Edgar Filing: GENENCOR INTERNATIONAL INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________

FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________ TO______________

COMMISSION FILE NUMBER 000-31167

GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
_______________

DELAWARE 16-1362385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 846-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
_______________

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS

YES [X] NO [ ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).

YES [X] NO [ ]
_______________

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

NUMBER OF SHARES OUTSTANDING
CLASS AT OCTOBER 31, 2003

COMMON STOCK, PAR VALUE $0.01 PER SHARE 59,197,758

TABLE OF CONTENTS

PAGE
----

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets as of
September 30, 2003 and December 31, 2002..................... 4
Condensed Consolidated Unaudited Statements of Operations for
the three and nine months ended September 30, 2003 and 2002.. 5
Condensed Consolidated Unaudited Statements of Cash Flows for
the nine months ended September 30, 2003 and 2002............ 6
Notes to Condensed Consolidated Unaudited Financial Statements.. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 28
Item 4. Controls and Procedures......................................... 28

PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 29
Item 2. Changes in Securities and Use of Proceeds....................... 29
Item 3. Defaults Upon Senior Securities................................. 29
Item 4. Submission of Matters to a Vote of Security Holders............. 29
Item 5. Other Information............................................... 29
Item 6. Exhibits and Reports on Form 8-K................................ 29

SIGNATURES................................................................. 30
EXHIBIT INDEX ............................................................. 31

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 Part I, Item
2 of this Report and in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. The Company disclaims any obligation to publicly
announce any revisions to these forward-looking statements to reflect facts or
circumstances of which the Company becomes aware after the date hereof.

Unless otherwise specified, all references in this Report to the "Company,"
"we," "us," "our," and "ourselves" refer to Genencor International, Inc. and its
subsidiaries collectively, as appropriate in the context of the disclosure.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------

ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 157,097 $ 169,001
Trade accounts receivable, net ................................ 59,476 51,576
Inventories ................................................... 56,916 54,215
Other current assets .......................................... 40,879 27,569
--------- ---------
Total current assets ....................................... 314,368 302,361
Property, plant and equipment, net ............................... 221,401 217,110
Goodwill ......................................................... 29,380 29,384
Intangible assets, net ........................................... 42,897 45,898
Other assets ..................................................... 67,268 60,169
--------- ---------
Total assets ............................................... $ 675,314 $ 654,922
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................. $ 8,221 $ 7,942
Current maturities of long-term debt .......................... 28,291 28,291
Accounts payable and accrued expenses ......................... 36,006 47,549
Other current liabilities ..................................... 18,806 15,536
--------- ---------
Total current liabilities .................................. 91,324 99,318
Long-term debt ................................................... 56,761 84,897
Other long-term liabilities ...................................... 41,001 32,700
--------- ---------
Total liabilities .......................................... 189,086 216,915
--------- ---------
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par value,
authorized 1 shares, 1 shares issued and outstanding ....... 175,207 169,750
--------- ---------
Stockholders' equity:
Common stock, par value $0.01 per share, 200,000 shares
authorized, 60,897 and 60,251 shares issued at September 30,
2003 and December 31, 2002, respectively ................... 609 602
Additional paid-in capital .................................... 356,094 349,579
Treasury stock, 1,780 shares at cost at September 30, 2003 and
December 31, 2002 .......................................... (21,030) (21,030)
Deferred stock-based compensation ............................. (1,160) (1,164)
Accumulated deficit ........................................... (2,162) (14,944)
Accumulated other comprehensive loss .......................... (21,330) (44,786)
--------- ---------
Total stockholders' equity ................................. 311,021 268,257
--------- ---------
Total liabilities, redeemable preferred stock and
stockholders' equity .................................... $ 675,314 $ 654,922
========= =========

The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.

GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------

Revenues:
Product revenue ............................ $ 89,795 $ 85,931 $ 269,577 $ 246,949
Fees and royalty revenues .................. 4,349 4,566 16,575 14,990
--------- --------- --------- ---------
Total revenues .......................... 94,144 90,497 286,152 261,939
Operating expenses:
Cost of products sold ...................... 52,096 50,270 154,723 138,484
Research and development ................... 18,315 17,360 51,608 50,302
Sales, marketing and business development .. 8,320 8,293 23,921 24,001
General and administrative ................. 7,946 8,790 23,729 25,086
Amortization of intangible assets .......... 1,414 1,355 4,304 3,989
Restructuring and related charges .......... -- 43 -- 16,422
Other (income)/expense ..................... (351) 161 408 (3,296)
--------- --------- --------- ---------
Total operating expenses ................ 87,740 86,272 258,693 254,988
--------- --------- --------- ---------
Operating income .............................. 6,404 4,225 27,459 6,951
Non operating expenses/(income):
Investment expense ......................... -- -- 1,018 --
Interest expense ........................... 1,539 1,995 5,128 6,559
Interest income ............................ (601) (1,347) (3,004) (4,059)
--------- --------- --------- ---------
Total non operating expenses/(income) ... 938 648 3,142 2,500
--------- --------- --------- ---------
Income before income taxes .................... 5,466 3,577 24,317 4,451
Provision for/(benefit from) income taxes ..... 1,367 625 6,079 (2,225)
--------- --------- --------- ---------
Net income .................................... $ 4,099 $ 2,952 $ 18,238 $ 6,676
========= ========= ========= =========
Net income available to holders of common stock $ 2,281 $ 1,134 $ 12,782 $ 1,220
========= ========= ========= =========
Earnings per common share:
Basic ................................... $ 0.04 $ 0.02 $ 0.22 $ 0.02
========= ========= ========= =========
Diluted ................................. $ 0.04 $ 0.02 $ 0.21 $ 0.02
========= ========= ========= =========
Weighted average common shares:
Basic ................................... 58,895 59,311 58,655 59,549
========= ========= ========= =========
Diluted ................................. 61,859 59,312 60,296 59,859
========= ========= ========= =========

The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.

GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
--------- ---------

Cash flows from operating activities:
Net income ......................................... $ 18,238 $ 6,676
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 26,639 24,418
Amortization of deferred stock-based compensation 679 3,557
Loss on disposition of property, plant
and equipment ................................ 631 331
Loss from impairment of investment in marketable
equity securities ............................ 1,018 --
Non-cash portion of restructuring and related
charges....................................... -- 9,495
(Increase) decrease in operating assets:
Trade accounts receivable .................... (4,134) (1,339)
Inventories .................................. 1,239 (384)
Other assets ................................. (12,894) (4,991)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses ........ (13,440) (13,231)
Other liabilities ............................ 3,625 2,577
--------- ---------
Net cash provided by operating activities..... 21,601 27,109
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ......... (18,640) (11,872)
Purchases of intangible assets ..................... -- (100)
Proceeds from sale of acquired assets .............. 1,145 --
Payment to acquire equity securities ............... -- (3,000)
Proceeds from sale of property, plant and
equipment ....................................... -- 191
Acquisition of business, net of cash acquired ...... -- (35,809)
--------- ---------
Net cash used in investing activities ........ (17,495) (50,590)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ............ 4,362 500
Proceeds from employee stock purchase plan ......... 1,103 1,137
Purchases of treasury shares ....................... -- (198)
Net proceeds from (payments on) notes payable of
foreign affiliate ............................... 278 (82)
Payment of long-term debt .......................... (28,185) (28,143)
--------- ---------
Net cash used in financing activities ........ (22,442) (26,786)
--------- ---------
Effect of exchange rate changes on cash ............... 6,432 6,546
--------- ---------
Net decrease in cash and cash equivalents ............. (11,904) (43,721)
Cash and cash equivalents -- beginning of period ...... 169,001 215,023
--------- ---------
Cash and cash equivalents -- end of period ............ $ 157,097 $ 171,302
========= =========

The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.

GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

1 -- BASIS OF PRESENTATION

The condensed consolidated unaudited financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
related footnotes for the year ended December 31, 2002, as included in the
Company's Annual Report on Form 10-K. These interim financial statements have
been prepared in conformity with the rules and regulations of the U.S.
Securities and Exchange Commission. Certain disclosures normally included in
financial statements prepared in conformity with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations pertaining to interim financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the interim financial statements
have been included therein. The results of operations of any interim period are
not necessarily indicative of the results of operations for the full year.

2 -- NEW ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends SFAS No. 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS No.
133, (2) in connection with other FASB projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative. This Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. All provisions of this
Statement are to be applied prospectively. The Company applied the provisions of
this statement as of July 1, 2003. The adoption of SFAS No. 149 has had no
material impact on the Company's financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how the Company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that the Company classify a financial instrument within its
scope as a liability. Some of the provisions of this Statement are consistent
with the current definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements." The remaining provisions of this Statement
are consistent with the FASB's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing its
own equity shares, depending on the nature of the relationship established
between the holder and the issuer. This Statement is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 has had no material impact on the Company's
financial position or its results of operations.

3 -- EARNINGS PER SHARE

SFAS No. 128, "Earnings per Share," requires the disclosure of basic and
diluted earnings per share. Basic earnings per share is computed based on the
weighted average number of common shares outstanding during the period. In
arriving at net income available to holders of common stock, undeclared and
unpaid dividends on redeemable preferred stock of $1,818 and $5,456 were
deducted from net income for each quarter presented and for each nine month
period presented, respectively.

Diluted earnings per common 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 income available to holders of common
stock of the Company. As a result of stock options outstanding under the
Company's 2002 Omnibus Incentive Plan and its predecessor plan, the Stock Option
and Stock

Appreciation Right Plan, there were dilutive securities for the three and nine
months ended September 30, 2003 and 2002. The weighted-average impact of these
has been reflected in the calculation of diluted earnings per common share for
the respective periods presented.

The following table reflects the calculation of basic and diluted earnings
per common share for the three and nine months ended September 30, 2003 and
2002:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------

Net income ..................... $ 4,099 $ 2,952 $ 18,238 $ 6,676
Less: Accrued dividends on
preferred stock ............. (1,818) (1,818) (5,456) (5,456)
-------- -------- -------- --------
Net income available to holders
of common stock ............. $ 2,281 $ 1,134 $ 12,782 $ 1,220
======== ======== ======== ========
Weighted average common shares:
Basic ....................... 58,895 59,311 58,655 59,549
Effect of stock options ..... 2,964 1 1,641 310
-------- -------- -------- --------
Diluted ..................... 61,859 59,312 60,296 59,859
======== ======== ======== ========
Earnings per common share:
Basic ....................... $ 0.04 $ 0.02 $ 0.22 $ 0.02
======== ======== ======== ========
Diluted ..................... $ 0.04 $ 0.02 $ 0.21 $ 0.02
======== ======== ======== ========

4 -- STOCK-BASED COMPENSATION

The Company adopted the disclosure provisions of SFAS No. 148 effective
January 1, 2003. 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 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 income and earnings per share would have been reduced to
the pro forma amounts shown below for the three and nine months ended September
30, 2003 and 2002:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2003 2002 2003 2002
--------- --------- ---------- ---------

Net income available to holders of common
stock - as reported ..................... $ 2,281 $ 1,134 $ 12,782 $ 1,220
Add: Stock-based employee compensation
expense included in reported net income
available, net of related tax ........... 16 222 302 760
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effect ............... (1,516) (3,137) (4,140) (5,415)
--------- --------- ---------- ---------
Net income available to holders of common
stock - pro forma ....................... $ 781 $ (1,781) $ 8,944 $ (3,435)
========= ========= ========== =========

Basic - as reported ..................... $ 0.04 $ 0.02 $ 0.22 $ 0.02
Basic - pro forma ....................... $ 0.01 $ (0.03) $ 0.15 $ (0.06)
Diluted - as reported ................... $ 0.04 $ 0.02 $ 0.21 $ 0.02
Diluted - pro forma ..................... $ 0.01 $ (0.03) $ 0.15 $ (0.06)

The pro forma figures in the preceding table may not be representative of
pro forma amounts in future quarters.

On June 6, 2003, the Company granted 47 shares of restricted common stock
to certain executive officers. These restricted shares were granted at fair
market value at the date of grant and the restrictions on these awards expire
three years from the grant date. Deferred compensation of $675 was recorded in
connection with these awards and was determined based on the number of granted
restricted shares and the 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 awards.

5 -- INVENTORIES

Inventories consist of the following:

SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------

Raw materials .............................. $ 8,122 $ 8,373
Work-in-progress ........................... 7,488 8,003
Finished goods ............................. 41,306 37,839
------- -------
Inventories ............................. $56,916 $54,215
======= =======

During the three months ended June 30, 2003, the Company sustained damage
to its finished bioproducts inventory as a result of an accident in a third
party warehouse in Rotterdam, the Netherlands. At that time, the Company reduced
its inventories by $7,487 to reflect the estimated amount of product that was
lost and recorded $1,041 of other costs incurred as a result of the accident in
other current assets as a receivable from the Company's insurer. During the
three months ended September 30, 2003, the Company reduced its estimate of the
inventory loss by $234 and recognized an additional $2,008 in costs associated
with the accident as an additional receivable in other current assets. Certain
reduced profits and additional costs, such as production inefficiencies,
additional freight and use of overtime are reflected in the results of
operations during the nine months ended September 30, 2003. While the Company
believes that these reduced profits and additional costs will be subject to
insurance recovery, the Company is unable to estimate the ultimate recovery at
this time. As of September 30, 2003, the Company has received $2,087 from the
insurer.

