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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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO______________
COMMISSION FILE NUMBER 000-31167
GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 16-1362385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 846-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT(s), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS
YES [ X ] NO [ ]
INDICATE 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 APRIL 30, 2003
COMMON STOCK, PAR VALUE $0.01 PER SHARE 58,592,244
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets as of March 31, 2003 and December 31, 2002.................. 4
Condensed Consolidated Unaudited Statements of Operations for the three months ended
March 31, 2003 and 2002..................................................................................... 5
Condensed Consolidated Unaudited Statements of Cash Flows for the three months ended
March 31, 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.................................................. 25
Item 4. Controls and Procedures..................................................................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 25
Item 2. Changes in Securities and Use of Proceeds................................................................... 26
Item 3. Defaults Upon Senior Securities............................................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 26
Item 5. Other Information........................................................................................... 26
Item 6. Exhibits and Reports on Form 8-K............................................................................ 26
SIGNATURES............................................................................................................... 27
CERTIFICATIONS........................................................................................................... 28
INDEX to EXHIBITS........................................................................................................ 30
2
This Report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. These include statements concerning
plans, objectives, goals, strategies, future events or performance and all other
statements which are other than statements of historical fact, including without
limitation, statements containing the words "believes," "anticipates,"
"expects," "estimates," "projects," "will," "may," "might" and words of a
similar nature. The forward-looking statements contained in this Report reflect
the Company's current beliefs and expectations on the date of this Report.
Actual results, performance or outcomes may differ materially from those
expressed in the forward-looking statements. Some of the important factors
which, in the view of the Company, could cause actual results to differ from
those expressed in the forward-looking statements are discussed in Part I, Item
2 of this Report and in the Company's 2002 Annual Report on Form 10-K. 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.
3
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)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 138,686 $ 169,001
Trade accounts receivable, net ................................................ 60,860 51,576
Inventories.................................................................... 57,064 54,215
Other current assets........................................................... 27,552 27,569
----------- -----------
Total current assets...................................................... 284,162 302,361
Property, plant and equipment, net............................................... 217,462 217,110
Goodwill......................................................................... 29,382 29,384
Intangible assets, net........................................................... 45,354 45,898
Other assets..................................................................... 59,968 60,169
----------- -----------
Total assets.............................................................. $ 636,328 $ 654,922
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................................. $ 8,033 $ 7,942
Current maturities of long-term debt........................................... 28,291 28,291
Accounts payable and accrued expenses.......................................... 45,249 47,549
Other current liabilities...................................................... 10,619 15,536
----------- -----------
Total current liabilities................................................. 92,192 99,318
Long-term debt................................................................... 56,852 84,897
Other long-term liabilities...................................................... 35,406 32,700
----------- -----------
Total liabilities......................................................... 184,450 216,915
----------- -----------
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par value, authorized
1 shares, 1 shares issued and outstanding................................... 171,569 169,750
----------- -----------
Stockholders' equity:
Common stock, par value $0.01 per share, 200,000 shares authorized, 60,357
and 60,251 shares issued at
March 31, 2003 and December 31, 2002, respectively.......................... 603 602
Additional paid-in capital..................................................... 350,474 349,579
Treasury stock, 1,780 shares at cost at March 31, 2003 and
December 31, 2002........................................................... (21,030) (21,030)
Deferred stock-based compensation.............................................. (865) (1,164)
Accumulated deficit............................................................ (10,243) (14,944)
Accumulated other comprehensive loss........................................... (38,630) (44,786)
----------- -----------
Total stockholders' equity................................................ 280,309 268,257
----------- -----------
Total liabilities, redeemable preferred stock and stockholders' equity.... $ 636,328 $ 654,922
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
4
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
Revenues:
Product revenue ............................ $ 90,038 $ 75,548
Fees and royalty revenues .................. 5,623 5,262
-------- --------
Total revenues ........................ 95,661 80,810
Operating expenses:
Cost of products sold ...................... 50,841 42,118
Research and development ................... 16,460 15,632
Sales, marketing and business development .. 7,699 7,142
General and administrative ................. 7,801 8,032
Amortization of intangible assets .......... 1,392 1,307
Restructuring and related charges .......... -- 16,294
Other expense/(income) ..................... 705 (1,347)
-------- --------
Total operating expenses .............. 84,898 89,178
-------- --------
Operating income/(loss) ...................... 10,763 (8,368)
Non operating expenses/(income):
Interest expense ........................... 2,020 2,520
Interest income ............................ (845) (1,401)
-------- --------
Total non operating expense/(income) .. 1,175 1,119
-------- --------
Income/(loss) before income taxes ............ 9,588 (9,487)
Provision for/(benefit from) income taxes .... 3,068 (8,428)
-------- --------
Net income/(loss) ............................ $ 6,520 $ (1,059)
======== ========
Net income available/(loss applicable) to
holders of common stock .................... $ 4,701 $ (2,878)
======== ========
Earnings/(loss) per common share:
Basic ................................. $ 0.08 $ (0.05)
======== ========
Diluted ............................... $ 0.08 $ (0.05)
======== ========
Weighted average common shares:
Basic ................................. 58,499 59,596
======== ========
Diluted ............................... 58,799 60,057
======== ========
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
5
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income/(loss) .................................. $ 6,520 $ (1,059)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation and amortization .................. 8,760 7,954
Amortization of deferred stock-based
compensation ................................. 299 863
Non-cash portion of restructuring and related
charges ...................................... -- 9,225
(Increase) decrease in operating assets:
Trade accounts receivable ................... (7,875) 1,071
Inventories ................................. (1,569) (2,048)
Other assets ................................ 248 (6,531)
Decrease in operating liabilities:
Accounts payable and accrued expenses ....... (3,173) (5,158)
Other liabilities ........................... (3,431) (3,309)
--------- ---------
Net cash (used in)/provided by operating
activities ................................ (221) 1,008
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ......... (4,548) (2,346)
Purchases of intangible assets ..................... -- (100)
Payment to acquire equity securities ............... -- (3,000)
Acquisition of business, net of cash acquired ...... -- (35,809)
--------- ---------
Net cash used in investing activities ....... (4,548) (41,255)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ............ 164 57
Proceeds from employee stock purchase plan ......... 345 393
Proceeds from/(payments on) notes of foreign
affiliate ........................................ 91 (143)
Payment of long-term debt .......................... (28,061) (28,037)
--------- ---------
Net cash used in financing activities ....... (27,461) (27,730)
--------- ---------
Effect of exchange rate changes on cash .............. 1,915 (1,943)
--------- ---------
Net decrease in cash and cash equivalents ............ (30,315) (69,920)
Cash and cash equivalents -- beginning of period ..... 169,001 215,023
--------- ---------
Cash and cash equivalents -- end of period ........... $ 138,686 $ 145,103
========= =========
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
6
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 June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that obligations associated with the
retirement of a tangible long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an asset retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted the provisions of
SFAS No. 143 as of January 1, 2003, and there was no impact for the period ended
March 31, 2003.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 does not permit the use of the original SFAS No. 123
prospective method of transition for changes to the fair value based method made
in fiscal years after December 15, 2003. The Company currently applies the
intrinsic value method and has no plans to convert to the fair value method.
