, to
reflect the decrease in the estimated market value of common stock during the
period in relation to the grant price of the Company's outstanding SARs. At
December 31, 2002 and 2001 there were 14 and 18 SARs, respectively, outstanding,
none of which were exercisable.
Restricted Stock Awards
On November 6, 2002, the Company granted 75 shares of restricted common
stock to its chief executive officer and president. These restricted shares were
granted at estimated fair market value at the date of grant and the restrictions
on the award expire three years from the date of grant. Deferred compensation
expense of $807 was recorded in connection with the award and was determined
based on the number of granted restricted shares and the estimated fair market
value on the grant date. This amount was recorded as a component of
stockholders' equity and will be amortized as a charge to operations over the
vesting period of the award.
Conversion of Stock Appreciation Rights
During the fourth quarter of 2001, the Company converted 451 previously
issued SARs to stock options. As a result, the SARs were canceled and new stock
options were granted at the exercise price and with vesting beginning as of the
grant date of the previously issued SARs. At the date of conversion, the accrued
compensation liability of $797 related to the SARs was reversed. For the new
stock options, stock-based compensation was then calculated as the difference
between the exercise price and the estimated fair value of the new stock options
on the conversion date. For the vested portion of the stock options, the Company
recognized compensation expense of $655 in 2001. For the unvested portion,
deferred stock-based compensation expense of $328 was recorded in a separate
component of stockholders' equity and will be amortized as a charge to
operations over the remaining vesting period of the options.
Deferred Compensation
In connection with the grant of 881 stock options to employees between
January 1, 2000 and July 27, 2000, the Company recorded deferred compensation
expense of $7,112. Deferred compensation for options granted to employees is
determined based on the difference between the grant price and the estimated
fair value of our common stock on the date we granted the options. This amount
was recorded as a component of stockholders' equity and amortized as a charge to
operations over the vesting period of the options.
In total, including the restricted stock award and elimination of all
stock-related loans in 2002 and the 2001 SARs conversion, amortization of
deferred stock-based compensation expense for 2002 and 2001 was $3,746 and
$3,265, respectively, and was reported in our Consolidated Statement of
Operations as follows:
2002 2001
------ ------
Cost of products sold ........................................ $ 382 $ 311
Research and development ..................................... 745 958
Sales, marketing and business development .................... 1,271 1,106
General and administrative ................................... 1,348 890
------ ------
Total amortization of deferred stock-based compensation ...... $3,746 $3,265
====== ======
Employee Stock Purchase Plan
On March 13, 2001, the Company adopted the Genencor International, Inc.
Employee Stock Purchase Plan (the ESPP) and has 2,000 shares of common stock for
issuance under the ESPP. Under the ESPP, eligible employees may purchase stock
at 85% of the lower of the closing prices for the stock as of the beginning or
the end of each six-month offering period. The offering periods generally begin
in January and July with the first offering beginning July 1, 2001. Purchases
are limited to 15% of the employee's compensation and may not exceed 1 shares
per offering period. At December 31, 2002, 153 shares had been issued. At
December 31, 2001, no shares had been issued.
58
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 2002, 2001 and 2000 amounted to approximately $2,869, $2,612 and
$2,531, respectively.
59
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:
PENSION BENEFITS OTHER BENEFITS
---------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- --------- ---------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................. $ 41,995 $ 38,958 $ 1,945 $ 1,439
Service cost ............................................ 3,359 2,655 213 161
Interest cost ........................................... 2,675 2,293 136 114
Plan participants' contributions ........................ 218 169 -- --
Amendments .............................................. -- 64 -- --
Actuarial (gain)/loss ................................... 4,162 951 392 261
Curtailment ............................................. (2) -- (616) --
Benefits paid ........................................... (2,099) (1,532) (39) (30)
Translation ............................................. 6,763 (1,563) -- --
---------- ---------- --------- ---------
Benefit obligation at end of year ....................... $ 57,071 $ 41,995 $ 2,031 $ 1,945
========== ========== ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year .......... $ 62,094 $ 65,794 $ -- $ --
Actual return on plan assets ............................ (6,672) (3,413) -- --
Employer contributions .................................. 3,783 4,428 -- --
Plan participants' contributions ........................ 218 169 -- --
Benefits paid ........................................... (2,099) (1,532) -- --
Translation ............................................. 9,021 (3,352) -- --
---------- ---------- --------- ---------
Fair value of plan assets at end of year ................ $ 66,345 $ 62,094 $ -- $ --
========== ========== ========= =========
FUNDED STATUS ........................................... $ 9,274 $ 20,411 $ (2,031) $ (1,945)
Unrecognized net actuarial (gain)/loss .................. 16,517 (71) 404 325
Unrecognized net (asset)/obligation ..................... 24 -- -- --
Unrecognized prior service cost ......................... (348) (295) 162 219
---------- ---------- --------- ---------
Prepaid cost (accrued benefit) .......................... $ 25,467 $ 20,045 $ (1,465) $ (1,401)
========== ========== ========= =========
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS CONSIST OF:
Prepaid benefit cost .................................... $ 26,259 $ 20,589 $ -- $ --
