-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Etpw+AE6NEAOA1KGxStn679KGUxbTx0Ok1znR/+Bcb0md1DR4dZVa1Vz8xz7AtOK /8H8ZU9gZT21heFpFO3oRA== /in/edgar/work/20000811/0000912057-00-036740/0000912057-00-036740.txt : 20000921 0000912057-00-036740.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-036740 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVITROGEN CORP CENTRAL INDEX KEY: 0001073431 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 330373077 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25317 FILM NUMBER: 695347 BUSINESS ADDRESS: STREET 1: 1600 FARADAY AVE CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 7606037200 MAIL ADDRESS: STREET 1: 1600 FARADAY AVE CITY: CARLSBAD STATE: CA ZIP: 92008 10-Q 1 a10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number: 0-25317 INVITROGEN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 33-0373077 -------- ----------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1600 FARADAY AVENUE, CARLSBAD, CA 92008 --------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 760-603-7200 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. As of August 7, 2000 there were 23,715,127 shares of Common Stock outstanding. PART 1 FINANCIAL INFORMATION Item 1. Financial Statements INVITROGEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
June 30, December 31, 2000 1999 ASSETS (Unaudited) (Unaudited) ------------------- ------------------- Current Assets: Cash and cash equivalents..................................................... $ 175,781 $ 102,238 Short-term investments, held-to-maturity...................................... 98,060 - Accounts receivable, net of allowance for doubtful accounts of $829 and $835.. 13,950 11,530 Inventories................................................................... 8,229 7,556 Income taxes receivable....................................................... 2,352 4,495 Deferred income taxes......................................................... 9,020 3,561 Prepaid expenses and other current assets..................................... 1,576 1,017 ------------------- ------------------- Total current assets........................................................ 308,968 130,397 Property and Equipment, net...................................................... 25,831 21,678 Intangible Assets, net........................................................... 5,403 4,139 Other Assets..................................................................... 6,229 562 ------------------- ------------------- Total assets................................................................ $ 346,431 $ 156,776 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to bank......................................................... $ 420 $ 850 Current portion of long-term obligations...................................... 743 6,300 Accounts payable.............................................................. 4,038 4,266 Accrued expenses.............................................................. 10,244 5,252 Income taxes payable.......................................................... - 1,680 ------------------- ------------------- Total current liabilities................................................... 15,445 18,348 Long-term obligations............................................................ 2,782 7,324 Deferred income taxes............................................................ - 439 5.5% Convertible subordinated notes due March 1, 2007............................ 172,500 - ------------------- ------------------- Total liabilities........................................................... 190,727 26,161 Stockholders' Equity: ------------------- ------------------- Common stock; $0.01 par value, 50,000,000 shares authorized; 23,669,458 and 22,470,009 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively...................................... 237 225 Additional paid-in-capital..................................................... 144,019 121,924 Deferred compensation.......................................................... (513) (746) Accumulated other comprehensive loss........................................... (698) (439) Retained earnings.............................................................. 12,659 9,701 ------------------- ------------------- Total stockholders' equity.................................................. 155,704 130,665 ------------------- ------------------- Total liabilities and stockholders' equity.................................. $ 346,431 $ 156,776 =================== ===================
The accompanying notes are an integral part of these consolidated balance sheets. 2 INVITROGEN CORPORATION AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) Revenues............................................................... $ 27,692 $ 23,638 $ 54,983 $ 45,243 Cost of Revenues....................................................... 8,864 8,329 17,985 16,501 ---------- --------- --------- --------- Gross margin........................................................ 18,828 15,309 36,998 28,742 ---------- --------- --------- --------- Operating Expenses: Sales and marketing.................................................. 5,512 4,172 10,291 8,167 General and administrative........................................... 3,482 3,227 7,102 6,283 Research and development............................................. 3,772 4,086 7,333 7,600 Merger related costs................................................. 153 - 6,580 - ---------- --------- --------- --------- Total operating expenses.......................................... 12,919 11,485 31,306 22,050 ---------- --------- --------- --------- Income from operations.......................................... 5,909 3,824 5,692 6,692 Other Income (Expense), net: Gain (loss) on foreign currency transactions......................... 171 (147) 12 (210) Interest and other expense........................................... (2,633) (184) (3,685) (377) Interest and other income............................................ 4,131 447 6,138 675 ---------- --------- --------- --------- Total other income, net........................................... 1,669 116 2,465 88 ---------- --------- --------- --------- Income before provision for income taxes............................... 7,578 3,940 8,157 6,780 Provision for income taxes............................................. (2,752) (1,416) (5,199) (2,509) Net income............................................................. 4,826 2,524 2,958 4,271 Less: Preferred stock dividends.................................... - - - (163) Accretion of non-voting redeemable common stock............ - (18) - (74) Adjustment to beneficial conversion feature related to convertible preferred stock................................. - - - 985 ---------- --------- --------- --------- Income available to common stockholders......................... $ 4,826 $ 2,506 $ 2,958 $ 5,019 Earnings per share: Basic $ 0.20 $ 0.13 $ 0.13 $ 0.28 ========== ========= ========= ========= Diluted.............................................................. $ 0.19 $ 0.11 $ 0.12 $ 0.24 ========== ========= ========= ========= Weighted average shares used in per share calculation: Basic 23,575 19,262 23,275 18,043 Diluted.............................................................. 25,282 21,889 25,365 20,499
The accompanying notes are an integral part of these consolidated balance sheets. 3 INVITROGEN CORPORATION AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Six Months Ended June 30, ----------------------------------------- 2000 1999 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................. $ 2,958 $ 4,271 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................................. 2,449 1,758 Amortization of deferred compensation...................................... 90 210 Deferred income taxes...................................................... 6,519 7 Merger related costs....................................................... 2,390 - Other non-cash adjustments................................................. 11 (264) Changes in operating assets and liabilities: Accounts receivable....................................................... (2,820) (2,857) Inventories............................................................... (759) (1,105) Prepaid expenses and other current assets................................. 1,444 (600) Other assets.............................................................. (167) 405 Accounts payable.......................................................... (236) 563 Accrued expenses.......................................................... 5,157 574 Income taxes payable...................................................... (1,775) 228 --------- --------- Net cash provided by operating activities.............................. 15,261 3,190 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments received on note receivables...................................... 183 - Purchases of short-term investments, held-to-maturity ..................... (98,060) - Purchases of property and equipment........................................ (6,451) (2,289) Sale of property and equipment ............................................ 12 5 Payments for intangible assets............................................. (168) (1,466) --------- --------- Net cash used in investing activities.................................. (104,484) (3,750) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances from (payments on) line-of-credit, net............................ (438) 1,311 Proceeds from long-term obligations........................................ 