6 -- GOODWILL AND OTHER INTANGIBLE ASSETS

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 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 December 31, 2002 through September 30, 2003:

INTANGIBLE ASSETS GOODWILL
------------------------------------- --------
OTHER
AMORTIZABLE
TECHNOLOGY ASSETS TOTAL
---------- ----------- --------

Balances, December 31, 2002 $ 15,617 $ 65,429 $ 81,046 $ 29,384
Foreign currency translation
and other adjustments ..... -- 2,068 2,068 (4)
-------- -------- -------- --------
Balances, September 30, 2003 $ 15,617 67,497 83,114 $ 29,380
======== ========
Less: Accumulated
amortization ............. (40,217) (40,217)
-------- --------
Intangible assets, net .. $ 27,280 $ 42,897
======== ========

In conjunction with the acquisition discussed in Note 10, the Company
acquired certain intangible assets on December 31, 2002. The Company is
currently in the process of segregating these intangible assets among the major
classes. As such,

the estimated value of these intangible assets has been included in other
amortizable intangible assets and will be segregated among the major classes
once the Company completes its allocation of the purchase price.

The foreign currency translation and other adjustments of $2,068 consist of
$3,165 of foreign currency translation. Also included are additional acquisition
costs of $48 to acquire assets and the sale of certain acquired assets for
$1,145, which were sold at fair market value resulting in no gain or loss on the
sale.

Estimated fiscal year amortization expense is as follows:

2003...................................................... $5,300
2004...................................................... 3,600
2005...................................................... 3,100
2006...................................................... 2,700
2007...................................................... 1,700

7 -- STOCKHOLDERS' EQUITY

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, 2002 .... $ (39,200) $ (3,463) $ (2,123) $ (44,786)
Current period change ........ 20,352 3,104 -- 23,456
--------- --------- --------- ---------
Balances, September 30, 2003 ... $ (18,848) $ (359) $ (2,123) $ (21,330)
========= ========= ========= =========

The change in the marketable securities valuation adjustment for the nine
months ended September 30, 2003 includes unrealized holding gains of $2,820
($4,476 pre-tax) on the Company's available-for-sale securities. The remaining
$284 ($451 pre-tax) relates to a reduction to other comprehensive loss resulting
from the investment loss discussed in Note 8.

8 -- INVESTMENT EXPENSE

During the three months ended June 30, 2003, the Company recorded an
investment loss of $1,018 as a result of the Company's assessment of an "other
than temporary" decline in the fair market value of an investment in certain
common stock. This amount is included in investment expense as part of total non
operating expenses/(income) for the period. There was no such investment income
or loss in the nine months ended September 30, 2002.

9 -- INCOME TAXES

The effective income tax rate for the nine months ended September 30, 2003
was a 25% tax expense, compared to a 50% tax benefit for the nine months ended
September 30, 2002. Factors that affect the Company's 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 and
other items which are not deductible for tax purposes, and research and
experimentation tax credits. In addition, the estimated annual effective rate
for the nine months ended September 30, 2003 includes the effect of estimated
valuation allowances, since the Company does not have the ability to carry back
or anticipate the ability to carry forward our United States net operating
losses. The effective rate for the nine months ended September 30, 2002 was
driven by anticipated annual tax benefits from operating losses in high tax
jurisdictions, partially offset by taxes on operating income generated in low
tax jurisdictions. The effective rate for the nine months ended September 30,
2002 also included the effect of restructuring and related charges. The tax
benefit related to these restructuring and related charges was approximately
$6,100 for the nine months ended September 30, 2002.

10 -- 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 included technology, product lines and personnel. The acquisition
expanded 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 were consolidated with the
Company's results of operations beginning January 1, 2003.

According to the Company's preliminary allocation of the purchase price on
December 31, 2002, the $8,925 consists solely of intangible assets. Due to the
effect of foreign currency translation, additional acquisition costs and the
sale of certain acquired assets, the carrying costs of these intangible assets
are $8,815 at September 30, 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 by the end of 2003.

11 -- RESTRUCTURING AND RELATED CHARGES

During February 2002, as a result of the acquisition of Enzyme Bio-Systems
Ltd. (EBS), now known as Genencor International Wisconsin, Inc., from Corn
Products International, Inc. 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. As a result of
the plan, restructuring and related charges of $16,422 were recorded in the
Company's operating earnings in the nine months ended September 30, 2002. This
restructuring was completed during 2002.

12 -- SEGMENT REPORTING

The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." Segments were determined based on products
and services provided by each segment. Accounting policies for the segments are
the same as those described in Note 1, "Summary of Significant Accounting
Policies" of the consolidated financial statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002. Performance of the
segments is evaluated based on operating income of the segment. No items below
operating income are allocated to the segments. The Company accounts for
transactions, if any, between the segments as though they were transactions with
third parties at approximate market prices. There were no material inter-segment
transactions in the periods presented. During the three months ended March 31,
2003, the Company modified its managerial financial reporting to reflect two
operating segments: Bioproducts and Health Care. Accordingly, the Company is
providing data in this new financial structure for the three months and nine
months ended September 30, 2003 and 2002.

The Bioproducts segment develops and delivers products and services to the
industrial, consumer and agri-processing markets to a global customer base. All
of the Company's current product revenues are derived from this segment.

The following table provides information by business segment; information
for 2002 has been restated to reflect the reorganized business segments:

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003

Health Segment Corporate Consolidated
Bioproducts Care Subtotal and Other Totals
----------- -------- --------- --------- ------------

Product revenue ............. $ 89,795 $ -- $ 89,795 $ -- $ 89,795
Fees and royalty revenues ... 4,149 200 4,349 -- 4,349
Total revenues .............. 93,944 200 94,144 -- 94,144
Research and development .... 10,925 7,390 18,315 -- 18,315
Operating income/(loss) ..... 15,379 (9,183) 6,196 208 6,404

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002

Health Segment Corporate Consolidated
Bioproducts Care Subtotal and Other Totals
----------- -------- --------- --------- ------------

Product revenue.............. $ 85,931 $ -- $ 85,931 $ -- $ 85,931
Fees and royalty revenues.... 4,566 -- 4,566 -- 4,566
Total revenues............... 90,497 -- 90,497 -- 90,497
Research and development..... 9,927 7,433 17,360 -- 17,360
Operating income/(loss)...... 14,975 (10,479) 4,496 (271) 4,225

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

Health Segment Corporate Consolidated
Bioproducts Care Subtotal and Other Totals
----------- -------- --------- --------- ------------

Product revenue.............. $269,577 $ -- $269,577 $ -- $269,577
Fees and royalty revenues.... 16,150 425 16,575 -- 16,575
Total revenues............... 285,727 425 286,152 -- 286,152
Research and development..... 32,159 19,449 51,608 -- 51,608
Operating income/(loss)...... 52,174 (24,625) 27,549 (90) 27,459