Accrued benefit cost .................................... (792) (544) (1,465) (1,401)
---------- ---------- --------- ---------
Net amount recognized ................................... $ 25,467 $ 20,045 $ (1,465) $ (1,401)
========== ========== ========= =========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate ........................................... 5.50%--6.50% 5.80%--7.00% 6.50% 7.00%
Expected return on plan assets .......................... 5.50%--8.00% 5.80%--8.00% N/A N/A
Rate of compensation increase ........................... 0.00%--6.50% 0.00%--6.50% N/A N/A
PENSION BENEFITS OTHER BENEFIT
----------------------------------- ---------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ----- ---- -----
COMPONENTS OF NET PERIODIC (BENEFIT) COST:
Service cost ........................................... $ 3,359 $ 2,655 $ 2,218 $ 213 $161 $ 119
Interest cost .......................................... 2,675 2,293 2,141 136 114 88
Expected return on plan assets ......................... (4,519) (4,373) (4,348) -- -- --
Amortization of net (asset)/obligation ................. 22 -- -- -- -- --
Amortization of prior service cost ..................... (46) (42) (49) 55 55 55
Recognized net actuarial (gain)/loss ................... 60 (330) (735) 26 2 (1)
------- ------- ------- ----- ---- -----
Net periodic (benefit) cost ............................ 1,551 203 (773) 430 332 261
Curtailment ............................................ 58 -- -- (327) -- --
------- ------- ------- ----- ---- -----
Total net periodic (benefit) cost ............ $ 1,609 $ 203 $ (773) $ 103 $332 $ 261
======= ======= ======= ===== ==== =====
60
In accordance with SFAS No. 87, "Employers' Accounting for Pensions," the
Company has recorded an additional minimum pension liability of $2,573 at
December 31, 2002, for an underfunded plan in the Netherlands. This liability
represents the excess of unfunded accumulated benefit obligation over the
previously recorded pension cost liabilities. A corresponding amount is
recognized as an intangible asset except to the extent these additional
liabilities exceed related unrecognized prior service costs and transition
obligations, in which case the increase in liabilities is charged directly to
other comprehensive income. As of December 31, 2002, an after-tax charge of
$2,123 was recorded to other comprehensive income.
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:
2002 2001
---- ----
Projected benefit obligation ................... 16,193 --
Accumulated benefit obligation ................. 13,742 --
Fair value of plan assets ...................... 11,233 --
As a result of the reduction in the number of employees covered by the
restructuring plan at the Company's Elkhart, Indiana facility, a curtailment
loss is reflected in the net periodic pension cost for 2002.
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 5.0% in 2007 and were 10% in 2002, 9.0% in 2001, and 10.0% in
2000. The trend rates assumed for post-65 claims graded to 5.0% in 2009 and were
12% in 2002, 9.0% in 2001, and 10.0% in 2000. For both pre and post-65 claims,
the trend rate was assumed to remain at 5.0% after 2007 and 2009, respectively.
A one percentage point increase in assumed health care cost trend rates would
increase total service and interest cost by $5 and increase the postretirement
benefit obligation by $76. A one percentage point decrease in assumed health
care cost trend rates would decrease total service and interest cost by $5 and
decrease the postretirement benefit obligation by $65.
12 -- INCOME TAXES
The (benefit from)/provision for income taxes consisted of the following
for the years ended December 31:
2002 2001 2000
------- -------- --------
Current:
Federal ................................................ $(7,265) $ 2,780 $ 5,868
State .................................................. -- 268 627
Foreign ................................................ 8,582 3,878 2,551
------- -------- --------
1,317 6,926 9,046
------- -------- --------
Deferred:
Federal and State ...................................... (5,623) (2,198) 5,258
Foreign ................................................ (718) 1,946 384
------- -------- --------
(6,341) (252) 5,642
------- -------- --------
Increase/(decrease) in valuation allowances .............. 1,609 (100) (580)
------- -------- --------
$(3,415) $ 6,574 $ 14,108
======= ======== ========
61
The components of deferred tax assets and liabilities consisted of the
following at December 31:
2002 2001
-------- --------
Current assets and liabilities:
Unrealized depreciation/(appreciation) on marketable equity
securities ............................................................ $ 2,059 $ 378
Deferred revenues ........................................................ 2,667 4,799
Inventories .............................................................. 200 (138)
Accrued expenses ......................................................... 929 714
Foreign currency exchange ................................................ 903 1,173
Other items, net ......................................................... 338 (297)
-------- --------
7,096 6,629
-------- --------
Non-current assets and liabilities:
Net operating loss and tax credit carryforwards .......................... 23,937 14,129
Employee costs ........................................................... (7,712) (7,521)
Depreciation and amortization ............................................ (17,171) (14,766)
Other items, net ......................................................... (188) (531)
-------- --------
(1,134) (8,689)
Valuation allowances ....................................................... (2,929) (1,320)
-------- --------
Net deferred tax liability ............................................... $ 3,033 $ (3,380)
======== ========
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 $10,600 for U.S. tax
purposes which expire in 2022. The Company also has net operating loss
carryforwards of $6,000 for Chinese tax purposes which expire in 2005 through
2007. The Company also has research and experimentation tax credit carryforwards
of $10,000 for U.S. federal income tax purposes, which expire in 2002 through
2022. Additionally, the Company has alternative minimum tax credit carryforwards
of $3,507, which may be used indefinitely to reduce U.S. federal income taxes.