166,999 - Principal payments on long-term obligations................................ (10,116) (650) Redemption of preferred and common stock and payment of accrued dividends.. - (17,060) Proceeds from sale of common stock......................................... 6,315 49,032 --------- --------- Net cash provided by financing activities.............................. 162,760 32,633 Effect of exchange rate changes on cash.................................... 6 126 --------- --------- Net increase in cash and cash equivalents.................................. 73,543 32,199 Cash and cash equivalents, beginning of period............................. 102,238 6,559 --------- --------- Cash and cash equivalents, end of period................................... $ 175,781 $ 38,758 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest..................................................... $ 68 $ 178 ========= ========= Cash paid for income taxes................................................. $ 509 $ 1,057 ========= ========= NONCASH INVESTING AND FINANCING ACTIVITIES: Stock issued for merger costs.............................................. $ 2,208 $ - ========= ========= Stock issued for business combination...................................... $ 1,337 $ - ========= ========= Conversion of Convertible Redeemable Preferred Stock to Redeemable Preferred Stock.......................................................... $ - $ 14,015 ========= ========= Conversion of Redeemable Preferred Stock to Common Stock.................. $ - $ 751 ========= ========= Note issued for patent rights.............................................. $ - $ 1,000 ========= ========= Preferred dividends declared............................................... $ - $ 163 ========= ========= Contribution of common stock to ESOP....................................... $ - $ 100 ========= ========= Accretion of redemption value for Redeemable Common Stock.................. $ - $ 74 ========= ========= Deferred compensation...................................................... $ - $ 164 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 4 PART 1 FINANCIAL INFORMATION Item 1. Financial Statements (continued) INVITROGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) GENERAL The consolidated financial statements include the accounts of Invitrogen Corporation and its 100% controlled subsidiaries, Invitrogen B.V., Invitrogen Export Company, Ltd., NOVEX Electrophoresis GmbH (formerly known as Anamed GmbH), Serva GmbH, NOVEX International Sales Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim financial statements have been prepared by Invitrogen, without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which include only normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements and the notes thereto included in our Form 10-K, filed with the Securities and Exchange Commission on March 14, 2000. 1. SHORT-TERM INVESTMENTS The Company's short-term investments are held-to-maturity, and consist of the following: corporate debt securities of $68.6 million and mortgage-backed securities of $29.4 million. The contractual maturities of these securities ranged from various dates with the last security maturing on November 15, 2000 as of June 30, 2000. The were no sales of or transfers from securities classified as held-to-maturity for the six months ended June 30, 2000. 2. INVENTORIES Inventories include material, labor and overhead costs and consist of the following:
June 30, December 31, (in thousands) 2000 1999 ------------------ ------------------ Raw materials and components......................... $ 1,571 $ 2,002 Work in process...................................... 1,986 1,082 Finished goods....................................... 4,672 4,472 ------------------ ------------------ $ 8,229 $ 7,556 ================== ==================
3. ACCUMULATED DEPRECIATION AND AMORTIZATION Accumulated depreciation and amortization of property, plant and equipment was $16 million and $13.8 million at June 30, 2000 and December 31, 1999, respectively. Accumulated amortization of intangible assets was $1.2 million and $0.9 million at June 30, 2000 and December 31, 1999, respectively. 4. ACCRUED EXPENSES Accrued expenses consist of the following:
June 30, December 31, (in thousands) 2000 1999 ------------------ ------------------ Accrued purchases.................................... $ 1,618 $ 734 Accrued payroll and related expenses................. 2,711 1,482 Accrued ESOP contribution............................ - 692 Accrued merger related costs......................... 840 1,678 Deferred revenue..................................... 1,388 171 Accrued interest..................................... 3,173 - Accrued other........................................ 514 495 ------------------ ------------------ $ 10,244 $ 5,252 ================== ==================
5 5. EARNINGS PER SHARE Earnings per share is calculated as follows:
THREE MONTHS ENDED JUNE 30, 2000 -------------------------------- INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT Basic EPS: Income available to common stockholders..................... $ 4,826 23,575 $ 0.20 Stock options............................................... - 1,707 ---------- ---------- ---------- Diluted EPS: Income available to common stockholders plus assumed conversions............................................... $ 4,826 25,282 $ 0.19 ========== ========== ==========
THREE MONTHS ENDED JUNE 30, 1999 -------------------------------- INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT Basic EPS: Income available to common stockholders..................... $ 2,506 19,262 $ 0.13 Stock options............................................... - 2,627 ---------- ---------- ---------- Diluted EPS: Income available to common stockholders plus assumed conversions.............................................. $ 2,506 21,889 $ 0.11 ========== ========== ==========
SIX MONTHS ENDED JUNE 30, 2000 -------------------------------- INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT Basic EPS: Income available to common stockholders..................... $ 2,958 23,275 $ 0.13 Stock options............................................... - 2,090 ---------- ---------- ---------- Diluted EPS: Income available to common stockholders plus assumed conversions.............................................. $ 2,958 25,365 $ 0.12 ========== ========== ==========
SIX MONTHS ENDED JUNE 30, 1999 -------------------------------- INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT Basic EPS: Income available to common stockholders..................... $ 5,019 18,043 $ 0.28 Stock options............................................... - 2,456 ---------- ---------- ---------- Diluted EPS: Income available to common stockholders plus assumed conversions.............................................. $ 5,019 20,499 $ 0.24 ========== ========== ==========
6. COMPREHENSIVE INCOME Total comprehensive income is determined as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (IN THOUSANDS) 2000 1999 2000 1999 ---- ---- ---- ---- Net income ............................................................ $ 4,826 $ 2,506 $ 2,958 $ 5,019 Foreign currency translation adjustments............................... (171) 147 (12) 210 ---------- --------- ---------- --------- Total comprehensive income........................................... $ 4,655 $ 2,653 $ 2,946 $ 5,229 ========== ========= ========= =========
6 7. BUSINESS COMBINATIONS RESEARCH GENETICS MERGER On February 2, 2000, the Company completed a merger with Research Genetics, a privately-held U.S. company that supplies products and services for functional genomics and gene-based drug discovery research. The Company issued 3.2 million shares of common stock for all of the outstanding common stock of Research Genetics. The merger has been accounted for as a pooling of interests and is intended to qualify as a tax-free exchange. Costs incurred as a result of the merger and related integration are expected to be $6.4 million and are subject to change. These costs were expensed in February 2000 upon completion of the merger. As of June 30, 2000 the Company had $.4 million remaining in accrued merger related costs. ETHROG MERGER On June 21, 2000, the Company completed a merger with Ethrog Biotechnologies, Ltd., a privately-held company headquartered in Israel that has developed and patented a novel, fully enclosed system for the electrophoretic separation of macromolecules. The Company issued 198,869 shares of its common stock for all of the capital stock of Ethrog in a transaction that has been accounted for as a pooling of interests. Costs incurred as a result of the merger were $.2 million and are subject to change. These costs were expensed in June 2000 upon completion of the merger. As of June 30, 2000 the Company had $.1 million remaining in accrued merger related costs. The combined financial information is presented to show the combined results of operations of Invitrogen, Research Genetics, and Ethrog Biotechnologies as if the mergers had occurred at the beginning of the periods presented. NAP ACQUISITION On June 30, 2000, the Company acquired Nucleic Acid Purification, Inc (NAP), a privately-held U.S. biotechnology company. The Company issued 17,778 shares of its common stock for all of the capital stock of NAP in a transaction that has been accounted for under the purchase method of accounting. Costs incurred as a result of the acquisition were $55,000, and were treated as part of the purchase price. The excess of purchase price over acquired assets was $1.4 million, and based on the life of the acquired technology will be amortized over 3 years. 