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/(loss applicable) to holders of common stock,
undeclared and unpaid dividends on redeemable preferred stock of $1,819 were
deducted from net income/(loss) for each quarter presented.
Diluted earnings/(loss) 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/(loss applicable) to
holders of common stock of the Company. As a result of stock options outstanding
under the Company's 2002 Omnibus Incentive Plan, successor to the Company's
Stock Option and Stock Appreciation Right Plan, there were dilutive securities
for the three months ended March 31, 2003 and 2002. The weighted-average impact
of these has been reflected in the calculation of diluted earnings/(loss) per
common share for the respective periods presented.
7
The following table reflects the calculation of basic and diluted
earnings/(loss) per common share for the three months ended March 31:
2003 2002
-------- --------
Net income/(loss) ............................. $ 6,520 $ (1,059)
Less: Accrued dividends on preferred stock .. (1,819) (1,819)
-------- --------
Net income available/(loss applicable)
to holders of common stock .................. $ 4,701 $ (2,878)
======== ========
Weighted average common shares:
Basic ....................................... 58,499 59,596
Effect of stock options ..................... 300 461
-------- --------
Diluted ..................................... 58,799 60,057
======== ========
Earnings/(loss) per common share:
Basic ....................................... $ 0.08 $ (0.05)
======== ========
Diluted ..................................... $ 0.08 $ (0.05)
======== ========
4 -- STOCK-BASED COMPENSATION
As discussed in Note 2 above, the Company adopted the provisions of SFAS No.
148. 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/(loss) and earnings/(loss) per share would have
been reduced to the pro forma amounts shown below:
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Net income available/(loss applicable)
to holders of common stock as reported ................ $ 4,701 $ (2,878)
Add: Stock-based employee compensation expense
included in reported net income available
/(loss applicable), net of related tax ................ 162 320
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effect ................. (1,300) (938)
--------- ---------
Pro forma net income available/(loss applicable) ......... $ 3,563 $ (3,496)
========= =========
Earnings/(loss) per common share:
Basic - as reported .................................... $ 0.08 $ (0.05)
Basic - pro forma ...................................... $ 0.06 $ (0.06)
Diluted - as reported .................................. $ 0.08 $ (0.05)
Diluted - pro forma .................................... $ 0.06 $ (0.06)
The pro forma figures in the preceding table may not be representative of pro
forma amounts in future quarters.
8
5 -- INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Raw materials.......................... $ 8,315 $ 8,373
Work-in-progress....................... 8,204 8,003
Finished goods......................... 40,545 37,839
---------- ---------
Inventories.......................... $ 57,064 $ 54,215
========== =========
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 March 31, 2003:
INTANGIBLE ASSETS GOODWILL
--------------------------------------------------- ------------
OTHER
AMORTIZABLE
TECHNOLOGY ASSETS TOTAL
-------------- --------------- --------------
Balances, December 31, 2002....... $ 15,617 $ 65,429 $ 81,046 $ 29,384
Foreign currency translation... - 1,123 1,123 (2)
----------- --------- ----------- ----------
Balances, March 31, 2003.......... $ 15,617 66,552 82,169 $ 29,382
=========== ==========
Less: Accumulated
amortization................... (36,815) (36,815)
--------- -----------
Intangible assets, net......... $ 29,737 $ 45,354
========= ===========
In conjunction with the acquisition discussed in Note 9, 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
intangible assets as of December 31, 2002 and will be segregated among the major
classes once the Company completes its allocation of the purchase price. There
were no intangible assets acquired during the three months ended March 31, 2003.
Estimated fiscal year amortization expense is as follows:
2003.................................................... $ 4,700
2004.................................................... 3,000
2005.................................................... 2,500
2006.................................................... 2,100
2007.................................................... 1,200
9
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 ....... 7,368 (1,212) -- 6,156
-------- -------- -------- --------
Balances, March 31, 2003 ...... $(31,832) $ (4,675) $ 2,123) $(38,630)
======== ======== ======== ========
The change in the marketable securities valuation adjustment for the three
months ended March 31, 2003, of $1,212, ($1,652 pre-tax) relates to unrealized
holding losses on the Company's available-for-sale securities.