A valuation allowance is provided for deferred tax assets if management
believes that it is more likely than not that 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 allowances are
$2,929 and $1,320 at December 31, 2002 and 2001, respectively.
During 2000, the Company reassessed its ability to realize the benefit of
certain deferred tax assets and reversed valuation allowances totaling $6,400,
approximately $600 of which was recorded to the provision for income taxes in
the statement of operations and $5,800, which related to acquired deferred tax
assets, was recorded as a reduction to 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 for the years ending December 31:
2002 2001 2000
---- ---- ----
U.S. federal statutory income tax rate ................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit ................. (39.0%) 1.6% 1.6%
Amortization of non-deductible intangible assets ...................... 55.4% 6.7% 3.8%
Foreign and U.S. tax effects attributable to foreign operations ....... (181.0%) (6.6%) (4.3%)
Change in valuation allowances ........................................ 67.6% (0.4%) (1.3%)
Tax credits ........................................................... (68.4%) (6.7%) (2.9%)
Other, net ............................................................ (13.0%) (2.6%) (0.9%)
------ ---- ----
(143.4%) 27.0% 31.0%
====== ==== ====
The Company is subject to a tax ruling in the Netherlands, which
effectively reduces the local effective income tax rate from 35% to 17.5%. This
ruling will expire in 2005. Effective January 1, 2003, a change in the Belgian
tax law reduces the Belgian tax rate from 40.17% to 33.99%.
62
13 -- SEGMENT AND PRODUCT 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. Product revenues are attributed to
countries based on the geographic location of the customer. Intercompany
transactions between countries have been eliminated. Long-lived assets include
property, plant, and equipment, intangible assets, and investments and other
assets and are attributed to countries based on physical location. Included in
non-U.S. long-lived assets are approximately $51,000 in 2002, $44,000 in 2001
and $46,000 in 2000 in Belgium and approximately $39,000 in 2002, $35,000 in
2001and 2000 in Finland. Geographical information is as follows:
U.S. NON-U.S. CONSOLIDATED
-------- -------- ------------
2002
Product revenue .................................... $149,954 $179,383 $329,337
Long-lived assets .................................. $195,177 $133,315 $328,492
2001
Product revenue .................................... $141,683 $169,427 $311,110
Long-lived assets .................................. $179,282 $117,528 $296,810
2000
Product revenue .................................... $139,170 $161,808 $300,978
Long-lived assets .................................. $184,398 $124,058 $308,456
Product revenue by similar product groupings is as follows:
2002 2001 2000
-------- -------- --------
Protein degrading enzyme products .................... $171,213 $177,573 $166,394
Starch degrading enzyme products ..................... 102,443 85,168 84,865
Cellulose degrading enzyme products .................. 40,623 34,169 35,775
Other ................................................ 15,058 14,200 13,944
-------- -------- --------
Total ...................................... $329,337 $311,110 $300,978
======== ======== ========
14 -- RELATED PARTY TRANSACTIONS
Danisco and its affiliates purchased approximately $11,000 during 2002,
$9,000 in 2001, and $8,000 in 2000 of products from the Company. The Company
purchased products from and/or through these related parties for approximately
$3,000 in 2002, $4,000 in 2001 and 2000. Also, the Company received
approximately $400 in fees and royalty revenues from a Danisco affiliate during
2002 and 2000 and no such fees and royalty revenues in 2001. These revenues were
received under a collaboration agreement for the development and
commercialization of enzymes for the animal feed market. In October 2000, the
Company signed an exclusive agreement with Danisco A/S for the development of
innovative bioingredients for the food industry. The four-year minimum term
agreement provides for up to $20 million in funding to the Company. During 2002
and 2001, the Company received approximately $1,100 and $1,300, respectively, in
fees and royalty revenues under this agreement.