8. ISSUANCE OF CONVERTIBLE SUBORDINATED DEBT In March 2000, the Company issued $172.5 million principal amount of 5.5% convertible subordinated notes (the "Convertible Notes") due March 1, 2007 to certain accredited investors. After expenses, the Company received net proceeds of $167.0 million. Interest on the Convertible Notes is payable semi-annually on March 1st and September 1st, commencing in September 2000. The Convertible Notes were issued at 100% of principal value, and are convertible into 2,024,648 shares of stock at the option of the holder at any time at a price of $85.20 per share. The Convertible Notes may be redeemed, in whole or in part, at the Company's option on or after March 1, 2003 at a premium of 103.143% of par value which declines annually to par value at maturity date. Costs incurred to issue the debt totaled $5.7 million and have been deferred and included in other assets in the consolidated balance sheet. These costs are being amortized over the term of the related debt using the effective interest method. The Convertible Notes are subordinate to substantially all of the current and future outstanding debt of Invitrogen, including all of its secured debt and all debts and liabilities of Invitrogen's subsidiaries. The Convertible Notes are not subordinate to amounts the Company owes for employee compensation, goods or services purchased or to amounts the Company may owe to its subsidiaries. 9. SUBSEQUENT EVENT In July 2000, the Company signed definitive agreements to acquire all of the outstanding shares of both Life Technologies, a supplier of molecular biology and cell culture products for the life science industry, and Dexter Corporation (Dexter), which currently owns approximately 75% of Life Technologies' outstanding stock. Under the terms of the agreements, the Company will acquire all of the outstanding common stock of Dexter for $62.50 per share or approximately $1.5 billion and all of the outstanding common stock of Life Technologies, other than the shares held by Dexter, for $60.00 per share or approximately $400 million. The consideration will consist of Invitrogen common stock and cash. The maximum cash available is approximately $410 million for Dexter shareholders and approximately $105 million for Life Technologies shareholders, or 28% of the aggregate merger consideration for each company. Dexter shareholders who elect to receive stock will receive between 1.0417 and 0.7813 shares of Invitrogen common stock per Dexter share and Life Technologies shareholders who elect to receive stock will receive between 1.0000 and 0.7500 shares of Invitrogen common stock per Life Technologies share. The ratio will be determined based on the average closing price of 7 Invitrogen's common stock for the 20 consecutive trading days ending three days prior to the shareholder meetings to approve the transactions. The Company will assume the outstanding options of Life Technologies which will be converted into options to purchase approximately 800,000 shares of common stock of the Company. These transactions will be accounted for as purchases. Consummation of the transactions are subject to the closing of the previously announced sales of Dexter's chemical businesses and usual and customary closing conditions and approvals, including the approval of the companies' stockholders and regulatory approvals. These transactions are expected to close in the Fall of 2000. The estimated direct costs of the transactions to be incurred by Invitrogen and the fair value of stock options assumed are estimated to be $43.6 million and are subject to change. These costs will be included in the purchase price of the transactions. Certain costs associated with the restructuring of existing Invitrogen operations and costs necessary to integrate the businesses of Invitrogen and Life Technologies that are expected to benefit future operations are estimated to range from $10 million to $20 million. These estimated costs will be expensed as restructuring costs after the completion of the mergers and after Invitrogen's management has completed and approved the restructuring plans and associated costs. 8 PART 1 FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We develop, manufacture, and market research tools in kit form and provide other research products and services to corporate, academic, and government entities. Our research kits simplify and improve gene cloning, gene expression, and gene analysis techniques as well as other molecular biology activities. Substantially all of our revenue to date has come from the sale of these research kits and related products used by a variety of scientific researchers to conduct gene cloning, expression, and analysis experiments. Our research kits are sold primarily in the United States, Europe, and Japan. Our products are used for research purposes and their use is not regulated by the United States Food and Drug Administration or by any comparable international organization. We manufacture the majority of our research kits and other products in our manufacturing facilities in Carlsbad and San Diego, California and Huntsville, Alabama. In addition, we purchase products from third-party manufacturers. We also have a manufacturing facilities in Heidelberg, Germany for formulating and packaging fine chemicals and Israel for formulating and packaging electrophoresis gels. The majority of our sales activities are conducted through a dedicated direct sales organization located in the United States and Europe. We also conduct marketing and distribution activities at our facilities in the United States and at a facility we own in the Netherlands. A small proportion of our sales are to international distributors who resell Invitrogen kits to researchers. These distributors are located in selected territories in Europe, as well as in Japan and other territories in Asia. We may choose in the future to establish a direct sales organization in these and additional territories. We conduct research activities in the United States and business development activities in the United States and Europe. As part of these activities we actively seek to license intellectual property from academic, government, and commercial institutions relating to gene cloning, expression, and analysis technologies. To date, we have obtained over 95 licenses, which provide us with access to over 200 patents covering gene cloning, expression and analysis materials and techniques. In June 1998, we began using our high-throughput cloning and expression technologies, which we market under the name Invitrogenomics. We are using this technology to rapidly clone and patent full-length genes which we are licensing and selling. In addition, we use our Invitrogenomics technology to provide gene cloning and expression services on a contract basis to pharmaceutical, biotechnology, and agricultural companies. Invitrogenomics products and services have generated limited revenues to date. Our revenues have increased significantly since our inception and from 1995 to 1999 we have experienced compound annual revenue growth of 29%. The increase in our revenues has been due to several factors, including the continued growth of the market for gene identification, cloning, expression, and analysis kits and products; increasing market acceptance of these kits and products; our introduction of new research kits and products for gene identification, cloning, expression, and analysis; and the expansion of our direct sales and marketing efforts. We plan to continue to introduce new research kits, as we believe continued new product development and rapid product introduction is a critical competitive factor in the market for molecular biology research kits. In order to support increased levels of sales and to augment our long-term competitive position, we anticipate that we will continue to increase expenditures in sales and marketing, manufacturing and research and development. We currently manufacture products for inventory and ship products shortly after the receipt of orders, and anticipate that we will do so in the future. Accordingly, we have not developed a significant backlog and do not anticipate that we will develop a material backlog in the future. We have acquired a significant number of patent rights from third-parties as part of our business activities. These patent rights are used as a basis for the development of our research kits and Invitrogenomics technologies. In the past, we have paid royalties to such third-parties relating to sales of some of our research kits and selected services. Royalty expense is recognized as a cost of revenue as the related royalties are incurred. On February 2, 2000 and June 21, 2000 we completed our mergers with Research Genetics and Ethrog Biotechnologies, Ltd., respectively. Both transactions have been accounted for as pooling of interests and the consolidated financial statements have 9 been restated for all periods prior to the mergers to reflect the combined financial and operating results of Invitrogen, Research Genetics and Ethrog. We anticipate that our results of operations may fluctuate from quarter to quarter and will be difficult to predict. The timing and degree of fluctuation will depend upon several factors, including: - Changes in customer research budgets which are influenced by the timing of their research and commercialization efforts and their receipt of government grants; - Competitive product introductions; - Our ability to successfully introduce or transition the market to new products; - Market acceptance of existing or new products; - Our ability to