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

Health Segment Corporate Consolidated
Bioproducts Care Subtotal and Other Totals
----------- -------- --------- --------- ------------

Product revenue.............. $246,949 $ -- $246,949 $ -- $246,949
Fees and royalty revenues.... 14,915 75 14,990 -- 14,990
Total revenues............... 261,864 75 261,939 -- 261,939
Research and development..... 28,683 21,619 50,302 -- 50,302
Operating income/(loss)...... 33,550 (29,870) 3,680 3,271 6,951

DECEMBER 31, 2002
--------------------------------------------------------------
Health Segment Corporate Consolidated
Bioproducts Care Subtotal and Other Totals
----------- -------- --------- --------- ------------

Total assets................. $467,782 $ 5,719 $473,501 $181,421 $654,922
Depreciation and amortization 31,127 2,064 33,191 -- 33,191
Capital additions............ 18,153 1,397 19,550 -- 19,550

The following table provides a reconciliation of segment information to total
consolidated information:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------

Net income:
Operating income/(loss) for
reportable segments ............ $ 6,196 $ 4,496 $ 27,549 $ 3,680
Other (income)/expense ............ (208) 271 90 (3,271)
Investment expense ................ -- -- 1,018 --
Interest expense .................. 1,539 1,995 5,128 6,559
Interest (income) ................. (601) (1,347) (3,004) (4,059)
Provision for/(benefit from) income
taxes ............................. 1,367 625 6,079 (2,225)
-------- -------- -------- --------
Consolidated net income ........ $ 4,099 $ 2,952 $ 18,238 $ 6,676
======== ======== ======== ========

DECEMBER 31,
2002
------------

Total assets:
Total assets for reportable segments.............................. $ 473,501
Cash and cash equivalents not allocated to business segments...... 163,376
Deferred tax assets............................................... 18,045
---------
Total consolidated assets..................................... $ 654,922
=========

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included in our Annual Report on
Form 10-K for the year ended December 31, 2002 and the condensed consolidated
unaudited financial statements and related notes included elsewhere in this
Report. In addition to disclosing results for the three months and nine months
ended September 30, 2003 and 2002 that are determined in accordance with
United States' Generally Accepted Accounting Principles ("GAAP"), the Company
also discloses non-GAAP financial measures that exclude the effects of
restructuring and related charges recorded in the 2002 period on consolidated
net income available to common stockholders and diluted earnings per share and
on the operating income of its Bioproducts segment. The Company is presenting
non-GAAP financial measures excluding the effects of the restructuring and
related charges because the Company believes it is useful for investors in
assessing the Company's financial results compared to the same period in the
prior year. Within the text, in connection with each non-GAAP financial measure
presented, the Company has presented the most directly comparable financial
measure calculated in accordance with GAAP and has provided a reconciliation of
the differences between the non-GAAP financial measure with its most directly
comparable financial measure calculated and presented in accordance with GAAP.

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, textile, food, and animal feed
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 located
in the United States, Finland, Belgium, China and Argentina. These products are
then marketed to the industrial, consumer and agri-processing markets through
our direct sales organization and other distribution channels. For the year
ended December 31, 2002, we derived approximately 50% of our revenues from our
foreign operations. For the nine months ended September 30, 2003, we derived
approximately 55% of our revenues from foreign operations.

SUMMARY OF RESULTS

For the three months ended September 30, 2003, we reported net income
available to common stockholders of $2.3 million, or $0.04 per diluted share,
compared to net income available to common stockholders of $1.1 million, or
$0.02 per diluted share for the three months ended September 30, 2002. For the
nine months ended September 30, 2003, net income available for common
stockholders was $12.8 million, or $0.21 per diluted share, compared to net
income available to common stockholders of $1.2 million, or $0.02 per diluted
share for the nine months ended September 30, 2002. During the nine months ended
September 30, 2002, we recorded restructuring and related charges of $16.4
million, or $10.4 million on an after-tax basis. Before these charges, we would
have reported net income available to common stockholders of $11.6 million, or
$0.19 per diluted share for the nine months ended September 30, 2002.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2003 and 2002

Revenues. Total revenues for the three-month period ended September 30,
2003 increased $3.6 million, or 4%, to $94.1 million from the three-month period
ended September 30, 2002, due to increases in product revenues.

Product Revenues. Product revenues for the three months ended September 30,
2003 increased $3.9 million, or 4%, to $89.8 million from the three months ended
September 30, 2002. For the three months ended September 30, 2003, unit
volume/mix increased 2% and the impact of foreign currency increased revenues 5%
while average prices fell 3%.

Volume/mix increased primarily in our food, feed and specialties markets, fuel
ethanol markets and textile markets, partially offset by decreases in our
sweetener markets and cleaning markets.

Regionally, North American product revenues for the three months ended
September 30, 2003 decreased $1.3 million, or 3%, to $38.7 million from the
three months ended September 30, 2002, driven primarily by decreased sales to
our cleaning markets, sweetener markets and textile markets, partially offset by
increased sales to our food, feed and specialties markets and fuel ethanol
markets. Product revenues in Europe, Africa and the Middle East for the three
months ended September 30, 2003 increased $4.8 million, or 15%, to $36.3 million
from the three months ended September 30, 2002, driven primarily by increased
sales to our food, feed, and specialties markets, cleaning markets, sweetener
markets and textile markets, partially offset by decreased sales to our fuel
ethanol markets. Our product revenues in the Asia Pacific region increased $0.5
million, or 5%, to $11.6 million for the three months ended September 30, 2003
from the three months ended September 30, 2002 due primarily to increased sales
to our fuel ethanol markets, sweetener markets and cleaning markets, partially
offset by decreased sales to our textiles markets and food, feed, and
specialties markets. Our product revenues in Latin America for the three months
ended September 30, 2003 decreased $0.1 million, or 3%, to $3.2 million from the
three months ended September 30, 2002, primarily due to decreased sales to our
cleaning markets and sweetener markets, partially offset by increased sales to
our textile markets and food, feed, and specialties markets.

Fees and Royalty Revenues. Fees and royalty revenues decreased $0.3
million, or 7%, to $4.3 million for the three months ended September 30, 2003
from the three months ended September 30, 2002, due to decreases in government
funded research revenues partially offset by increases in customer funded
research.

Funded research revenues for the three months ended September 30, 2003
decreased $0.3 million, or 7%, to $4.1 million from the three months ended
September 30, 2002. 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 $0.8 million, to less than $0.1 million for the three months ended
September 30, 2003 from the three months ended September 30, 2002 primarily due
to completion of our agreement with the National Renewable Energy Laboratory to
develop an enzymatic process to convert biomass into bioethanol. Funded research
revenues provided by customers increased $0.5 million, or 14%, to $4.1 million
for the three months ended September 30, 2003 from the three months ended
September 30, 2002, primarily driven by funding from our strategic alliance with
the Dow Corning Corporation.