At December 31, 2002 and 2001, the Company had amounts due from Danisco of
$377 and $229, respectively. At December 31, 2001 and 2000, the Company had
amounts due to Danisco of $227 and $315, respectively.
The Company had outstanding relocation-related notes receivable with
balances totaling $3,222 and $3,983 from officers of the Company at December 31,
2002 and 2001, respectively. 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 at 5.32% to 6.80% per year on the notes, with an offset
recorded as compensation expense.
The Company also had outstanding promissory notes of $14,647 at December
31, 2001. This amount related to the exercise of stock options granted to
executive officers during 2000. In November 2001, the Company allowed our
executive officers to surrender 350 vested, restricted shares to the Company at
a value of $5,630, to pay principal and interest due on these notes. On August
21, 2002, in order to eliminate all stock-related loans, the Company's executive
officers surrendered approximately 1,430 restricted shares at a value of $10.77
per share, to make full payment of the outstanding principal and accrued
interest on their obligations under these notes. The Company is holding the
surrendered shares as treasury shares.
63
During November 2002, the Company granted 75 shares of restricted common
stock to its chief executive officer and president. These restricted shares were
granted at estimated fair market value at the date of grant and the restrictions
on the award expire three years from the date of grant. Deferred compensation
expense of $807 was recorded in connection with the award and was determined
based on the number of granted restricted shares and the estimated fair market
value on the grant date. This amount was recorded as a component of
stockholders' equity and will be amortized as a charge to operations over the
vesting period of the award.
15 -- SUPPLEMENTAL CASH FLOW INFORMATION
2002 2001 2000
------- ------- -------
Interest paid ............................................ $ 9,065 $10,433 $10,474
======= ======= =======
Taxes paid ............................................... $ 6,244 $ 9,728 $ 6,043
======= ======= =======
Schedule of non-cash investing and
financing activity:
Acquisition of treasury stock in exchange for
notes and interest receivable .......................... $15,202 $ 5,316 $ --
======= ======= =======
Debt of acquired business ................................ $ 974 $ -- $ --
======= ======= =======
Capital lease obligation ................................. $ -- $ -- $ 2,845
======= ======= =======
Issuance of restricted stock ............................. $ 807 $ -- $18,008
======= ======= =======
16 -- COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in legal proceedings involving
claims against the Company, which are handled and defended in the ordinary
course of business. While the resolution of such litigation could have a
material effect on earnings and cash flows in the year of resolution, none is
currently expected to have a material adverse effect on the financial condition
of the Company as of December 31, 2002.
64
17 -- SELECTED QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
---- -------- ------- ------- --------
Product revenue .......................................... $ 75,548 $85,470 $85,931 $ 82,388
Gross profit ............................................. 33,430 39,374 35,661 34,489
Net (loss)/income ........................................ (1,059) 4,783 2,952 (879)
Net (loss applicable)/income available to holders of
common stock ........................................... (2,878) 2,964 1,134 (2,698)
Basic (loss)/earnings per common share ................... $ (0.05) $ 0.05 $ 0.03 $ (0.05)
======== ======= ======= ========
Diluted (loss)/earnings per common share ................. $ (0.05) $ 0.05 $ 0.03 $ (0.05)
======== ======= ======= ========
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER
---- -------- ------- ------- --------
Product revenue .......................................... $ 75,268 $78,514 $77,847 $ 79,481
Gross profit ............................................. 34,370 34,987 33,715 35,052
Net income ............................................... 6,277 4,109 3,370 4,018
Net income available to holders of
common stock ........................................... 4,458 2,290 1,552 2,199
Basic earnings per common share .......................... $ 0.07 $ 0.04 $ 0.03 $ 0.04
======== ======= ======= ========
Diluted earnings per common share ........................ $ 0.07 $ 0.04 $ 0.03 $ 0.04
======== ======= ======= ========
FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER
---- -------- ------- ------- --------
Product revenue .......................................... $ 73,640 $ 76,626 $ 77,359 $ 73,353
Gross profit ............................................. 31,642 33,363 32,864 30,844
Net income ............................................... 16,543 4,688 4,753 5,426
Net income available to holders of common stock .......... 14,724 2,869 2,934 3,608
Basic earnings per common share .......................... $ 0.29 $ 0.06 $ 0.05 $ 0.06
======== ======== ======== ========
Diluted earnings per common share ........................ $ 0.28 $ 0.05 $ 0.05 $ 0.06
======== ======== ======== ========
18 -- COLLABORATIVE AGREEMENTS
During January 2002, the Company entered into a two-year extendable
collaboration agreement with The Johns Hopkins University for the research of
therapeutic vaccines and other immunotherapies targeting cancers and oncogenic
viruses. Under the agreement, the Company received worldwide licenses to certain
proprietary technologies as well as exclusive commercialization rights to any
products developed through the agreement. This collaboration required the
Company to pay an upfront license fee as well as annual royalties. The agreement
also requires certain research and development funding and has potential for
additional milestone payments and royalties on future product sales.