manufacture our products efficiently; - Our ability to control or adjust research and development, marketing, sales and general and administrative expenses in response to changes in revenues; and - Currency rate fluctuations. In addition, our results of operations could be affected by the timing of orders from distributors and the mix of sales among distributors and our direct sales force. Although we have experienced growth in recent years, there can be no assurance that, in the future, we will sustain revenue growth or remain profitable on a quarterly or annual basis or that our growth will be consistent with predictions made by securities analysts. RESULTS OF OPERATIONS REVENUES. Revenues for the three months ended June 30 increased $4.1 million, or 17%, from $23.6 million in 1999 to $27.7 million for 2000. For these same periods, revenues in North America increased $3.5 million, or 18%, from $18.9 million to $22.4 million, and revenues outside of North America increased $0.6 million, or 13%, from $4.7 million to $5.3 million. The overall increase in revenue was primarily attributable to continued market growth and increased market penetration for DNA microarrays, sequence-verified gene clones and gene cloning, expression and analysis kits. European revenues, when reported in U.S. Dollars, were adversely affected by changes in currency rates. The change in currency rates accounted for a decrease in U.S. Dollar denominated revenues of $.6 million, or 3%. European revenues also reflect no growth for the quarter for the fine chemicals product line acquired with the NOVEX merger last year. The fine chemicals product line is a slow to no-growth business. Holding currency conversion rates constant with those in 1999 and excluding revenues from the fine chemicals product line, European revenues increased 30% and worldwide revenues increased 20%. For the six months ended June 30, revenues increased $9.8 million, or 22%, from $45.2 million in 1999 to $55 million in 2000. Revenues in North America increased $8.7 million, or 25%, from $35.4 million in 1999 to $44.1 million in 2000 and revenues outside of North America increased $1.1 million, or 11%, from $9.8 million in 1999 to $10.9 million in 2000. Holding currency conversion rates constant with those in 1999 and excluding revenues from the fine chemicals product line, European revenues for the six month period ended June 30, 2000 increased 34% and worldwide revenues increased 26%. We expect that future revenues will be affected by new product introductions, competitive conditions, customer research budgets, the rate of expansion of our customer base, and foreign currency rates. GROSS MARGIN. Gross margin as a percentage of revenues for the three months ended June 30, 2000 increased to 68% from 64.8% for the same period in 1999. For the six months ended June 30, gross margin increased from 63.5% in 1999 to 67.3% in 2000. Gross margin improvements during both periods ended June 30 were primarily a result of increased sales of higher-margin products, and manufacturing and operational efficiencies. We believe that gross margin for future periods could be affected by sale volumes, competitive conditions, royalty payments on licensed technologies and foreign exchange factors. The functional currency of our Netherlands subsidiary, Invitrogen B.V., is the Netherlands Guilder (NLG), for our German subsidiary, Serva GmbH, is the Deutsche Mark and for our Israeli subsidiary Ethrog, is the New Israeli Shekel (NIS). The translation from NLG, Deutsche Mark and NIS to the U.S. Dollar for revenue and expenses is based on the average exchange rate during the period; large increases or decreases in the spread between currencies have affected and may continue to affect revenues, gross margin and reported income. The two European subsidiaries conduct their European business in the currencies of their significant customers. Exchange gains or losses arising from transactions denominated in these currencies are recorded using the actual exchange differences on the date of the transaction. Large increases or decreases in these currency fluctuations could also impact revenues, gross margin and reported profits. 10 SALES AND MARKETING. Sales and marketing expenses increased $1.3 million from $4.2 million for the three months ended June 30, 1999 to $5.5 million for the same period in 2000. As a percentage of revenues, sales and marketing expenses increased from 18% to 20% for these periods. For the six months ended June 30, 2000, sales and marketing expenses increased $2.1 million from $8.2 million in 1999 to $10.3 million in 2000. As a percentage of revenues, sales and marketing expenses increased from 18% to 19% in 2000. The increase in sales and marketing expenses occurred as we increased our sales forces both in Europe and North America and implemented a new brand recognition program. The number of sales personnel doubled from June 30, 1999 to June 30, 2000, with two thirds of the new hires occurring in the first six months of this year. We anticipate that sales and marketing expenses will comprise over 20% of revenues over the next few years as we continue this expansion of our field sales forces in both North America and Europe. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three months ended June 30 increased $0.3 million from $3.2 million in 1999 to $3.5 million in 2000. As a percentage of revenues for the same periods, general and administrative expenses decreased from 14% to 13%. For the six months ended June 30, 2000 general and administrative expenses increased $0.8 million from $6.3 million, or 14% of revenues, in 1999 to $7.1 million, or 13% of revenues in 2000. The absolute increase resulted from the continued expansion during 2000 of administrative resources to support our growth and requirements as a newly public company. The decline as a percentage of revenues occurred as a fixed portion of our general and administrative expenses was spread over a larger revenue base. RESEARCH AND DEVELOPMENT. Research and development expenses decreased $0.3 million from $4.1 million for the three months ended June 30, 1999, to $3.8 million in 2000. As a percentage of revenues, research and development expenses decreased from 17% in 1999 to 14% in 2000. For the six months ended June 30, 2000, research and development expenses decreased $0.3 million to $7.3 million, or 13% of revenues, from $7.6 million for the same period in 1999, or 17% of revenues. The decrease in research expenses resulted from increased operating efficiencies from the integration of the Novex and Invitrogen research personnel from two facilities into one. The decline as a percentage of revenues occurred as our research and development expenses were spread over a larger revenue base. OTHER INCOME (EXPENSE), NET. Other income (expense), net, increased by $1.6 million from $0.1 million for the three months ended June 30, 1999, to $1.7 million for the same period in 2000. For the six months ended June 30, other income (expense), net, increased $2.4 million from $0.1 million in 1999 to $2.5 million in 2000. The increase for both periods were mainly attributable to larger balances of cash and investments during the period, offset by interest accruing on the 5.5% Convertible Subordinated notes that were issued in March 2000. PROVISION FOR INCOME TAXES. The provision for income taxes for the six months ended June 30, 2000 was 63.7% due to certain merger related costs incurred in February and June 2000 that are not deductible for tax purposes. Excluding the impact of the merger related costs, net of tax, our effective tax rate increased from 33.7% for all of 1999 to 37.3% for 2000. Higher taxable income in 2000 lessens the impact of our tax credits which effectively increases our rate. Company holdings in tax-deductible investments have also been reinvested in fully taxable investments due to our net operating loss carryforward for tax purposes, which also increases our effective rate. LIQUIDITY AND CAPITAL RESOURCES Net cash from operating activities generated $15.3 million during the first six months of 2000. Net cash generated from financing activities totaled $162.8 million, and reflects $167.0 million in net proceeds from the issuance of convertible subordinated debt, $6.3 million in net proceeds from stock issued under employee stock plans, reduced by $9.4 million that was used to pay off debt acquired in the Research Genetics merger. Purchases of held-to-maturity securities totaled $98.0 million, and capital expenditures and payments for intangible assets during the first six months of 2000 totaled $6.4 million and $.2 million, respectively. 