Royalty revenues are based on the sales of customers' products produced
using our technology. These royalty payments were $0.2 million for the three
months ended September 30, 2003 and September 30, 2002. There were no license
fees for the three months ended September 30, 2003 and September 30, 2002.

Operating Expenses

Cost of Products Sold. Cost of products sold increased $1.8 million, or 4%,
to $52.1 million for the three months ended September 30, 2003 from the three
months ended September 30, 2002. Our expanded sales volume/mix increased costs
by $2.6 million, along with a $2.6 million increase due to the impact of the
U.S. Dollar against foreign currencies, primarily the Euro. These increases in
costs were offset by lower unit production costs of $3.4 million.

Gross Profit and Margins from Products Sold. Gross profit from products
sold increased $2.1 million, or 6%, to $37.7 million for the three months ended
September 30, 2003 from the three months ended September 30, 2002. This increase
in gross profit was primarily driven by lower unit production costs of $3.4
million and a $2.0 million favorable impact of the U.S. Dollar against foreign
currencies, primarily the Euro. This net increase in gross profit was partially
offset by the 3% decline in average selling prices. As a result of these
factors, gross margin increased to 42.0% for the three months ended September
30, 2003 from 41.5% for the three months ended September 30, 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 conducted in Palo Alto, California and
Leiden, the Netherlands. These expenses increased $0.9 million, or 5%, to $18.3
million for the three months ended September 30,

2003 from the three months ended September 30, 2002, due primarily to an
increase in personnel-related costs, including salaries, benefits, travel
expenses and other costs of $0.9 million and facilities expense of $0.2 million,
partially offset by a decrease in incentive compensation of $0.2 million. As a
part of total research and development expenses, estimated expenses related to
research collaborations partially funded by customers decreased $1.6 million, or
40%, to $2.4 million for the three months ended September 30, 2003 from the
three months ended September 30, 2002.

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 and business development functions.
These expenses were $8.3 million for the three months ended September 30, 2003
and September 30, 2002. Decreases in incentive compensation costs of $0.7
million were offset by an increase in personnel-related costs, including
salaries, benefits, commissions and travel expenses of $0.7 million.

General and Administrative. General and administrative expenses include the
costs of our corporate executive, finance, information technology, legal, human
resources, and communications functions. These expenses decreased $0.9 million,
or 10%, to $7.9 million for the three months ended September 30, 2003 from the
three months ended September 30, 2002, due primarily to decreases in incentive
compensation of $0.7 million, outside services of $0.6 million and communication
expenses of $0.1 million, partially offset by an increase in personnel-related
costs, including salaries, benefits and travel expenses of $0.6 million.

Amortization of Intangible Assets. We amortize our definite-lived
intangible assets, consisting of patents, licenses, customer lists and other
contractual agreements on a straight-line basis over their estimated useful
lives. Amortization expense was $1.4 million for the three months ended
September 30, 2003 and September 30, 2002.

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 three months ended September 30, 2003 was $0.3 million as
compared with other expense of $0.2 million for the three months ended September
30, 2002. This $0.5 million increase in income was due mainly to Argentine Peso
and Euro-driven currency transaction gains.

Deferred Compensation. We measure deferred compensation for options granted
to employees as the difference between the grant price and the fair value of our
common stock on the date we granted the options. Deferred compensation for
restricted common stock granted to employees is based on the number of granted
restricted shares and the fair market value on the grant date.

In connection with the grant of stock options to employees during 2000,
amortization of deferred compensation expense for the three months ended
September 30, 2002 was $1.8 million, which included the acceleration of deferred
compensation expense related to elimination of all stock-related loans resulting
from the surrender to us of approximately 1.4 million restricted shares by
certain executive officers.

In total, amortization of deferred stock-based compensation expense was
$0.1 million and $2.0 million for the three months ended September 30, 2003 and
2002, respectively, and was reported in our Consolidated Statements of
Operations as follows (in millions):

2003 2002
------ ------

Cost of products sold ...................................... $ -- $ 0.2
Research and development ................................... -- 0.3
Sales, marketing and business development .................. -- 0.7
General and administrative ................................. 0.1 0.8
------ ------
Total amortization of deferred compensation expense ........ $ 0.1 $ 2.0
====== ======

Non Operating Expense and Income

Interest Income. Interest income decreased $0.7 million, or 54%, to $0.6
million for the three months ended September 30, 2003 from the three months
ended September 30, 2002, due mainly to reductions in interest rates and
lower cash balances, as discussed below under the heading "Liquidity and Capital
Resources."

Income Taxes. The effective income tax rate for the three months ended
September 30, 2003 was 25%, compared to 17% for the three months ended September
30, 2002. The effective rate for the three months ended September 30, 2003 is
representative of our most recent assessment of our annual effective income tax
rate. 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 and other items which are not deductible for
tax purposes, and research and experimentation tax credits. In addition, the
estimated effective rate for the three months ended September 30, 2003 includes
the effect of estimated valuation allowances, since we do not have the ability
to carry back or anticipate the ability to carry forward our United States net
operating losses.

Comparison of the Nine Months Ended September 30, 2003 and 2002

Revenues. Total revenues for the nine months ended September 30, 2003
increased $24.2 million, or 9%, to $286.2 million from the nine months ended
September 30, 2002, due to increases in both product revenues and fees and
royalty revenues.

Product Revenues. Product revenues in the nine months ended September 30,
2003 increased $22.7 million, or 9%, to $269.6 million from the nine months
ended September 30, 2002. For the nine months ended September 30, 2003, unit
volume/mix grew 6% along with a positive currency impact of 7%, while average
prices fell 4%. Volume/mix increased in our food, feed, and specialties markets,
fuel ethanol markets, textile markets and sweeteners markets, partially offset
by a decrease in our cleaning markets.

Regionally, North American product revenues for the nine months ended
September 30, 2003 decreased $2.6 million, or 2%, to $115.4 million from the
nine months ended September 30, 2002, driven primarily by a decrease in sales to
our cleaning markets, textile markets and sweetener markets, partially offset by
an increase in sales to our food, feed and specialties markets and fuel ethanol
markets. Product revenues in Europe, Africa and the Middle East for the nine
months ended September 30, 2003 increased $20.5 million, or 23%, to $108.1
million from the nine months ended September 30, 2002, driven primarily by
increased sales to our food, feed and specialties markets, sweetener markets,
cleaning markets, and textile markets, partially offset by a decreased sales in
our fuel ethanol markets. Product revenues in the Asia Pacific region increased
$4.5 million, or 14%, to $36.0 million for the nine months ended September 30,
2003 from the nine months ended September 30, 2002, due mainly to increased
sales to our cleaning markets, sweetener markets, fuel ethanol markets, textile
markets and food, feed and specialties markets. Our product revenues in Latin
America for the nine months ended September 30, 2003 increased $0.2 million, or
2%, to $10.0 million from the nine months ended September 30, 2002, due
primarily to increased sales to our sweetener markets and food, feed and
specialties markets, partially offset by decreased sales to our textile markets
and cleaning markets.