Also during January 2002, the Company formed a strategic alliance with
Seattle Genetics, Inc., to jointly discover and develop a class of cancer
therapeutics. Under terms of the alliance, the companies will share preclinical
and clinical development costs and have the right to jointly commercialize any
resulting products. The Company made an equity investment in Seattle Genetics of
$3,000 and agreed to pay certain fees and milestone payments. Seattle Genetics
also agreed to make certain milestone payments to the Company. In July 2002, the
Company made a payment of $500 to Seattle Genetics in accordance with the
agreement.
During October 2002, the Company and the University of Leicester announced
that they would participate in a collaboration for microbial biotechnology
between the European Union (EU) and the People's Republic of China. The
three-year project funded by the European Commission Fifth Framework Program
strives to identify metabolic and genetic diversity as a source of new and
valuable products.
During July 2001, the Company acquired a 10% ownership interest in and
entered into a license agreement with Epimmune Inc. The Company also entered
into a research collaboration agreement with Epimmune Inc. Although the
Company's investment in
65
Epimmune Inc. is considered available-for-sale, the Company currently has no
intent to liquidate its investment. Therefore, the investment is recorded at
fair value within other assets. In December 2001, we increased our equity stake
in Epimmune and made our first milestone payment.
During August 2001, the Company entered into a collaboration agreement
with Phogen Ltd., which gives the Company worldwide rights to proprietary
technology to develop therapeutic vaccines for infectious viral diseases and
develop applications to enhance DNA vaccine formulation. This collaboration
required the Company to pay an upfront license fee as well as annual license
maintenance fees. The agreement requires certain research and development
funding and has potential for additional milestone payments.
During October 2001, the Company entered into a strategic alliance with
Dow Corning Corporation to create a new, proprietary technology platform for the
development of new biomaterials. The terms of the agreement include an upfront
payment which will be recognized over the term of the agreement, research
funding and milestone payments.
66
FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
SCHEDULE II
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF VALUATION AND QUALIFYING ACCOUNTS
REDUCTIONS
(ADDITIONS)
BALANCE AT ADDITIONS CHARGED TO DEDUCTIONS/ BALANCE AT
BEGINNING CHARGED TO ACQUIRED AMOUNTS END
OF PERIOD EARNINGS GOODWILL WRITTEN OFF OF PERIOD
---------- ---------- ------------ ------------ -----------
(AMOUNTS IN THOUSANDS)
Year Ended December 31, 2002
Deducted in the Consolidated Balance
Sheet:
From current assets:
Trade accounts receivable, allowance
for doubtful accounts ............... $(2,628) $ (557) $ -- $ 415 $(2,770)
Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments ......................... (1,789) (1,205) -- 315 (2,679)
------- -------- ---------- -------- -------
Total .................................... (4,417) (1,762) -- 730 (5,449)
======= ======== ========== ======== =======
Deferred tax valuation allowance ......... (1,320) (1,609) -- -- (2,929)
======= ======== ========== ======== =======
From current liabilities:
Restructuring reserves ................ (234) (16,427) -- 15,856 (805)
======= ======== ========== ======== =======
Year Ended December 31, 2001
Deducted in the Consolidated Balance
Sheet:
From current assets:
Trade accounts receivable, allowance
for doubtful accounts ............... (2,574) (255) -- 201 (2,628)
Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments ......................... (2,043) -- -- 254 (1,789)
------- -------- ---------- -------- -------
Total .................................... (4,617) (255) -- 455 (4,417)
======= ======== ========== ======== =======
Deferred tax valuation allowance ......... (1,420) (680) -- 780 (1,320)
======= ======== ========== ======== =======
From current liabilities:
Restructuring reserves ................ (2,679) -- -- 2,445 (234)
======= ======== ========== ======== =======
Year Ended December 31, 2000
Deducted in the Consolidated Balance
Sheet:
From current assets:
Trade accounts receivable, allowance
for doubtful accounts ............... (1,814) (414) -- (346) (2,574)
Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments ......................... (2,255) -- -- 212 (2,043)
------- -------- ---------- -------- -------
Total .................................... (4,069) (414) -- (134) (4,617)
======= ======== ========== ======== =======
Deferred tax valuation allowance ......... (7,800) (920) 5,800 1,500 (1,420)
======= ======== ========== ======== =======
From current liabilities:
Restructuring reserves ................ (6,100) -- -- 3,421 (2,679)
======= ======== ========== ======== =======
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
the Company's definitive proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company on May 29, 2003 under the captions
"Proposed for Election as Directors for a Three-Year Term Expiring in 2006,"
"Director Whose Terms Do Not Expire at the Meeting," "Executive Officers," and
"Section 16(a) Beneficial Ownership Reporting Compliance," which proxy statement
will be filed within 120 days after the end of the Company's 2002 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Company's definitive proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company on May 29, 2003 under the caption
"Executive Compensation" (excepting the "Report of the Management Development
and Compensation Committee" and the "Stock Price Performance Graph"), which
proxy statement will be filed within 120 days after the end of the Company's
2002 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options, warrants price of outstanding options, plans (excluding securities
and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
------------- ----------------------------- ----------------------------- ------------------------------
Equity compensation plans
approved by security holders 8,856,019 $11.13 4,882,315
Equity compensation plans not
approved by security holders -- N/A --
Total 8,856,019 $11.13 4,882,315
Security Ownership and Changes in Control
The information required by this Item is incorporated by reference from
the Company's definitive proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company on May 29, 2003 under the caption
"Security Ownership of Certain Beneficial Owners and Management," which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.