11 During the first six months of 2000 we recorded a current deferred tax asset of $12.3 million representing amounts deductible for income tax purposes for non-qualified stock option exercises and disqualifying dispositions of our common stock by employees during the quarter. This benefit is reflected as additional paid-in capital in the June 30, 2000 consolidated balance sheet. On February 2, 2000 we completed our merger with Research Genetics. As consideration for the merger, we issued 3.2 million shares of our common stock for all of the outstanding common stock of Research Genetics. Costs incurred as a result of the merger and related integration are expected to be $6.4 million, which includes $2.2 million paid by a Research Genetics shareholder, and are subject to change. These costs were expensed in February 2000, after the merger was completed. In March 2000 we issued $172.5 million in 5.5% Convertible Subordinated Notes due 2007. The Notes were priced on February 24, 2000 at 100% of their principal amount and are convertible into 2,024,648 shares of Invitrogen's common stock. Interest is payable semiannually on March 1 and September 1. The Notes may be redeemed, in whole or in part, at the option of Invitrogen on or after March 1, 2003. On June 21, 2000 we completed our merger with Ethrog. As consideration for the merger, we issued 198,869 shares of our common stock for all of the outstanding common stock of Ethrog. Costs incurred as a result of the merger were $.2 million. These costs were expensed in June 2000, after the merger was completed. On June 30, 2000 we completed our acquisition of Nucleic Acid Purification (NAP). As consideration for the acquisition, we issued 17,778 shares of our common stock for all of the outstanding common stock of NAP. Costs incurred as a result of the merger were $55,000 and have been included in the purchase price of the transaction. As of June 30, 2000 we had cash, cash equivalents and short-term investments held-to-maturity, totaling $273.8 million and working capital of $293.5 million. Our funds are currently invested in U.S. Treasury and government agency obligations, and corporate debt securities. We have an available bank line-of-credit facility totaling $3.0 million that expires in October 2001, and at June 30, 2000 no amounts were outstanding. Due to our sufficient cash balances in February 2000 we terminated the $1.2 million line-of-credit facility that we acquired in the NOVEX merger. In February we assumed Research Genetics' bank line-of-credit facility totaling $1.5 million. In March 2000 we fully paid the outstanding balance on this line and terminated the facility. The proposed transaction with Life Technologies and Dexter will require the Company to make cash payments of approximately $518 million. This will be funded with current cash balances and the proceeds from the sale of certain Dexter assets. The estimated direct costs of the transaction to be incurred by Invitrogen and the fair value of stock options assumed are estimated to be $43.6 million and are subject to change. Certain costs associated with the restructuring of existing Invitrogen operations and costs necessary to integrate the businesses of Invitrogen and Life Technologies that are expected to benefit future operations are estimated to range from $10 million to $20 million. At the conclusion of the transaction, the Company expects to have less than $50 million in cash, cash equivalents, and short-term investments. Excluding the proposed merger transaction, we expect that our current cash and cash equivalents, funds from operations and interest income earned thereon will be sufficient to fund our operations for at least two years. Our future capital requirements and the adequacy of our available funds will depend on many factors, including scientific progress in our research and development programs, the magnitude of those programs, our ability to establish collaborative and licensing arrangements, the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments and future business acquisitions. CURRENCY HEDGING AND FOREIGN CURRENCY TRANSLATION We conduct business transactions with our subsidiaries in the Netherlands, Israel and with our foreign distributors, including those in Asia, in U.S. Dollars. Transactions with our German subsidiary, Serva GmbH, are denominated in Deutsche Marks. We have not taken any action to reduce our exposure to changes in foreign currency exchange rates, such as options or futures contracts with respect to transactions with our subsidiaries or transactions with our foreign customers. However, in the normal course of business, Invitrogen B.V. from time to time purchases exchange-traded put options on U.S. Dollars and U.K. Pounds Sterling to mitigate foreign currency exposure. At June 30, 2000 outstanding options totaled $1.4 million and mature on various dates through December 2000. NLG is the functional currency for Invitrogen B.V., NIS is the functional currency of Israel and the Deutsche Mark is the functional currency for Serva GmbH. The translation from NLG, NIS and the Deutsche Mark to the U.S. Dollar for balance sheet accounts is done using the current exchange rate in effect at the balance sheet date and for revenue and expense accounts 12 using the average exchange rate during the period. The effects of translation are recorded as a separate component of stockholders' equity. Invitrogen B.V., and Serva GmbH conduct their business with significant customers in their local European currencies; exchange gains and losses arising from these transactions are recorded using the actual exchange differences on the date of the transaction and are included in the consolidated statements of income in the respective period incurred. ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION On January 1, 1999, certain member states of the European Economic Community (EEC), including the Netherlands, fixed their respective currencies to a new currency, the Euro. On that day, the Euro became a functional legal currency within these countries. During the three years beginning on January 1, 1999, business in these EEC member states will be conducted in both the Euro and the existing national currency, such as the Netherlands Guilder, French Franc or Deutsche Mark. Businesses will be required to complete transition to the Euro and begin reporting and conducting their transactions in the Euro by January 1, 2002. On July 1, 2002 the existing national currencies will be withdrawn and will no longer be considered legal tender. Companies operating in or conducting business in EEC member states will need to ensure that their financial and other software systems are capable of processing transactions and properly handling the existing currencies, as well as the Euro. We have tested our internal systems and are able to process orders and invoices in the Euro as well as the local currency for the members of the monetary union. To date we have spent immaterial amounts to comply with these statutory requirements. These assessments have not been independently verified. However, we have not determined the costs related to any problems that may arise in the future due to the inability of any of our customers or vendors to comply with the statutory requirements. Any such problems may materially adversely affect our business, operating results and financial condition. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to interest rate risk. Our investment portfolio is maintained in accordance with our investment policy which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. We do not utilize any form of interest rate swap agreements to manage our exposure to fluctuations in earnings due to changes in interest rates. As of June 30, 2000, cash and cash equivalents are invested primarily in securities with maturities of less than 180 days. Since the fair value of Invitrogen's cash and cash equivalents approximated carrying value due to the short-term nature of the investments, any increase in interest rates would not have a material impact on the ending value of our cash equivalents. We would, however, be at risk for lower earnings should interest rates decline dramatically. FORWARD-LOOKING STATEMENTS The Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to trends in revenues, expenses and net income, and are therefore prospective. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," "project," and "continue" or similar words. You should read statements that contain these words carefully because they: - Discuss our future expectations - Contain projections of our future results of operations or of our financial condition - State other "forward-looking" information Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those listed below under "Risk Factors " as well as other risks and uncertainties detailed in our Preliminary Proxy Statement, filed with the Securities and Exchange Commission on August 2, 2000. The above Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Invitrogen's Preliminary Proxy Statement, filed with the Securities and Exchange Commission on August 2, 2000. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS 13 FAILURE TO SUCCESSFULLY INTEGRATE LIFE TECHNOLOGIES INTO OUR OPERATIONS COULD REDUCE INVITROGEN'S PROFITABILITY. Invitrogen signed the merger agreement with Life Technologies on July 7, 2000. Our integration of the operations of Life Technologies will require significant efforts from each company, including the coordination of research and development and sales and marketing efforts. We may find it difficult to integrate the operations of these acquired companies. Personnel may leave or be terminated because of the mergers. Such employee terminations or resignations or facility closures may require us to make severance or other payments and may result in related litigation. Life Technologies' headquarters is located in Rockville, Maryland with other U.S. operations in Frederick, Maryland and Grand Island, New York, while Invitrogen's U.S. headquarters and the bulk of Invitrogen's other operations are located in Carlsbad, California. This physical separation of facilities could make it difficult for us to communicate effectively with, manage and integrate Life Technologies' staff and operations with the rest of Invitrogen. Such difficulties could significantly hurt our operations and consequently our financial results. Invitrogen's management may have its attention diverted while trying to integrate Life Technologies. Such diversion of management's attention or difficulties in the transition process could have a material adverse impact on us. If we are not able to successfully integrate the operations