8 -- INCOME TAXES
The effective income tax rate for the three months ended March 31, 2003 was a
32% tax expense, compared to an 89% tax benefit for the three months ended March
31, 2002, which reflects the Company's assessment of its annual effective
income tax rate. Factors affecting the Company's estimated annual effective
income tax rate include increased research and development expenditures in the
United States, the statutory income tax rates and mix of earnings among tax
jurisdictions, amortization of certain intangible assets and other items which
are not deductible for tax purposes, and research and experimentation tax
credits. In addition, the estimated annual effective rate in the three months
ended March 31, 2003 included the effect of estimated valuation allowances,
since the Company did not have the ability to carry back or anticipate the
ability to carry forward its United States net operating losses. The effective
rate for the three months ended March 31, 2002 included the effect of
restructuring and related charges. Accordingly, the tax benefit related to the
restructuring and related charges of approximately $6,000 was recorded in the
first quarter of 2002. During both periods, the Company was subject to a tax
ruling in the Netherlands that reduces the local effective income tax rate from
35.0% to 17.5%. This ruling will expire in 2005.
9 -- 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 the intangible assets are $9,264 at March
31, 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
during 2003.
10 -- 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 $16,294 were recorded in the
Company's operating earnings in the three months ended March 31, 2002. This
restructuring was completed during 2002.
10
11 -- 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 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 first quarter of 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 quarter ended March 31, 2003 as well as each of the four quarters of 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 Health Care segment is focused on expanding the Company's current
technology and product platforms into the health care market. This segment is
primarily engaged in the performance of research and development, the securing
of intellectual property and the establishment of strategic investments and
collaborations.
The following table provides information by business segment; information by
quarter for 2002 has been restated to reflect the reorganized business segments:
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Consolidated
Bioproducts Health Care Segment Subtotal and Other Totals
- --------------------------------------------------------------------------------------------------------------------------------
Product revenue..................... $ 90,038 $ -- $ 90,038 $ -- $ 90,038
Fees and royalty revenues........... 5,548 75 5,623 -- 5,623
Total revenues...................... 95,586 75 95,661 -- 95,661
Research and development............ 10,320 6,140 16,460 -- 16,460
Operating income/(loss)............. 19,058 (7,906) 11,152 (389) 10,763
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Consolidated
Bioproducts Health Care Segment Subtotal and Other Totals
- --------------------------------------------------------------------------------------------------------------------------------
Product revenue..................... $ 75,548 $ -- $ 75,548 $ -- $ 75,548
Fees and royalty revenues........... 5,187 75 5,262 -- 5,262
Total revenues...................... 80,735 75 80,810 -- 80,810
Research and development............ 8,474 7,158 15,632 -- 15,632
Operating income/(loss)............. (223) (9,722) (9,945) 1,577 (8,368)
11
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Consolidated
Bioproducts Health Care Segment Subtotal and Other Totals
- -----------------------------------------------------------------------------------------------------------------------------------
Product revenue ............ $85,470 $ -- $85,470 $ -- $85,470
Fees and royalty revenues .. 5,162 -- 5,162 -- 5,162
Total revenues ............. 90,632 -- 90,632 -- 90,632
Research and development ... 10,282 7,028 17,310 -- 17,310
Operating income/(loss) .... 18,798 (9,669) 9,129 1,965 11,094
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Consolidated
Bioproducts Health Care Segment 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 THREE MONTHS ENDED DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Consolidated
Bioproducts Health Care Segment Subtotal and Other Totals
- -----------------------------------------------------------------------------------------------------------------------------------
Product revenue ............ $82,388 -- $82,388 $ -- $82,388
Fees and royalty revenues .. 5,751 -- 5,751 -- 5,751
Total revenues ............. 88,139 -- 88,139 -- 88,139
Research and development ... 12,161 7,727 19,888 -- 19,888
Operating income/(loss) .... 11,014 (11,003) 11 300 311
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Consolidated
Bioproducts Health Care Segment 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
12
The following table provides a reconciliation of segment information to total
consolidated information:
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2003 2002 2002 2002 2002
-------- -------- -------- -------- --------
Net income:
Operating income/(loss) for
reportable segment ......... $ 11,152 $ (9,945) $ 9,129 $ 4,496 $ 11
Other (income)/expense ........ 389 (1,577) (1,965) 271 (300)
Investment expense/(income) ... -- -- -- -- 1,500
Interest expense .............. 2,020 2,520 2,044 1,995 2,028
Interest income ............... (845) (1,401) (1,311) (1,347) (1,148)
Provision for/(benefit from)
income taxes ................ 3,068 (8,428) 5,578 625 (1,190)
-------- -------- -------- -------- --------
Consolidated net income .... $ 6,520 $ (1,059) $ 4,783 $ 2,952 $ (879)
======== ======== ======== ======== ========
Total assets: DECEMBER 31,
2002
--------
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
========
13 -- SUBSEQUENT EVENTS
In April 2003, the Financial Accounting Standards Board issued 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 Board 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 will apply the provisions
of this statement as of June 30, 2003. The Company believes that the application
of SFAS No. 149 will not have a material impact on its financial position or
results of operations.
13
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 2002 Annual Report on Form 10-K and
the condensed consolidated unaudited financial statements and related notes
included elsewhere in this report. In addition to disclosing results for the
three months ended March 31, 2003 and 2002 that are determined in accordance
with 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/loss applicable to common stockholders and diluted earnings/loss 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 and textile industries, with the
remainder of our revenues from research funding, fees and royalties. We intend
to apply our proven and proprietary technologies and manufacturing capabilities
to expand sales in our existing markets and address new opportunities in the
health care, agri-processing, industrial, and consumer markets. We have formed,
and plan to continue to form, strategic alliances with market leaders to
collaborate with us to develop and launch products.