68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Company's definitive proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company on May 29, 2003 under the caption
"Certain Transactions," which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
ITEM 14. CONTROLS AND PROCEDURES
Quarterly Evaluation of the Company's Disclosure Controls and Internal
Controls
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including Jean-Jacques Bienaime, the Company's Chief
Executive Officer and President, and Raymond J. Land, the Company's Senior Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, Mr. Bienaime and Mr. Land
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's periodic filing with the Securities and Exchange
Commission. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 (Exchange Act), such as this Annual Report,
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that (1)
our transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with accounting principles generally accepted in the United States of
America.
Limitations on the Effectiveness of Controls
The Company's management does not expect that our Disclosure Controls or
our Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 15(a)(1), 15(a)(2) and 15(d):
Consolidated Financial Statements:
Report of Independent Accountants
69
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The following financial statement schedule is filed as part of this
Report:
Schedule II- Valuation and Qualifying Accounts
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements and notes thereto.
Item 15(a)(3) and 15(c):
See Index to Exhibits
Item 15(b):
During the last quarter of the fiscal year ended December 31, 2002,
the Company did not file a Current Report on Form 8-K.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
GENENCOR INTERNATIONAL, INC.
Date: March 26, 2003 By: /s/ Jean-Jacques Bienaime
----------------------------------
Jean-Jacques Bienaime
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jean-Jacques Bienaime Director, Chief Executive Officer and March 26, 2003
--------------------------------- President (Principal Executive Officer)
Jean-Jacques Bienaime
/s/ Raymond J. Land Senior Vice President and March 26, 2003
--------------------------------- Chief Financial Officer
Raymond J. Land (Principal Financial Officer)
/s/ Darryl L. Canfield Vice President and Corporate Controller March 26, 2003
--------------------------------- (Principal Accounting Officer)
Darryl L. Canfield
/s/ W. Thomas Mitchell Chairman March 26, 2003
---------------------------------
W. Thomas Mitchell
/s/ Soren Bjerre-Nielsen Director March 26, 2003
--------------------------------
Soren Bjerre-Nielsen
/s/ Gregory O. Nelson Director March 26, 2003
---------------------------------
Gregory O. Nelson
/s/ Bruce C. Cozadd Director March 26, 2003
---------------------------------
Bruce C. Cozadd
/s/ Jorgen Rosenlund Director March 26, 2003
---------------------------------
Jorgen Rosenlund
/s/ Theresa K. Lee Director March 26, 2003
---------------------------------
Theresa K. Lee
/s/ Robert H. Mayer Director March 26, 2003
---------------------------------
Robert H. Mayer
/s/ Joseph A. Mollica Director March 26, 2003
---------------------------------
Joseph A. Mollica
/s/ Norbert G. Riedel Director March 26, 2003
---------------------------------
Norbert G. Riedel
/s/ James P. Rogers Director March 26, 2003
---------------------------------
James P. Rogers
71
CERTIFICATIONS
I, Jean-Jacques Bienaime, certify that:
1. I have reviewed this annual report on Form 10-K of Genencor International,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003 By: /s/ Jean-Jacques Bienaime
--------------------------------
Jean-Jacques Bienaime,
Chief Executive Officer and President
72
I, Raymond J. Land, certify that:
1. I have reviewed this annual report on Form 10-K of Genencor International,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003 By: /s/ Raymond J. Land
---------------------
Raymond J. Land,
Senior Vice President and
Chief Financial Officer
73
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) Articles of Incorporation and By-laws
3.1 Form of Restated Certificate of Incorporation is incorporated
herein by reference to Exhibit 3.3 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
3.2 Form of Amended and Restated Bylaws is incorporated herein by
reference to Exhibit 3.4 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
(4) Instruments defining the rights of securities holders, including
indentures
4.1 Exhibit 3.1 to this Report is incorporated herein by
reference.