of Life Technologies, our expectations of future results of operations may not be met. Factors which will determine the success of the mergers include: - - changes in the favorable market reaction to Invitrogen's and Life Technologies' significant products; - - competitive factors, including technological advances attained by competitors and patents granted to, or contested by competitors, which would result in their ability to compete against us more effectively; - - the ability of the combined company to increase sales of both companies' products; and - - the ability of the combined company to operate efficiently and achieve cost savings. Even if the companies are able to integrate operations, there can be no assurance that synergies will be achieved. The failure to achieve synergies could have a material adverse effect on the business results of operations and financial condition of the combined company. FAILURE TO MANAGE GROWTH COULD IMPAIR OUR BUSINESS. Our business has grown rapidly. Our net revenues increased from $55.3 million in 1997 to $92.9 million in 1999. During that same period we significantly expanded our operations in the United States and in Europe. The number of our employees has increased from approximately 272 at December 31, 1996 to approximately 609 at December 31, 1999. Following the proposed mergers, the combined companies will have approximately 2,800 employees and approximately $502 million in pro forma 1999 revenues. It is very difficult to manage this rapid growth, and our future success depends on our ability to implement: - - research and product development; - - sales and marketing programs; - - customer support programs; - - operational and financial control systems; and - - recruiting and training of new personnel. Our ability to offer successfully products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and to expand and train our workforce worldwide. 14 We have developed a high-throughput gene cloning and expression system by scaling up our TOPO TA Cloning technology. We are commercializing this technology under the name Invitrogenomics. Our future business growth depends in part on the success of our Invitrogenomics products and services. In order to succeed in this business we may need to hire additional senior managers. Moreover, operation of Invitrogenomics may present unfamiliar management challenges that we might not successfully address. We may not be able to locate or hire the necessary managers or successfully address the potentially unfamiliar management issues that may occur in Invitrogenomics or other areas of our business. Invitrogen's mergers with Life Technologies and Dexter will require additional investments in operations, product research and development, administration and sales and marketing which are significant expenses. Failure to manage successfully and coordinate the growth of the combined company could adversely impact our revenue and profits. REDUCTION IN RESEARCH AND DEVELOPMENT BUDGETS AND GOVERNMENT FUNDING MAY AFFECT SALES. Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to changes in available resources, spending priorities and institutional budgetary policies. Our business could be seriously damaged by any significant decrease in life sciences research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories. In recent years, the United States pharmaceutical industry has undergone substantial downsizing and consolidation. Further mergers or corporate consolidations in the pharmaceutical industry could cause us to lose existing customers and potential future customers, which could have a material adverse effect on our business, financial condition and results of operations. A significant portion of our sales have been to researchers, universities, government laboratories and private foundations whose funding is dependent upon grants from government agencies such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies. Also, a portion of our direct revenues comes from NIH Small Business Innovation Research grant funds. Although the level of research funding has increased during the past several years, we cannot assure you that this trend will continue. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Our revenues may be adversely affected if our customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities. A reduction in government funding for the NIH or other government research agencies could seriously damage our business. Our customers generally receive funds from approved grants at particular times of the year, as determined by the federal government. In the past, grants have been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds affects the timing of purchase decisions by our customers and, as a result, can cause fluctuations in our sales and operating results. FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT. Our business model of providing products to researchers working on a variety of genetic projects requires us to develop a wide spectrum of products. To generate broad product lines it is advantageous to sometimes license technologies from the scientific community at large rather than depending exclusively on our own employees. As a result, we believe our ability to in-license new technologies from third parties is and will continue to be critical to our ability to offer new products. More than 40% of our current revenues are from products manufactured or sold under licenses from third parties. From time to time we are notified or become aware of patents held by third parties which are related to technologies we are selling or may sell in the future. After a review of these patents, we may decide to obtain a license for these technologies from such third parties. We are currently in the process of negotiating several such licenses and expect that we will also negotiate these types of licenses in the future. There can be no assurances that we will be able to negotiate such licenses on favorable terms, or at all. Our ability to gain access to technologies needed for new products and services depends in part on our ability to convince inventors that we can successfully commercialize their inventions. We cannot assure you that we will be able to continue to identify new technologies developed by others. Even if we are able to identify new technologies of interest, we may not be able to negotiate a license on favorable terms, or at all. 15 LOSS OF LICENSES COULD HURT OUR PERFORMANCE. Some of our licenses do not run for the length of the underlying patent. We may not be able to renew our existing licenses on favorable terms, or at all. If we lose the rights to a patented technology, we may need to stop selling certain of our products, redesign our products or lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share for certain products. Our licenses typically subject us to various commercialization, sublicensing and other obligations. If we fail to comply with these requirements we could lose important rights under a license, such as the right to exclusivity in a certain market. In some cases, we could also lose all rights under a license. In addition, certain rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent. We typically do not receive significant indemnification from a licensor against third party claims of intellectual property infringement. OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE. The market for our products and services is only about fifteen years old. Rapid technological change and frequent new product introductions are typical for the market. For example, prepackaged kits to perform research in particular cell lines and already-isolated genetic material are only now coming into widespread use among researchers. Our future success will depend in part on continuous, timely development and introduction of new products that address evolving market requirements. We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and are reluctant to switch thereafter. To the extent we fail to introduce new and innovative products, we may lose market share to our competitors, which will be difficult or impossible to regain. An inability, for technological or other reasons, to develop successfully and introduce new products could reduce our growth rate or damage our business. We have made a substantial investment in developing the technology underlying Invitrogenomics products and services. The products portion of Invitrogenomics was launched commercially in 1998, and has not achieved significant revenues. We cannot be sure that Invitrogenomics will achieve any commercial success or that revenues will equal or exceed the cost of our investment. In the past we have experienced, and are likely to experience in the future, delays in the development and introduction of products. We cannot assure you that we will keep pace with the rapid rate of change in life sciences research, or that our new products will adequately meet the requirements of the marketplace or achieve market acceptance. Some of the factors affecting market acceptance of new products include: - - availability, quality and price relative to competitive products; - - the timing of introduction of the product relative to competitive products; - - scientists' opinion of the product's utility; - - citation of the product in published research; and - - general trends in life sciences research. The expenses or losses associated with unsuccessful product development activities or lack of market acceptance of our new products could materially adversely affect our business, operating results and financial condition. LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS. Our products and services are highly technical in nature. In general only highly qualified and trained scientists have the necessary skills to develop and market our products and provide our services. We face intense competition for these professionals from our competitors and our customers, marketing partners and companies throughout our industry. Any failure on our part to hire, train and retain a sufficient number of qualified professionals would seriously damage our business. We do not generally enter into employment agreements requiring these employees to continue in our employment for any period of time. COMPETITION IN THE LIFE SCIENCES RESEARCH MARKET COULD REDUCE SALES. 