Fees and Royalty Revenues. Fees and royalty revenues increased $1.6
million, or 11%, to $16.6 million for the nine months ended September 30, 2003
from the nine months ended September 30, 2002, due to increases in funded
research revenues and royalties.

Funded research revenues increased $1.2 million, or 9%, to $15.3 million
for the nine months ended September 30, 2003 from the nine months ended
September 30, 2002. 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 increased $0.2
million, or 8%, to $2.8 million for the nine months ended September 30, 2003
from the nine months ended September 30, 2002, primarily due to funding provided
by the National Renewable Energy Laboratory to develop an enzymatic process to
convert biomass into bioethanol. Funded research revenues provided by customers
increased $1.0 million, or 9%, to $12.5 million for the nine months ended
September 30, 2003 from the nine months ended September 30, 2002, primarily
driven by funding from our strategic alliance with the Dow Corning Corporation.

Royalties increased $0.3 million, or 38%, to $1.1 million for the nine
months ended September 30, 2003 from the nine months ended September 30, 2002,
due primarily to the timing of customer royalty payments. License fees increased
$0.1 million to $0.2 million for the nine months ended September 30, 2003 from
the nine months ended September 30, 2002.

Operating Expenses

Cost of Products Sold. Cost of products sold increased $16.2 million, or
12%, to $154.7 million for the nine months ended September 30, 2003 from the
nine months ended September 30, 2002. Our expanded sales volume/mix increased
costs by $10.6 million, along with increases of $10.2 million due to the impact
of the U.S. Dollar against foreign currencies, primarily the Euro. These
increases were partially offset by lower unit production costs of $4.6 million.

Gross Profit and Margins from Products Sold. Gross profit from products
sold increased $6.5 million, or 6%, to $114.9 million for the nine months ended
September 30, 2003 from the nine months ended September 30, 2002. This increase
in gross profit was primarily driven by a $7.0 million favorable impact of the
U.S. Dollar against foreign currencies, primarily the Euro, lower unit
production costs of $4.6 million and the sales volume/mix increase of 6%. These
increases were partially offset by the 4% decline in average selling prices.
As a result of these factors however, gross margin on product revenue decreased
to 42.6% for the nine months ended September 30, 2003 from 43.9% for the nine
months ended September 30, 2002, primarily driven by the impact of lower
average selling prices.

Research and Development. Research and development expenses increased $1.3
million, or 3%, to $51.6 million for the nine months ended September 30, 2003
from the nine months ended September 30, 2002, primarily due to increases in
personnel-related costs, including salaries, benefits and travel expenses of
$3.7 million and facility costs of $0.2 million, partially offset by decreases
in outside services of $2.0 million, incentive compensation of $0.3 million and
supply costs of $0.6 million. As a part of total research and development
expenses, estimated expenses related to research collaborations partially funded
by customers decreased $2.8 million, or 24%, to $8.8 million for the nine months
ended September 30, 2003 from the nine months ended September 30, 2002.

Sales, Marketing and Business Development. Sales, marketing and business
development expenses decreased $0.1 million to $23.9 million for the nine months
ended September 30, 2003 from the nine months ended September 30, 2002,
primarily due to decreases in incentive compensation of $1.2 million and outside
services of $0.3 million, partially offset by an increase in personnel-related
costs, including salaries, benefits, commissions and travel expenses of $1.4
million.

General and Administrative. General and administrative expenses decreased
$1.4 million, or 6%, to $23.7 million for the nine months ended September 30,
2003 from the nine months ended September 30, 2002, due primarily to decreases
in outside services of $2.2 million, incentive compensation of $0.9 million and
advertising and promotions of $0.4 million, partially offset by an increase in
personnel-related costs, including salaries, benefits, and travel expenses of
$2.1 million.

Amortization of Intangible Assets. Amortization expense increased $0.3
million, or 8%, to $4.3 million for the nine months ended September 30, 2003
from the nine months ended September 30, 2002, primarily due to additional
amortization of newly acquired intangible assets.

Other Expense and Income. Other expense for the nine months ended September
30, 2003 was $0.4 million as compared to $3.3 million of other income for the
nine months ended September 30, 2002. This difference in income of $3.7 million
was primarily due to Argentine Peso and Euro-driven foreign currency transaction
gains during the nine months ended September 30, 2002.

On June 6, 2003, we granted 0.05 million shares of restricted common stock
to certain executive officers. These restricted shares were granted at fair
market value at the date of grant and the restrictions on these awards expire
three years from the date of grant. Deferred compensation expense of $0.7
million was recorded in connection with these awards and was determined based on
the number of granted restricted shares and the 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 awards.

In connection with the grant of stock options to employees during 2000,
amortization of deferred compensation expense for the nine months ended
September 30, 2002 was $3.2 million, which included the acceleration of deferred
compensation expense related to elimination of all stock-related loans resulting
from the surrender to us of approximately 1.4 million restricted shares by
certain executive officers.

In total, amortization of deferred stock-based compensation expense was
$0.7 million and $3.6 million for the nine months ended September 30, 2003 and
2002, respectively, and was reported in our Consolidated Statements of
Operations as follows (in millions):

2003 2002
------ ------

Cost of products sold ...................................... $ -- $ 0.3
Research and development ................................... 0.3 0.7
Sales, marketing and business development .................. 0.1 1.4
General and administrative ................................. 0.3 1.2
------ ------
Total amortization of deferred compensation expense ........ $ 0.7 $ 3.6
====== ======

Non Operating Expense and Income

Investment Expense. We recorded an investment loss of $1.0 million in the
nine months ended September 30, 2003, as a result of our assessment of an "other
than temporary" decline in the fair market value of an investment in certain
common stock. There was no such investment income or loss in the nine months
ended September 30, 2002.

Interest Income. Interest income decreased $1.1 million, or 27%, to $3.0
million for the nine months ended September 30, 2003 from the nine months ended
September 30, 2002 due mainly to the reduction of interest received associated
with our lower cash balances, discussed below under the heading "Liquidity and
Capital Resources."

Income Taxes. The effective income tax rate for the nine months ended
September 30, 2003 was a 25% tax expense, compared to a 50% tax benefit for the
nine months ended September 30, 2002. 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 and other items which are not deductible for tax purposes, and
research and experimentation tax credits. In addition, the estimated annual
effective rate for the nine months ended September 30, 2003 includes the effect
of estimated valuation allowances, since we do not have the ability to carry
back or anticipate the ability to carry forward our United States net operating
losses. The effective rate for the nine months ended September 30, 2002 was
driven by anticipated annual tax benefits from operating losses in high tax
jurisdictions, partially offset by taxes on operating income generated in low
tax jurisdictions. The rate for the nine months ended September 30, 2002 also
included the effect of the restructuring and related charges. The tax benefit
related to these restructuring and related charges was approximately $6.1
million for the nine months ended September 30, 2002.