We manufacture our products at our eight manufacturing facilities 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 three months ended March 31, 2003, we derived
approximately 60% of our revenues from foreign operations.
SUMMARY OF RESULTS
For the three months ended March 31, 2003, we reported net income available
to common stockholders of $4.7 million, or $0.08 per diluted share, compared to
a net loss applicable to common stockholders of $2.9 million, or a loss of $0.05
per diluted share for the three months ended March 31, 2002. During the three
months ended March 31, 2002, we recorded restructuring and related charges of
$16.3 million, or $10.3 million on an after-tax basis. Before these charges, we
would have reported net income available to common stockholders of $7.4 million,
or $0.12 per diluted share for the three months ended March 31, 2002.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2003 and 2002
Revenues. Total revenues for the three-month period ended March 31, 2003
increased $14.9 million, or 18%, to $95.7 million from the three-month period
ended March 31, 2002, primarily due to an increase in product revenues.
Product Revenues. Product revenues for the three months ended March 31, 2003
increased $14.5 million, or 19%, to $90.0 million from the three months ended
March 31, 2002. For the three months ended March 31, 2003, unit volume/mix
increased 15% and the impact of foreign currency increased 8% while average
prices fell 4%. Volume/mix increased primarily in our agri-processing markets,
textile markets, and through protease enzyme sales to a major customer,
partially offset by a decrease in sales to another major customer.
14
Regionally, North American product revenues for the three months ended March
31, 2003 increased $1.4 million, or 4%, to $37.6 million from the three months
ended March 31, 2002, driven primarily by sales to our agri-processing markets,
partially offset by decreased sales to our cleaning and fabric care markets.
Product revenues in Europe, Africa and the Middle East for the three months
ended March 31, 2003 increased $8.1 million, or 29%, to $35.9 million from the
three months ended March 31, 2002, driven primarily by increased sales to our
agri-processing markets and protease enzyme sales to a major customer, partially
offset by decreased sales to our cleaning and fabric care markets. Our product
revenues in the Asia Pacific region increased $4.3 million, or 48%, to $13.2
million for three months ended March 31, 2003 from the three months ended March
31, 2002 due to increased sales to our cleaning and fabric care markets,
agri-processing markets and protease enzyme sales to a major customer. Our
product revenues in Latin America for the three months ended March 31, 2003
increased $0.7 million, or 27%, to $3.3 million from the three months ended
March 31, 2002, primarily due to increased sales to our agri-processing markets,
partially offset by decreased sales to our cleaning and fabric care markets.
Fees and Royalty Revenues. Fees and royalty revenues increased $0.3 million,
or 6%, to $5.6 million, for the three months ended March 31, 2003 from the three
months ended March 31, 2002, due to increases in government and customer funded
research.
Funded research revenues for the three months ended March 31, 2003 increased
$0.3 million, or 6%, to $5.1 million from the three months ended March 31, 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 22%, to $1.1 million for the three months ended March
31, 2003 from the three months ended March 31, 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 $0.1 million, or 3%, to $4.0 million for the three months
ended March 31, 2003 from the three months ended March 31, 2002, primarily
driven by funding from our strategic alliance with the Dow Corning Corporation.
Royalties increased $0.1 million, or 25%, to $0.5 million for the three
months ended March 31, 2003 from the three months ended March 31, 2002, due
primarily to the timing of customer royalty payments that are based on the sales
of the customers' products produced using our technology.
Operating Expenses
Cost of Products Sold. Cost of products sold increased $8.7 million, or 21%,
to $50.8 million for the three months ended March 31, 2003 from the three months
ended March 31, 2002. Our expanded sales volume/mix increased costs $4.9 million
along with the sale of higher cost inventories of $0.8 million and increases due
to the impact of the weaker U.S. Dollar against foreign currencies, primarily
the Euro, of $3.0 million.
Gross Profit and Margins from Products Sold. Gross profit from products sold
increased $5.8 million, or 17%, to $39.2 million for the three months ended
March 31, 2003 from the three months ended March 31, 2002. This overall increase
was caused by significant product revenue related factors including a 15%
increase in volume/mix processed through our plants, partially offset by an
average price decline of 4%. This net increase in gross profit was also affected
by a $2.9 million increase due to the impact of the U.S. dollar against foreign
currencies. As a result of these factors however, gross margin on product
revenue decreased to 43.5% in 2003 from 44.2% in 2002, primarily driven by price
reductions and sales of higher cost inventories, partially offset by increases
in sales volume/mix.
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 6%, to $16.5
million for the three months ended March 31, 2003 from the three months ended
March 31, 2002, due primarily to increased personnel-related costs, including
salaries, benefits and travel expenses of $1.7 million, partially offset by a
decrease in outside services of $0.8 million. As a part of total research and
development expenses, estimated expenses related to research collaborations
partially funded by customers decreased $0.7 million, or 18%, to $3.1 million
for the three months ended March 31, 2003 from the three months ended March 31,
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. These expenses increased $0.6 million,
or 8%, to $7.7
15
million for the three months ended March 31, 2003 from the three months ended
March 31, 2002, due primarily to increased personnel-related costs, including
salaries, benefits, commissions and travel expenses of $0.6 million, outside
services of $0.4 million, partially offset by decreases in incentive
compensation of $0.3 million and employee programs of $0.3 million.
General and Administrative. General and administrative expenses include the
costs of our corporate executive, finance, information technology, legal, human
resources, and communications functions. In total, these expenses decreased $0.2
million, or 3%, to $7.8 million for the three months ended March 31, 2003 from
the three months ended March 31, 2002, due primarily to decreases in outside
services of $0.8 million, advertising and promotions costs of approximately $0.2
million and employee programs of $0.1 million, partially offset by increased
personnel-related costs, including salaries, benefits and travel expenses of
$0.9 million.