4.2 Exhibit 3.2 to this Report is incorporated herein by
reference.
4.3 Form of Specimen Common Stock Certificate is incorporated
herein by reference to Exhibit 4.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
4.4 Note Agreement for the $140,000,000 6.82% Senior Notes due
2006 between the Company and the purchasers identified
therein, dated March 28, 1996 is incorporated herein by
reference to Exhibit 4.2 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000.
*4.5 Amendment No. 1 dated as of September 25, 1996 to Note
Agreement for the $140,000,000 6.82% Senior Notes due 2006.
*4.6 Amendment No. 2 dated as of December 31, 1996 to Note
Agreement for the $140,000,000 6.82% Senior Notes due 2006.
*4.7 Amendment No. 3 dated as of May 5, 2000 to Note Agreement for
the $140,000,000 6.82% Senior Notes due 2006.
*4.8 Amendment No. 4 dated as of October 1, 2000 to Note Agreement
for the $140,000,000 6.82% Senior Notes due 2006.
*4.9 Amendment No. 5 dated as of April 17, 2002 to Note Agreement
for the $140,000,000 6.82% Senior Notes due 2006.
4.10 $32,000,000 Three Year Credit Agreement dated as of January
31, 2001 among the Company, the Lenders party thereto and The
Chase Manhattan Bank, as Administrative Agent is incorporated
herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration No.
333-61450) filed on May 23, 2001.
4.11 Amendment No. 1 dated as of April 20, 2001 to the $32,000,000
Three Year Credit Agreement dated as of January 31, 2001 among
the Company, the Lenders party thereto and The Chase Manhattan
Bank, as Administrative Agent is incorporated herein by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 333-61450) filed on
May 23, 2001.
4.12 Letter Agreement dated as of January 31, 2002 among JP Morgan
Chase Bank, ABN AMRO Bank, NV, the Bank of New York, Credit
Suisse First Boston and the Company regarding Credit
Agreements dated as of January 31, 2001 and Acquisition of
Enzyme Bio-Systems is incorporated herein by reference to
Exhibit 4.10 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
(9) Voting Trust Agreement
Not applicable.
(10) Material Contracts
10.1 Stockholder Agreement between the Company, Eastman Chemical
Company and Danisco A/S, dated July 25, 2000 is incorporated
herein by reference to Exhibit 10.5 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 26, 2000.
*10.2 First Amendment to Stockholder Agreement, dated February 16,
2001, between the Company, Eastman Chemical Company and
Danisco A/S.
*10.3 Second Amendment to Stockholder Agreement, dated November 15,
2002, between the Company, Eastman Chemical Company and
Danisco A/S.
10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers is incorporated herein by
reference to Exhibit 10.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
74
10.5 Lease Agreement by and between the Company and The Board of
Trustees of the Leland Stanford Junior University dated May
22, 1995 is incorporated herein by reference to Exhibit 10.6
to Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-36452) filed on June 26, 2000.
(Palo Alto)
10.6 Lease Agreement between the Company and Meridian Centre
Associates, L.P., dated August 16, 1999, as amended September
1, 1999 is incorporated herein by reference to Exhibit 10.7 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-36452) filed on June 26, 2000.
(Rochester)
10.7 Lease between Genencor International B.V. and ABN AMRO
Onroerend Goed Lease en Financieringen B.V., dated January 6,
1999 is incorporated herein by reference to Exhibit 10.8 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-36452) filed on June 26, 2000.
(Leiden, the Netherlands)
10.8 Deed of Economic Transfer between Genencor International B.V.
and ABN AMRO Goed Lease en Financieringen B.V., dated January
6, 1999 is incorporated herein by reference to Exhibit 10.8.1
to Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-36452) filed on June 26, 2000.
10.9 Lease agreement by and between the Company and Eastman Kodak
Company, dated August 28, 1991 is incorporated herein by
reference to Exhibit 10.9 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000. (Rochester)
*10.10 First Amendment to Lease, dated November 30, 2001, by and
between the Company and Eastman Kodak Company.
*10.11 Second Amendment to Lease Agreement and Landlord Consent,
dated July 8, 2002, by and between the Company and Eastman
Kodak Company.