FINANCIAL RESULTS BY SEGMENT

During the three months ended March 31, 2003, we modified our managerial
financial reporting to provide information that aligns with the two-segment
structure of Bioproducts and Health Care. Accordingly, we have provided
historical financial data in this new financial segment-reporting format for the
three months and the nine months ended September 30, 2003 and 2002.

The Bioproducts segment develops and delivers products and services for the
industrial, consumer and agri-processing markets to a global customer base. All
of our current product revenues are derived from this segment. For the three
months ended September 30, 2003, the Bioproducts segment achieved operating
income of $15.4 million as compared to an operating income of $15.0 million for
the three months ended September 30, 2002. For the nine months ended September
30, 2003, the Bioproducts segment achieved operating income of $52.2 million as
compared to an operating income of $33.6 million for the nine months ended
September 30, 2002. For the nine months ended September 30, 2002, Bioproducts
recorded restructuring and related costs of $16.4 million. Before these
restructuring and related charges, the segment would have reported operating
income of $50.0 million for the nine months ended September 30, 2002.

The Health Care segment is primarily engaged in the performance of research
and development, securing intellectual property and the establishment of
strategic investments and collaborations in support of our product objectives in
the health care market. For the three months ended September 30, 2003, the
Health Care segment experienced an operating loss of $9.2 million as compared to
an operating loss of $10.5 million for the three months ended September 30,
2002. For the nine months ended September 30, 2003, the Health Care segment
experienced an operating loss of $24.6 million as compared to an operating loss
of $29.9 million for the nine months ended September 30, 2002.

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
included technology, product lines and personnel. The acquisition expanded 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 were consolidated with our results of operations beginning
January 1, 2003.

According to our preliminary allocation of the purchase price on December
31, 2002, the $8.9 million consists solely of intangible assets. Due to the
effect of foreign currency translation, additional acquisition costs and the
sale of certain acquired assets, the carrying costs of these intangible assets
are $8.8 million at September 30, 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 by the end of 2003.

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, we engaged in a plan to restructure our overall supply infrastructure by
ceasing operations at our Elkhart, Indiana plant and downsizing our Argentine
facilities. As a result of the plan, restructuring and related charges of $16.4
million were recorded in our operating earnings for the nine months ended
September 30, 2002. This restructuring was completed during 2002.

WAREHOUSE INVENTORY LOSS

During the three months ended June 30, 2003, we sustained damage to our
finished bioproducts inventory as a result of an accident in a third party
warehouse in Rotterdam, the Netherlands. At that time, we reduced our
inventories by $7.5 million to reflect the estimated amount of product that was
lost and recorded $1.0 million of other costs incurred as a result of the
accident in other current assets as a receivable from our insurer. During the
three months ended September 30, 2003, we reduced our estimate of the inventory
loss by $0.2 million and recognized an additional $2.0 million in costs
associated with the accident as an additional receivable in other current
assets. Certain reduced profits and additional costs, such as production
inefficiencies, additional freight and use of overtime are reflected in the
results of operations during the nine months ended September 30, 2003. While we
believe that these reduced profits and additional costs will be subject to
insurance recovery, we are unable to estimate the ultimate recovery at this
time. As of September 30, 2003, we have received $2.1 million from our insurer.

LIQUIDITY AND CAPITAL RESOURCES

Our funding needs consist primarily of capital expenditures, research and
development activities, sales and marketing expenses, and general corporate
purposes. We have financed our operations primarily through cash from the sale
of products, the sale of stock, research and development funding from partners,
government grants, and short-term and long-term borrowings.

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 lines of credit, will satisfy our funding needs over the
next twelve months. Factors that could negatively impact our cash position
include, but are not limited to, future levels of product revenues, fees and
royalty revenues, expense levels, capital expenditures, acquisitions, and
foreign currency exchange rate fluctuations.

As of September 30, 2003, cash and cash equivalents totaled $157.1 million.
The funds were invested in short-term instruments, including A-1/P1 and A-2/P2
rated commercial paper, AAA and AA rated medium term notes, institutional money
market funds, auction rate preferred securities and bank deposits.

Cash provided by operations was $21.6 million and $27.1 million for the
nine months ended September 30, 2003 and 2002, respectively. The decrease of
$5.5 million in 2003 from 2002 was generated principally by increases in
operating earnings, net of non-cash items such as depreciation and amortization,
offset by changes in operating assets and liabilities.

Cash used in investing activities was $17.5 million and $50.6 million for
the nine months ended September 30, 2003 and 2002, respectively. This decrease
of $33.1 million was driven primarily by the EBS acquisition of $35.8 million
and the equity investment in Seattle Genetics, Inc. of $3.0 million during the
nine months ended September 30, 2002. Cash used in investing activities for the
nine months ended September 30, 2003 included $1.1 million in proceeds from the
sale of certain acquired assets as discussed above in Acquisitions. Capital
expenditures for the nine months ended September 30, 2003 were $18.6 million in
2003 compared with $11.9 million in 2002. A significant portion of the capital
spending included process improvement projects at our manufacturing and research
and development facilities and information technology enhancements, as well as
the construction of our Rochester, New York facility for the clinical scale
manufacturing of human therapeutic proteins. During the three months ended
September 30, 2003, we completed construction of the facility. Equipment
installation and facility start-up and validation are currently under way.

Cash used in financing activities was $22.4 million and $26.8 million for
the nine months ended September 30, 2003 and 2002, respectively. This decrease
of $4.4 million was primarily driven by proceeds received from the exercise of
stock options during the nine months ended September 30, 2003. While we are
permitted to pay dividends to our common stockholders, we currently intend to
utilize our resources 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 September 30, 2003, we had a $40.0 million revolving credit facility with
a syndicate of banks which is available for general corporate purposes. The
facility makes available to us $40.0 million of committed borrowings and carries
fees of 0.35% on the amount of unborrowed principal under the credit agreement.
As of September 30, 2003, there were no borrowings under this facility, which is
scheduled to expire on January 31, 2004. We currently intend to renew or replace
this committed 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 $84.0 million. Annual installment payments of $28.0 million commenced
on March 30, 2002. We are currently in compliance with the financial covenants
included in the senior note agreement.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends SFAS No. 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS No.
133, (2) in connection with other FASB projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative. This Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. All provisions of this
Statement are to be applied prospectively. We have applied the provisions of
this statement as of July 1, 2003. The adoption of SFAS No. 149 has had no
material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how we classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
that we classify a financial instrument within its scope as a liability. Some of
the provisions of this Statement are consistent with the current definition of
liabilities in FASB Concepts Statement No. 6, "Elements of Financial
Statements." The remaining provisions of this Statement are consistent with the
FASB's proposal to revise that definition to encompass certain obligations that
a reporting entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between the holder and
the issuer. This Statement is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at

the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 has had no material impact on our financial position or
results of operations.