Amortization of Intangible Assets. We amortize our intangible assets,
consisting of patents, licenses, customer lists and other contractual agreements
on a straight-line basis over their estimated useful lives. Amortization expense
increased $0.1 million, or 7%, to $1.4 million for the three months ended March
31, 2003 from the three months ended March 31, 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 expense for the three months ended March 31, 2003 was $0.7 million as
compared with other income of $1.3 million for the three months ended March 31,
2002. This $2.0 million decrease in income was due mainly to Argentine
peso-driven foreign currency transaction gains during the three months ended
March 31, 2002.
Deferred Compensation. We measure deferred compensation for options granted
to employees as the difference between the grant price and the estimated fair
value of our common stock on the date we granted the options.
Primarily driven by the grant of stock options to employees during 2000,
amortization of deferred stock-based compensation expense was $0.3 million and
$0.9 million for the three months ended March 31, 2003 and 2002, respectively,
and was reported in our Consolidated Statement of Operations as follows (in
millions):
2003 2002
------- -------
Cost of products sold .................................. $ - $ 0.1
Research and development ............................... 0.1 0.2
Sales, marketing and business development .............. -- 0.4
General and administrative ............................. 0.2 0.2
------- -------
Total amortization of deferred compensation expense .... $ 0.3 $ 0.9
======= =======
Non Operating Expense and Income
Interest Income. Interest income decreased $0.6 million, or 43%, to $0.8
million for the three months ended March 31, 2003 from the three months ended
March 31, 2002 due mainly to lower cash balances and lower interest rates.
Income Taxes. The effective income tax rate for the three months ended March
31, 2003 was a 32% tax expense, compared to an 89% tax benefit for the three
months ended March 31, 2002, which reflects our assessment of the annual
effective income tax rate. Factors affecting our estimated annual effective
income tax rate include increased research and development expenditures in the
United States, the statutory income tax rates and mix of earnings among tax
jurisdictions, amortization of certain intangible assets and other items which
are not deductible for tax purposes, and research and experimentation tax
credits. In addition, the estimated annual effective rate in the three months
ended March 31, 2003 included the effect of estimated valuation allowances,
since we did 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
three months ended March 31, 2002 included the effect of restructuring and
related charges. Accordingly, the tax benefit related to the restructuring and
related charges of approximately $6.0 million was recorded in the first quarter
of 2002. During both periods, we were subject to a tax ruling in the Netherlands
that reduces the local effective income tax rate from 35.0% to 17.5%. This
ruling will expire in 2005.
16
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 provided historical
financial data in this new financial segment-reporting format for the three
months ended March 31, 2003 as well as for each of the four quarters of 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 March 31, 2003, the Bioproducts segment achieved operating income
of $19.1 million as compared to an operating loss of $0.2 million for the three
months ended March 31, 2002. For the three months ended March 31, 2002,
Bioproducts recorded restructuring and related costs of $16.3 million. Before
these restructuring and related charges, the segment would have reported
operating income of $16.1 million for the three months ended March 31, 2002.
The Health Care segment is focused on expanding our current technology and
product platforms into the health care market. This segment is primarily engaged
in the performance of research and development, the securing of intellectual
property and the establishment of strategic investments and collaborations. For
the three months ended March 31, 2003, the Health Care segment experienced an
operating loss of $7.9 million as compared to an operating loss of $9.7 million
for the three months ended March 31, 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 the intangible assets were $9.3 million at March
31, 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 during 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 $16.3
million were recorded in our operating earnings in the three months ended March
31, 2002. This restructuring was completed during 2002.
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.
17
As of March 31, 2003, cash and cash equivalents totaled $138.7 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 used in operations was $0.2 million for the three months ended March 31,
2003 and cash provided by operations was $1.0 million for the three months ended
March 31, 2002. The decrease of $1.2 million in 2003 from 2002 was generated
principally by operating income, net of non-cash items such as depreciation and
amortization, and changes in operating assets and liabilities.
Cash used in investing activities was $4.5 million and $41.3 million for the
three months ended March 31, 2003 and 2002, respectively. This decrease of $36.8
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 three
months ended March 31, 2002. Capital expenditures for the first quarter were
$4.5 million in 2003 compared with $2.3 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. We also continued our construction of a facility for the
clinical-scale manufacture of human therapeutic proteins in Rochester, New York
during the three months ended March 31, 2003.
Cash used in financing activities was $27.5 million and $27.7 million for the
three months ended March 31, 2003 and 2002, respectively. This decrease of $0.2
million was primarily driven by an increase in borrowing by a foreign affiliate.
While we are permitted to pay dividends, we currently intend to retain future
earnings to finance the expansion of our business. Any future determination to
pay cash dividends to our common stockholders will be at the discretion of our
board of directors and will depend upon our financial condition, results of
operations, capital requirements, general business conditions and other factors
that the board of directors may deem relevant, including covenants in our debt
instruments that may limit our ability to declare and pay cash dividends on our
capital stock. Covenants in our senior note agreement restrict the payment of
dividends or other distributions in cash or other property to the extent the
payment puts us in default of these covenants. Such covenants include, but are
not limited to, maintaining a debt to total capitalization of no greater than
55% and a maximum ratio of debt to earnings before interest, taxes, depreciation
and amortization (EBITDA) of 3.5:1.
At March 31, 2003, we had a $40.0 million revolving credit facility with a
syndicate of banks, which is available for general corporate purposes. The
facility, which consists of a credit agreement, makes available to the Company
$40.0 million of committed borrowings, which expires on January 31, 2004. The
facility carries fees of 0.40% on the amount of unborrowed principal under the
agreement. As of March 31, 2003, there were no borrowings under the facility.