+10.12 Collaborative Research and Development Agreement between the
Company and E.I. du Pont de Nemours and Company, dated
September 1, 1995, as amended, is incorporated herein by
reference to Exhibit 10.14 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
+10.13 Fourth Amendment to Collaborative Research and Development
Agreement Dated 1st September, 1995, between E. I. duPont de
Nemours and Company and the Company, dated February 27, 2001
is incorporated herein by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
+10.14 Fifth Amendment to Collaborative Research and Development
Agreement Dated 1st September, 1995, between E. I. duPont de
Nemours and Company and the Company, dated December 1, 2001 is
incorporated herein by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.15 Amended and Restated Equity Joint Venture Contract between
Genencor Mauritius Ltd. and Wuxi Enzyme Factory, dated May 10,
1998 is incorporated herein by reference to Exhibit 10.15 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-36452) filed on June 26, 2000.
*10.16 Agreement for the First Amendment to the Amended and Restated
Equity Joint Venture Contract and First Amendment to the
Amended and Restated Articles of Association, dated as of
December 23, 2002, between Genencor Mauritius Ltd. and Wuxi
Enzymes Factory.
#10.17 Senior Executive Relocation Policy is incorporated herein by
reference to Exhibit 10.18 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000.
#10.18 Form of executive officer Promissory Note is incorporated
herein by reference to Exhibit 10.19 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000.
#10.19 Retirement and Consulting Agreement dated as of August 21,
2002 between W. Thomas Mitchell and the Company is
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.
*#10.20 Employment Agreement dated October 17, 2002 between the
Company and Jean Jacques Bienaime.
*#10.21 Letter Agreement dated December 17, 2002 between the Company
and Debby Jo Blank.
#10.22 Form of executive officer Employment Agreement is incorporated
herein by reference to Exhibit 10.21 to Amendment No. 1 to the
Company's Registration Statement (Registration No. 333-36452)
filed on June 26, 2000.
75
+10.23 Research Agreement between the Company and The Procter &
Gamble Company, dated June 30, 2000 is incorporated herein by
reference to Exhibit 10.11 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
10.24 Technology Transfer Agreement between the Company and The
Procter & Gamble Company, dated June 30, 2000 is incorporated
herein by reference to Exhibit 10.12 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
+10.25 Commercialization Agreement between the Company and The
Procter & Gamble Company, dated April 25, 2000 is incorporated
herein by reference to Exhibit 10.13 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
*10.26 National Renewable Energy Laboratory Definitized Subcontract,
effective April 27, 2000, between Midwest Research Institute
acting through its National Renewable Energy Laboratory
Division and the Company (including Modification Nos. 1-3).
+10.27 Enzyme Supply Agreement by and between the Company and
Cargill, Incorporated dated as of January 5, 2001 is
incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Statement on Form 10-Q for the quarter
ended March 31, 2001.
+10.28 License Agreement by and between Epimmune Inc. and the Company
dated as of July 9, 2001 is incorporated herein by reference
to Exhibit 10.1 to the Company's Quarterly Statement on Form
10-Q for the quarter ended September 30, 2001.
*10.29 First Amendment of the License Agreement by and between
Epimmune Inc. and the Company dated as of October 16, 2002.
+10.30 Collaboration Agreement by and between Epimmune Inc. and the
Company dated as of July 9, 2001 is incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Statement
on Form 10-Q for the quarter ended September 30, 2001.
*+10.31 First Amendment of the Collaboration Agreement by and between
Epimmune Inc. and the Company dated as of October 16, 2002.
+10.32 Securities Purchase Agreement by and between Epimmune Inc. and
the Company dated as of July 9, 2001 is incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Statement
on Form 10-Q for the quarter ended September 30, 2001.
+10.33 Supply Agreement by and among The Procter & Gamble
Manufacturing Company, The Procter & Gamble Company, Procter &
Gamble International Operations SA, and P&G Northeast Asia
PTE, Ltd., and the Company executed October 17, 2001 is
incorporated herein by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
+10.34 Research Agreement between Dow Corning Corporation and the
Company, dated October 4, 2001 is incorporated herein by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
+10.35 Enzyme Supply Agreement between the Company and Corn Products
International, Inc., dated February 5, 2002 is incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
(11) Statement re computation of per share earnings
Not included as a separate exhibit as computation can be determined
from Note 1 to the financial statements included in this Report
under Item 8.
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q, or quarterly report to
security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the Registrant
*Subsidiaries of the Registrant are listed on Exhibit 21.1.
(22) Published report regarding matters submitted to a vote of security holders
Not applicable.
(23) Consents of experts and counsel
*Consent of independent accountants is included herein as Exhibit
23.1.
76
(24) Power of Attorney
Not applicable.
(99) Additional Exhibits
*99.1 Certifications Pursuant to 18 U.S.C. Section 1350 As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
----------
* Exhibits filed with this Report.
+ Confidential Treatment requested as to certain information which has been
separately filed with the Securities and Exchange Commission pursuant to
an application for such treatment.
# Management contract or compensatory plan.
77