MARKET RISK

Foreign currency risk and interest rate risk are the primary sources of our
market risk. Foreign operations, mainly denominated in Euros, accounted for
approximately 55% of our revenues for the nine months ended September 30, 2003.
We believe that we mitigate this risk by locating our manufacturing facilities
so that a significant portion of our 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 positions in assets and liabilities where deemed
appropriate. We do not use these instruments for speculative purposes. We
recorded a gain of $0.1 million in the statement of operations for the nine
months ended September 30, 2003 from foreign currency contracts.

As of September 30, 2003, cash and cash equivalents totaled $157.1
million. Of this amount, $63.9 million was denominated in Euros. The remainder,
or $93.2 million, was primarily denominated in U.S. Dollars. Short-term debt was
mainly comprised of our third installment of $28.0 million due March 30, 2004
under our 6.82% senior notes discussed under the heading "Liquidity and Capital
Resources" in this Report and $8.0 million of short-term debt held by our
Chinese affiliate. We expect to refinance all of the debt held by our Chinese
affiliate. 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.
The $84.0 million 6.82% senior notes outstanding at September 30, 2003 mature
evenly in installments of $28.0 million per year. Annual installment payments
commenced March 30, 2002.

Foreign Currency Exposure

We conduct business throughout the world. During the nine months ended
September 30, 2003, we derived approximately 55% of our revenues from foreign
operations, and these foreign operations generated income that offset net losses
in our U.S. operations during the same nine month period. Economic conditions in
countries where we conduct business and changing foreign currency exchange rates
affect our financial position and results of operations. We are exposed to
changes in foreign exchange rates in Europe, Latin America, and Asia. The Euro
and Argentine Peso present 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. Our manufacturing and
administrative operations for Latin America are located in Argentina. A
significant part of our Latin American revenues are denominated in U.S. Dollars.
Net foreign exchange losses from U.S. Dollar/Euro and U.S. Dollar/ Argentine
Peso transactions were $0.2 million for the nine months ended September 30,
2003.

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 $0.1 million in the statement of operations
for the nine months ended September 30, 2003 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.

RISK FACTORS

If any of the following risks actually occur, they could harm our business,
financial condition, results of operations and or our cash flows.

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 continue to invest significant
amounts into 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:

o 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;

o The product may fail to receive necessary governmental and regulatory
approvals, or the government may delay regulatory approvals significantly;

o The product may not be economically viable because of manufacturing costs
or other factors;

o The product may not gain acceptance in the marketplace; or

o The proprietary rights of others or competing products or technologies for
the same application may preclude us from commercializing the product.

o 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:

o We fail to meet our agreed upon research and development objectives;

o We disagree with our strategic partners over material terms of the
alliances, such as intellectual property or manufacturing rights; or

o 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 decreased
volume with Unilever N.V. will cause another buyer to qualify as one of our five
largest customers for 2003.

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 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 accounted for approximately 34% of
total 2002 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:

o Difficulties and costs associated with staffing and managing foreign
operations;

o Unexpected changes in regulatory requirements;

o Difficulties of compliance with a wide variety of foreign laws and
regulations;

o Changes in our international distribution network and direct sales forces;

o Political trade restrictions and exchange controls;

o Political, social, or economic unrest including armed conflict and acts of
terrorism;

o Labor disputes including work stoppages, strikes and embargoes;

o Inadequate and unreliable services and infrastructure;

o Import or export licensing or permit requirements; and

o 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% of 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:

o Developments in our relationships with current or future strategic
partners;

o Conditions or trends in the biotechnology industry;

o Announcements of technological innovations or new products by us or our
competitors;

o Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;

o Developments in patent or other intellectual proprietary rights or
announcements relating to these matters;

o Investor concern regarding the public acceptance of the safety of
biotechnology products or announcements relating to these matters;

o Litigation or governmental proceedings or announcements relating to these
matters;

o Economic and other external factors or other disaster or crisis;

o Future royalties from product sales, if any, by our licensees;

o Sales of our common stock or other securities in the open market; and

o 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:

o The ability and willingness of strategic partners to commercialize products
derived from our technology or containing our products on expected
timelines;

o Our ability to successfully commercialize products developed independently
and the rate of adoption of such products;

o 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

o 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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information presented in Item 2 of Part I of this Report on Form 10-Q
under the heading "Market Risk" is hereby incorporated by reference.

ITEM 4. CONTROLS AND PROCEDURES

Quarterly Evaluation of the Company's Disclosure Controls and Internal Controls

As of the end of the period covered by 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 Chairman, 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 (Disclosure
Controls) pursuant to Securities and Exchange Commission Rule 13a-15 under the
Securities Exchange Act of 1934 (Exchange Act). 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 changes in the
Company's internal control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

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 Exchange Act such as this Quarterly 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 the
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 II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Nothing to report

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The information presented in Item 2 of Part I of this Report on Form
10-Q under the heading "Liquidity and Capital Resources" is hereby incorporated
by reference. The Company's Registration Statement on Form S-1 (Registration No.
333-36452) was effective as of July 27, 2000.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Nothing to report

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Nothing to report

ITEM 5. OTHER INFORMATION

Nothing to report

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS

(10) Material Contracts
10.1 Letter agreement, dated February 11, 2003, between
Dow Corning Corporation and the Company

(31) Rule 13a-14(a)/15d-14(a) Certifications
31.1 Rule 13a-14(a)/15d-14(a) Certifications

(32) Section 1350 Certifications
32.1 Section 1350 Certifications

B. REPORTS ON FORM 8-K

On July 31, 2003 the Company filed a Current Report on Form 8-K
regarding its press release concerning financial results for the three
months and six months ended June 30, 2003. The report included condensed
financial statements and other financial information.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

GENENCOR INTERNATIONAL, INC.

November 12, 2003 By: /s/ Raymond J. Land
--------------------------- ------------------------------------
Date
Raymond J. Land
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)

November 12, 2003 By: /s/ Darryl L. Canfield
--------------------------- ------------------------------------
Date
Darryl L. Canfield
Vice President and Corporate Controller
(Chief Accounting Officer)

EXHIBIT INDEX

(10) Material Contracts
10.1 Letter agreement, dated February 11, 2003, between Dow Corning Corporation and the Company

(31) Rule 13a-14(a)/15d-14(a) Certifications
31.1 Rule 13a-14(a)/15d-14(a) Certifications

(32) Section 1350 Certifications
32.1 Section 1350 Certifications