Our long-term debt consists primarily of the 6.82% senior notes issued in
1996 to certain institutional investors. The remaining principal amount of these
notes is $84.0 million. Annual installment payments of $28.0 million commenced
on March 30, 2002. We are currently in compliance with all of the material
financial covenants included in the senior note agreement.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires that
obligations associated with the retirement of a tangible long-lived asset be
recorded as a liability when those obligations are incurred, with the amount of
the liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period and
the capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. We adopted the
provisions of SFAS No. 143 as of January 1, 2003 and there was no impact for the
period ended March 31, 2003.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 does not permit the use of
18
the original SFAS No. 123 prospective method of transition for changes to the
fair value based method made in fiscal years after December 15, 2003. We
currently apply the intrinsic value method and have no plans to convert to the
fair value method.
In April 2003, the Financial Accounting Standards Board issued 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 Board 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 will apply the provisions of this
statement as of June 30, 2003. We believe that the application of SFAS No. 149
will not have a 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 60% of our revenues for the three months ended March 31, 2003. We
believe that we mitigate this risk by locating our manufacturing facilities so
that the costs are denominated in the same currency as our product revenues. We
may manage the foreign currency exposures that remain through the use of
foreign currency forward contracts, currency options and off-setting currency
positions in assets and liabilities where deemed appropriate. We do not use
these instruments for speculative purposes. There were no material foreign
currency gains in connection with these types of contracts recorded in the
statement of operations for the three months ended March 31, 2003.
As of March 31, 2003, cash and cash equivalents totaled $138.7 million. Of
this amount, $49.8 million was denominated in Euros. The remainder, or $88.9
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 March 31, 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 three-month period ended
March 31, 2003, we derived approximately 50% of our revenues from foreign
operations, and these foreign operations generated income that offset net losses
in U.S. operations during the same three-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 exchange rates in Europe, Latin America, and Asia. The Euro presents
our most significant foreign currency exposure risk. Changes in foreign currency
exchange rates, especially the strengthening of the U.S. Dollar, may have an
adverse effect on our financial position and results of operations as they are
expressed in U.S. Dollars. The gains from the U.S. Dollar/Euro transactions for
the three months ended March 31, 2003 were not significant.
Our manufacturing and administrative operations for Latin America are located
in Argentina. Due to the fact that a significant part of our Latin American
revenues were denominated in U.S. Dollars, our statement of operations reflected
a $0.5 million foreign currency loss from the remeasurement of related accounts
receivable for the three months ended March 31, 2003.
19
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 less than $0.1 million in the statement of
operations for the three months ended March 31, 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, and/or results of operations.
IF WE FAIL TO DEVELOP PRODUCTS FOR THE HEALTH CARE AND BIOPRODUCTS MARKETS WE
ARE TARGETING, THEN WE MAY NEVER ACHIEVE A RETURN ON OUR RESEARCH AND
DEVELOPMENT EXPENDITURES OR REALIZE PRODUCT REVENUES FROM THESE MARKETS.
A key element of our business strategy is to utilize our technologies for the
development and delivery of new products to the Health Care market and new
segments of the Bioproducts market. We intend to significantly increase our
investment in research and development to develop products for these markets.
The successful development of products is highly uncertain and is dependent on
numerous factors, many of which are beyond our control, and may include the
following:
- - The product may be ineffective or have undesirable side effects in
preliminary and commercial testing or, specifically in the Health Care area,
in preclinical and clinical trials;
- - The product may fail to receive necessary governmental and regulatory
approvals, or the government may delay regulatory approvals significantly;
- - The product may not be economically viable because of manufacturing costs or
other factors;
- - The product may not gain acceptance in the marketplace; or
- - The proprietary rights of others or competing products or technologies for
the same application may preclude us from commercializing the product.
- - Due to these factors we may never achieve a return on our research and
development expenditures or realize product revenues from the Health Care and
new Bioproducts markets that we are targeting.
IF WE FAIL TO ENTER INTO STRATEGIC ALLIANCES WITH PARTNERS IN OUR TARGET MARKETS
OR INDEPENDENTLY RAISE ADDITIONAL CAPITAL, WE WILL NOT HAVE THE RESOURCES
NECESSARY TO CAPITALIZE ON ALL OF THE MARKET OPPORTUNITIES AVAILABLE TO US.
We do not currently possess the resources necessary to independently develop
and commercialize products for all of the market opportunities that may result
from our technologies. We intend to form strategic alliances with industry
leaders in our target markets to gain access to funding for research and
development, expertise in areas we lack and distribution channels. We may fail
to enter into the necessary strategic alliances or fail to commercialize the
products anticipated from the alliances. Our alliances could be harmed if:
- - We fail to meet our agreed upon research and development objectives;
- - We disagree with our strategic partners over material terms of the alliances,
such as intellectual property or manufacturing rights; or
- - Our strategic partners become competitors or enter into agreements with our
competitors.
New strategic alliances that we enter into, if any, may conflict with the
business objectives of our current strategic partners and negatively impact
existing relationships. In addition, to capitalize on the market opportunities
we have identified, we may need to seek additional capital, either through
private or public offerings of debt or equity securities. Due to market and
other conditions beyond our control, we may not be able to raise additional
capital on acceptable terms or conditions, if at all.
20
IF THE DEMAND FOR PROTEIN DEGRADING ENZYMES DECREASES OR IF MAJOR CUSTOMERS
REDUCE OR TERMINATE BUSINESS WITH US, OUR REVENUES COULD SIGNIFICANTLY DECLINE.