16 The markets for our products are very competitive and price sensitive. Many other life science research product suppliers have greater financial, operational, sales and marketing resources, and more experience in research and development than we do. These and other companies may have developed or could in the future develop new technologies that compete with our products or even render our products obsolete. If a competitor develops superior technology or cost-effective alternatives to our kits and other products, our business, operating results and financial condition could be materially adversely affected. The market for our electrophoresis products is also subject to specific competitive risks. This market is highly price competitive. Our competitors have in the past and may in the future compete by lowering prices on certain products. In certain cases, we may respond by lowering our prices which would reduce revenues and profits. Conversely, failure to anticipate and respond to price competition may hurt our market share. We believe that customers in our markets display a significant amount of loyalty to their initial supplier of a particular product. Therefore, it may be difficult to generate sales to customers who have purchased products from competitors. To the extent we are unable to be the first to develop and supply new products, our competitive position will suffer. DISTRIBUTORS MAY FORCE US TO USE MORE EXPENSIVE MARKETING AND DISTRIBUTION CHANNELS. Certain of our customers have developed purchasing initiatives to reduce the number of vendors from which they purchase in order to lower their supply costs. In some cases these accounts have established agreements with large distributors, which include discounts and the distributors' direct involvement with the purchasing process. These activities may force us to supply the large distributors with our products at a discount to reach those customers. For similar reasons many larger customers, including the U.S. government, have requested and may in the future request, special pricing arrangements, including blanket purchase agreements. These agreements may limit our pricing flexibility, especially with respect to our electrophoresis products, which could adversely impact our business, financial condition and results of operations. Currently, we do not have the capability to accept and process orders through our website. Accordingly, we may implement sales through Internet vendors. Internet sales through third parties may negatively impact our gross margins as the commission paid on Internet sales would be an additional cost not incurred through the use of non-Internet vendors. WE RELY ON THIRD PARTY MANUFACTURERS TO MANUFACTURE SOME OF OUR PRODUCTS AND COMPONENTS. We rely on third party manufacturers to supply many of our raw materials, product components and, in some cases, entire products. In particular, we purchase all of the cassettes used in our pre-cast electrophoresis gels from a single third party manufacturer. Also, we recently contracted with an outside vendor for the production of our PowerEase instrument products. Manufacturing problems may occur with these and other outside sources. If such problems occur, there can be no assurance that we will be able to manufacture our products profitably or on time. INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR RESULTS. Including subsidiaries and distributors, our products are currently marketed in more than 30 countries throughout the world. Our international revenues, which include revenues from our Netherlands, Germany and Israeli subsidiaries and export sales, represented 31% of our product revenues in 1999 and 1998, and 27% in 1997. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future, in part because we intend to expand our international operations. There are a number of risks arising from our international business, including: - - general economic and political conditions in the markets in which we operate, including fluctuations in significant currency exchange rates; - - potential increased costs associated with overlapping tax structures; - - potential trade restrictions and exchange controls; - - more limited protection for intellectual property rights in some countries; - - difficulties and costs associated with staffing and managing foreign operations; 17 - - uncertain effects of the movement in Europe to a unified currency; - - slower growth in the European market until the unified currency is fully adopted; - - unexpected changes in regulatory requirements; - - the difficulties of compliance with a wide variety of foreign laws and regulations; - - longer accounts receivable cycles in certain foreign countries; and - - import and export licensing requirements. A significant portion of our business is conducted in currencies other than the U.S. dollar, which is our reporting currency. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations among the U.S. dollar and the currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. We engage in foreign exchange hedging transactions to manage our foreign currency exposure, but we cannot assure you that our strategies will adequately protect our operating results from the effects of exchange rate fluctuations. The Asia/Pacific region in the past has experienced unstable economic conditions and significant devaluation in its currencies. The economic situation in the region may result in slower payments of outstanding receivable balances. To date, this region has not represented a significant portion of our revenues. However, to the extent the Asia/Pacific region becomes increasingly important, or to the extent the factors affecting the region begin to affect other geographic locations, our business could be damaged. INABILITY TO PROTECT OUR TECHNOLOGIES COULD AFFECT OUR ABILITY TO COMPETE. Our success depends to a significant degree upon our ability to develop proprietary products and technologies. However, we cannot assure you that patents will be granted on any of our patent applications. We also cannot assure you that the scope of any of our issued patents will be sufficiently broad to offer meaningful protection. We only have patents issued in selected countries. Therefore, third parties can make, use and sell products covered by our patents in any country in which we do not have patent protection. In addition, our issued patents or patents we license could be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier. The right to use our products is given to our customers under label licenses that are for research purposes only. These licenses could be contested and we cannot assure you that we would either be aware of an unauthorized use or be able to enforce the restrictions in a cost-effective manner. DISCLOSURE OF TRADE SECRETS COULD AID OUR COMPETITORS. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, our employees and consultants. However, these agreements can be breached and, if they are, there may not be an adequate remedy available to us. If our trade secrets become known we may lose our competitive position. INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS. Litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. We are aware that patents have been applied for and, in some cases, issued to others claiming technologies which are closely related to ours. As a result, and in part due to the ambiguities and evolving nature of intellectual property law, we periodically receive notices of potential infringement of patents held by others. Although we have to date successfully resolved these types of claims, we may not be able to do so in the future. In the event of an intellectual property dispute we may be forced to litigate. Such litigation could involve proceedings declared by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought by affected third parties. Intellectual property litigation can be extremely expensive, and such expense, as well as the consequences should we not prevail, could seriously harm our business. 18 If a third party claimed an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our products and processes, pay license fees or cease certain activities. Although we might under these circumstances attempt to obtain a license to such intellectual property, we may not be able to do so on favorable terms, or at all. In addition to intellectual property litigation, other substantial, complex or extended litigation could result in large expenditures by us and distraction of our management. For example, lawsuits by employees, stockholders, collaborators or distributors could be very costly and substantially disrupt our business. Disputes from time to time with such companies or individuals are not uncommon and we cannot assure you that we will always be able to resolve them out of court. OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS AND MAY DEPRESS INVITROGEN'S STOCK PRICE. Certain provisions of our certificate of incorporation, bylaws and Delaware law could be used by our incumbent management to make it substantially more difficult for a third party to acquire control of Invitrogen. These provisions include the following: - - we may issue preferred stock with rights senior to those of our common stock; - - we have a classified board of directors; - - our by-laws prohibit action by written consent by stockholders; and - - we require advance notice for nomination of directors and for stockholder proposals. These provisions could discourage potential takeover attempts and could adversely affect the market price of Invitrogen common stock. ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS. Portions of our operations require the controlled use of hazardous and radioactive materials. Although we believe our safety procedures comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination of property or injury to individuals from these materials cannot be completely eliminated. In the event of such an accident, we could be liable for any damages that result, which could seriously damage our business. Additionally, any accident could partially or completely shut down our research and manufacturing facilities and operations. We generate waste that must be transported to approved landfills. The transportation and disposal of such waste meets applicable state and federal guidelines. However, the disposal of such waste puts the company at risk for environmental liability if, in the future, the landfills leak and are proved to have damaged the environment. Furthermore, in acquiring Dexter, we are assuming Dexter's environmental liabilities. While we believe that Dexter has adequately reserved and/or has insurance for the cost of such liabilities, we anticipate purchasing additional insurance to safeguard the company's assets. However, unexpected costs could exceed stated reserves and insurance. This may require us to allocate additional funds and other resources to address Dexter's environmental liabilities. POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL CONDITION. We face a potential risk of liability claims based on our products or services. We carry product liability insurance coverage which is limited in scope and amount but which we believe to be adequate. We cannot assure you, however, that we will be able to maintain this insurance at reasonable cost and on reasonable terms. We also cannot assure you that this insurance will be adequate to protect us against a product liability claim, should one arise. ABSENCE OF DIVIDENDS COULD REDUCE INVITROGEN'S ATTRACTIVENESS TO INVESTORS. Some investors favor companies that pay dividends, particularly in market downturns. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. 19 FOLLOWING THE MERGERS, WE MAY NEED TO OBTAIN ADDITIONAL FINANCING TO SUPPORT ONGOING OPERATIONS. In order to consummate the mergers, we will deplete our cash reserves. In order to support ongoing operations, we may need to raise additional funds. Such funds may not be available on favorable terms or at all. If we are unable to raise additional funds we may be required to scale back operations which could adversely impact our business. THERE ARE OTHER RISKS RELATED TO LIFE TECHNOLOGIES' AND DEXTER'S ONGOING OPERATIONS. There are additional risks related to the ongoing operation of Life Technologies and Dexter that differ in some respects from the risks we have faced previously. These risks include: - changes in pricing or availability of fetal bovine serum, - the possibility of adverse rulings by or adverse developments in negotiations with the government, - litigation risks, - potential environmental liabilities, and - other risks detailed in the filings by Dexter and Life Technologies with the Securities and Exchange Commission. We can not assure you that we will be able to manage these risks in such a manner as will not adversely affect our business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See discussion under Currency Hedging and Foreign Currency Translation in the Management Discussion and Analysis for quantitative and qualitative disclosures about market risk. 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders was held on April 27, 2000. (b) See c) below. (c) PROPOSAL I. The following members of the Board of Directors were elected to serve for three years and until their successors are elected and qualified:
Number of Votes Cast Total votes for Each Total votes Withheld Director from Each Director --------------------- --------------------- James R. Glynn 19,409,977 53,802 Donald W. Grimm 18,315,675 1,148,104
PROPOSAL II. To amend Invitrogen's 1998 Stock Option Plan to increase the number of shares reserved for issuance under the plan by 100,000 shares for a total of 350,000 shares of common stock was approved by 18,284,662 affirmative votes vs. 1,176,152 negative votes vs. 2,965 abstentions. PROPOSAL III. To ratify the appointment of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ending December 31, 2000 was approved by 19,419,307 affirmative votes vs. 2,861 negative votes vs. 41,611 abstentions. (d) Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report:
* 3.1 Restated Certificate of Incorporation of the Company, as amended. * 3.2 Amended and Restated Bylaws of the Company. * 4.1 Specimen Common Stock Certificate. * 10.1 Form of Indemnification Agreement for directors and executive officers. * 10.2 1995 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. * 10.3 1997 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. * 10.4 1998 Employee Stock Purchase Plan and form of subscription agreement thereunder. * 10.5 Patent License Agreement, effective as of July 1, 1998, among F. Hoffmann-La Roche Ltd, Roche Molecular Systems, Inc. and Invitrogen Corporation. * 10.6 License Agreement, dated May 10, 1990, between Molecular Chimerics Corporation and Invitrogen Corporation. * 10.7 Purchase Agreement, effective July 1, 1994, between Cayla and Invitrogen, as amended.
21
* 10.8 License Agreement, dated January 22, 1997, between Sloan-Kettering Institute for Cancer Research and Invitrogen. * 10.9 Lease, dated November 1, 1995, as amended, between CRC and Invitrogen. * 10.10 Stock Purchase and Stockholders Agreement dated June 20, 1997 among Invitrogen, Lyle C. Turner, Joseph Fernandez, TA/Advent VIII L.P., Advent Atlantic and Pacific III, L.P. and TA Venture Investors L.P. * 10.11 Stock Purchase Agreement dated November 3, 1998, between MorphaGen, Inc., Heidi Short and Invitrogen Corporation. * 10.12 Employment Agreement between Theodore De Frank and Invitrogen dated September 28, 1995. ** 10.13 Assignment of Intellectual Property Conditional on Payment Dated as of May 31, 1999, by and between Molecular Biology Resources and Invitrogen Corporation. ** 10.14 Agreement and Plan of Merger, dated as of June 14, 1999, among Invitrogen Corporation, INVO Merger Corporation and NOVEX. *** 10.15 1996 NOVEX Stock Option/Stock Issuance Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. *** 10.16 1998 NOVEX Stock Option/Stock Issuance Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. *** 10.17 Employment Agreement between NOVEX and David E. McCarty dated July 22, 1997, assumed by Invitrogen on August 17, 1999. *** 10.18 Promissory Note from Lyle C. Turner dated December 1998. *** 10.19 Novel Experimental Technology 401(k) Employee Ownership Plan and Trust Agreement, dated April 1, 1997, as amended. *** 10.20 Invitrogen Corporation Employee Stock Ownership Plan, dated January 1, 1996. ****10.21 5.5% Convertible Subordinated Note Due 2007. ****10.22 5.5% Convertible Subordinated Notes due 2007, Purchase Agreement dated February 25, 2000. ****10.23 Indenture dated as of March 1, 2000 between Invitrogen Corporation and State Street Bank and Trust Company of California, N.A. ****10.24 5.5% Convertible Subordinated Notes Due 2007, Registration Rights Agreement dated as of March 1, 2000 by and among Invitrogen Corporation, and Donaldson, Lufkin & Jenrette Securities Corporation et al., as Initial Purchasers. ****10.25 Agreement and Plan of Reorganization, dated as of February 1, 2000, among Invitrogen Corporation, RG Merger Corporation and Research Genetics, Inc. ****10.26 2000 Nonstatutory Stock Option Plan. 27.01 Financial Data Schedule
- ---------------------- * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File NO. 333-68665) ** Incorporated by reference to the Registrant's Registration Statement on Form S-4 (File NO. 333-82593) *** Incorporated by reference to the Registrant's Registration Statement on Form S-1/A (File NO. 333-87085) **** Incorporated by reference to the Registrant's Registration Statement on Form S-3/A (File NO. 333-37964) (b) A Form 8-K dated July 9, 2000 was filed on July 11, 2000 to report the signing of a definitive merger agreement with Life Technologies and Dexter Corporation. 22 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. INVITROGEN CORPORATION Date: August 11, 2000 By: /s/ James R. Glynn ---------------------------- James R. Glynn Executive Vice President and Chief Financial Officer 23 EX-27.1 2 ex-27_1.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INVITROGEN'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS 6-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 JUN-30-2000 JUN-30-1999 175,781 36,230 98,060 2,439 14,779 11,681 829 350 8,229 7,052 308,968 60,308 41,792 31,442 15,961 12,120 346,431 84,275 15,445 15,290 172,500 0 0 0 0 0 237 194 155,467 60,820 346,431 84,275 53,950 44,376 54,983 45,243 17,985 16,501 17,985 16,501 31,306 22,050 0 0 3,685 377 8,157 6,780 5,199 2,509 2,958 4,271 0 0 0 0 0 0 2,958 4,271 0.13 0.28 0.12 0.24
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