Our largest selling family of products, protein degrading enzymes, or
proteases, accounted for approximately 52% of our 2002 revenue. If the demand
for proteases decreases or alternative proteases render our products
noncompetitive, our revenues could significantly decline.
In addition, our five largest customers collectively accounted for over 51%
of our 2002 product revenues, with our largest customer, The Procter & Gamble
Company, accounting for over 35% of such revenues. Our five largest customers in
2002 were Benckiser N.V., Cargill, Incorporated, Danisco Animal Nutrition - the
feed ingredients business unit of Danisco A/S which was formerly known as
Finnfeeds, The Procter & Gamble Company, and Unilever N.V. Any one of these
customers may reduce their level of business with us. Should any of our largest
customers decide to reduce or terminate business with us, our revenues and
profitability could decline significantly.
We have arrangements of various durations with our major customers and are
routinely involved in discussions regarding the status of these relationships.
These discussions may lead to extensions or new commercial arrangements, or may
be unsuccessful. Our customer relationships involve uncertainty by virtue of
economic conditions, customer needs, competitive pressures, our production
capabilities and other factors. Consequently, our customer base will change over
time as will the nature of our relationships with individual customers,
including major customers. For example, we currently expect that our business
with Corn Products International, Inc., combined with decreased volume with
Unilever N.V., may cause Corn Products to qualify as one of our five largest
customers.
WE INTEND TO ACQUIRE BUSINESSES, TECHNOLOGIES AND PRODUCTS, BUT WE MAY FAIL TO
REALIZE THE ANTICIPATED BENEFITS OF SUCH ACQUISITIONS AND WE MAY INCUR COSTS
THAT COULD SIGNIFICANTLY NEGATIVELY IMPACT OUR PROFITABILITY.
In the future, we may acquire other businesses, technologies and products
that we believe are a strategic fit with our business. If we undertake any
transaction of this sort, we may not be able to successfully integrate any
businesses, products, technologies or 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.
21
If a third party successfully claims an intellectual property right to
technology we use, it may force us to discontinue an important product or
product line, alter our products and processes, pay license fees, pay damages
for past infringement or cease certain activities. Under these circumstances, we
may attempt to obtain a license to this intellectual property; however, we may
not be able to do so on commercially reasonable terms, or at all. In addition,
regardless of the validity of such a claim, its mere existence may affect the
willingness of one or more customers to use or continue to use our products and,
thereby, materially impact us.
Those companies with which we have entered or may enter into strategic
alliances encounter similar risks and uncertainties with respect to their
intellectual property. To the extent that any such alliance companies suffer a
loss or impairment of their respective technologies, we may suffer a
corresponding loss or impairment that may materially and adversely affect our
investments.
FOREIGN CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL CONDITIONS IN FOREIGN
COUNTRIES COULD CAUSE OUR REVENUES AND PROFITS TO DECLINE.
In 2002, we derived approximately 50% of our product revenues from our
foreign operations. Our foreign operations generate sales and incur expenses in
local currency. As a result, we are exposed to market risk related to
unpredictable interest rates and foreign currency exchange rate fluctuations. We
recognize foreign currency gains or losses arising from our operations in the
period incurred. As a result, currency fluctuations between the U.S. dollar and
the currencies in which we do business could cause our revenues and profits to
decline.
Product revenues denominated in Euros account for approximately 34% of total
product revenues, and the fluctuations in the currency exchange rate against the
U.S. dollar can have a significant impact on our reported product revenues.
We expect to continue to operate in foreign countries and that our
international sales will continue to account for a significant percentage of our
revenues. As such, we are subject to certain risks arising from our
international business operations that could be costly in terms of dollars
spent, the diversion of management's time, and revenues and profits, including:
- - Difficulties and costs associated with staffing and managing foreign
operations;
- - Unexpected changes in regulatory requirements;
- - Difficulties of compliance with a wide variety of foreign laws and
regulations;
- - Changes in our international distribution network and direct sales forces;
- - Political trade restrictions and exchange controls;
- - Political, social, or economic unrest including armed conflict and acts of
terrorism;
- - Labor disputes including work stoppages, strikes and embargoes;
- - Inadequate and unreliable services and infrastructure;
- - Import or export licensing or permit requirements; and
- - Greater risk on credit terms and long accounts receivable collection cycles
in some foreign countries.
IF THE OWNERSHIP OF OUR COMMON STOCK CONTINUES TO BE HIGHLY CONCENTRATED, IT MAY
PREVENT OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND
MAY RESULT IN CONFLICTS OF INTEREST THAT COULD CAUSE OUR STOCK PRICE TO DECLINE.
After our initial public offering and continuing to the present, Eastman
Chemical Company and Danisco A/S and their affiliates, referred to as our
majority stockholders, each own in excess of 40% 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
22
delaying or preventing a change to our control favored by our other stockholders
or accelerating or approving a change to our control opposed by our other
stockholders. In addition, the majority stockholders' control over our
management could create conflicts of interest between the majority stockholders
and us with respect to the allocation of corporate opportunities and between the
majority stockholders and other stockholders.
IF EXISTING STOCKHOLDERS SELL LARGE NUMBERS OF SHARES OF OUR COMMON STOCK, OUR
STOCK PRICE COULD DECLINE.
The market price of our common stock could decline as a result of sales by
our existing stockholders or holders of stock options of a large number of
shares of our common stock in the public market or the perception that these
sales could occur. Our two majority stockholders, for example, hold over 80% of
our common stock, and all of these shares are subject to registration rights. In
addition, we issued stock options to our officers, directors and employees
pursuant to our 2002 Omnibus Incentive Plan, approved by our stockholders in May
2002, and its predecessor plan.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, PARTICULARLY VOLATILE.
The stock market from time to time, has experienced significant price and
volume fluctuations that are unrelated to the operating performance of
companies. The market prices for securities of biotechnology companies,
including ours, have been highly volatile in the period since our initial public
offering in July 2000 and may continue to be highly volatile in the future. Our
stock may be affected by this type of market volatility, as well as by our own
performance. The following factors, among other risk factors, may have a
significant effect on the market price of our common stock:
- - Developments in our relationships with current or future strategic partners;
- - Conditions or trends in the biotechnology industry;
- - Announcements of technological innovations or new products by us or our
competitors;
- - Announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- - Developments in patent or other intellectual proprietary rights or
announcements relating to these matters;
- - Investor concern regarding the public acceptance of the safety of
biotechnology products or announcements relating to these matters;
- - Litigation or governmental proceedings or announcements relating to these
matters;
- - Economic and other external factors or other disaster or crisis;
- - Future royalties from product sales, if any, by our licensees;
- - Sales of our common stock or other securities in the open market; and
- - Period-to-period fluctuations in our operating results.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
A large portion of our expenses, including expenses for facilities, equipment
and personnel, are relatively fixed. Accordingly, if product revenue declines or
does not grow as we anticipate or non-product revenue declines due to the
expiration or termination of strategic alliance agreements or the failure to
obtain new agreements or grants, we may not be able to correspondingly reduce
our operating expenses in any particular quarter. Our quarterly revenue and
operating results have fluctuated in the past and are likely to do so in the
future. If our operating results in some quarters fail to meet the expectations
of stock mark-et analysts and investors, our stock price would likely decline.
Some of the factors that could cause our revenue and operating results to
fluctuate include:
23
- - The ability and willingness of strategic partners to commercialize products
derived from our technology or containing our products on expected timelines;
- - Our ability to successfully commercialize products developed independently
and the rate of adoption of such products;
- - Fluctuations in consumer demand for products containing our technologies or
products, such as back to school sales of blue jeans and other denim
products, resulting in an increase in the use of textile processing enzymes,
and fluctuations in laundry detergent use due to promotional campaigns run by
consumer products companies; and
- - Fluctuations in geographic conditions including currency and other economic
conditions such as economic crises in Latin America or Asia and increased
energy and related transportation costs.
We also have incurred significant infrequently occurring charges within given
quarters, such as those incurred in conjunction with restructuring activities,
and recognized investment income from sales of available-for-sale marketable
securities.
CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD RESULT IN OUR INABILITY TO
COMMERCIALIZE PRODUCTS.
We produce a significant amount of our products from genetically modified
microorganisms. We cannot predict public attitudes and acceptance of existing or
future products made from genetically modified microorganisms. As a result, if
we are not able to overcome the ethical, legal and social concerns relating to
safety and environmental hazards of genetic engineering, the general public may
not accept our products and this may prevent us from commercializing products
dependent on our technologies or inventions. In addition, public attitudes may
influence laws and regulations governing the ownership or use of genetic
material, which could result in greater government regulation of genetic
research and bioengineered products.
IF WE ARE SUBJECT TO A COSTLY PRODUCT LIABILITY DAMAGE CLAIM OR AWARD, OUR
PROFITS COULD DECLINE.
We may be held liable if any product we develop, or any product that a third
party makes with the use or incorporation of any of our products, causes injury
or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Our current product liability insurance may not cover our
potential liabilities. Inability to obtain sufficient insurance coverage in the
future at an acceptable cost or otherwise to protect against potential liability
claims could prevent or inhibit the commercialization of products developed by
us or our strategic partners. If a third party sues us for any injury caused by
our products, our liability could exceed our insurance coverage amounts and
total assets and our profits could decline.
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.
24
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
Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including Jean-Jacques Bienaime, the Company's 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-14 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 significant changes
in the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the 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
25
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The information presented in Item 2 of Part I of this Report on Form 10-Q
under the heading "Liquidity and Capital Resources" is hereby incorporated by
reference. The Company's Registration Statement on Form S-1 (Registration No.
333-36452) was effective as of July 27, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report
ITEM 5. OTHER INFORMATION
On April 2, 2003, the Board of Directors accepted the resignation of W.
Thomas Mitchell as the Company's Chairman and as a member of the Company's Board
of Directors. Effective on the same date, The Board of Directors appointed
Jean-Jacques Bienaime as Chairman and reduced the number of directors to ten.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
(10) Material Contracts
---- ------------------
10.1 Lease by and between the Company and The Board of Trustees of the
Leland Stanford Junior University dated January 30, 2003
(99) Additional Exhibits
---- -------------------
99.1 Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. REPORTS ON FORM 8-K
None
26
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.
May 13, 2003 By: /s/ Raymond J. Land
- ---------------------- ---------------
Date
Raymond J. Land
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
May 13, 2003 By: /s/ Darryl L. Canfield
- ---------------------- ----------------------------
Date
Darryl L. Canfield
Vice President and Corporate Controller
(Chief Accounting Officer)
27
CERTIFICATIONS
I, Jean-Jacques Bienaime, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genencor International,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 By: /s/ Jean-Jacques Bienaime
-------------------- --------------------------------
Jean-Jacques Bienaime,
Chairman, Chief Executive Officer and
President
28
I, Raymond J. Land, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genencor International,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 By: /s/ Raymond J. Land
------------------ -------------------------
Raymond J. Land,
Senior Vice President and
Chief Financial Officer
29
EXHIBIT INDEX
Exhibit Number Description
- ---------------- ---------------------------------------------------------------------------------------
10.1 Lease by and between the Company and The Board of Trustees of the Leland Stanford
Junior University dated January 30, 2003.
99.1 Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
30