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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto 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. Employerincorporation or organization)
    
    Identification Number)
 925 Page Mill Road
Palo Alto, California 94304
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (650) 846-7500 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01
(Title of Class)  Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or15(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 þ Noo Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to thisForm 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ Noo  The aggregate market value (based upon the closing price on the Nasdaq Stock Market on June
30, 2004) of the 9,291,059 shares of voting stock held by non-affiliates as of June 30, 2004 was
approximately $152,094,636. As of March 1, 2005, there were 60,119,648 shares of Common Stock, par value $0.01 per share,
outstanding.   1




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TABLE OF CONTENTS PagePART I.Item 1. Business
    
    3Item 2. Properties
    
    23Item 3. Legal Proceedings
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    25PART II.Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    26Item 6. Selected Financial Data
    
    27Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    28Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    43Item 8. Financial Statements and Supplementary Data
    
    45Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    76Item 9A. Controls and Procedures
    
    76Item 9B. Other Information
    
    76PART III.Item 10. Directors and Executive Officers of the Registrant
    
    77Item 11. Executive Compensation
    
    80Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    87Item 13. Certain Relationships and Related Transactions
    
    89Item 14. Principal Accountant Fees and Services
    
    90PART IV.Item 15. Exhibits and Financial Statement Schedules
    
    91SIGNATURES
    
    93INDEX TO EXHIBITS
    
    94Exhibit 10.18 WUXI Equity Transfer Agreement--RedactedExhibit 10.19 WUXI Equity Land Grant--RedactedExhibit 10.21 Goldsmith Promissory NoteExhibit 10.34 PHS Patent License Agreement-RedactedExhibit 10.35 Variable Pay Plan--RedactedExhibit 14.1 Code of ConductExhibit 21.1 SubsidiariesExhibit 23.1 Consent of Independent AccountantExhibit 31.1 CertificationExhibit 31.2 CertificationExhibit 32.1 Certifications
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Unless otherwise specified, all references to Genencor, the Company, we, us, our,
and ourselves refer to Genencor International, Inc. or Genencor International, Inc. and its
subsidiaries collectively, as appropriate in the context of the disclosure. This Report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. 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,
intends, plans, projects, will, may, might, and words of a similar nature. The
forward-looking statements contained in this Report reflect the Companys current beliefs and
expectations on the date of this Report. Actual results, performance or outcomes may differ
materially from those expressed in the forward-looking statements. Some of the important factors
which, in the view of the Company, could cause actual results to differ from those expressed in the
forward-looking statements are discussed in Items 1, 7, and 7A of this Report. The Company
disclaims any obligation to update any forward-looking statement to reflect facts or circumstances
after the date hereof. 
 PART I. 
 Item 1. Business Company Overview, Recent Developments and History We are a diversified biotechnology company that develops and delivers products and services
for the industrial, consumer and agri-processing markets, which we refer to as our Bioproducts
segment. In addition, we are developing products for the health care market in our Health Care
segment. Using an integrated set of technology platforms, including gene discovery and functional
genomics, molecular evolution and design, and human immunology, we develop products that deliver
innovative and sustainable solutions to many of the problems of everyday life. Our strategy is to apply our proven and proprietary technologies, manufacturing capabilities
and resources to expand sales in our existing markets and to address new opportunities in both
bioproducts and health care. Our Bioproducts formulations contain enzymes that are used in
applications as diverse as removing stubborn stains from clothing, converting corn starch to the
sweeteners used in many foods and beverages, and enhancing the nutritional value of grains for
animal feed. We own or lease eight Bioproducts manufacturing and distribution facilities and
eleven stand-alone Bioproducts distribution centers, making up a global supply chain spanning four
continents. In addition, we own a therapeutics production facility to support our preclinical and
clinical Health Care efforts. We have a strong commitment to research as an essential component of our product development
effort, and we are developing a number of other products independently as well as through
collaborations. We focus our research and development activities in our technology platforms to
discover, optimize, produce and deliver products to our target markets. An important part of our
research and development effort is undertaken through third-party collaborations that contribute
significant technology and other resources to the development and commercialization of products.
We believe this aspect of our research and development effort will continue to be important as we
expand into health care and other new markets. On January 27, 2005, we entered into an Acquisition Agreement (the Acquisition Agreement) with
Danisco A/S (Danisco) and DH Subsidiary Inc., an indirect wholly-owned subsidiary of Danisco
(Acquisition Sub), providing for a cash tender offer (the Offer) to acquire all of our outstanding
shares of common stock not otherwise owned by Danisco or its subsidiaries for $19.25 per share, net
to the seller in cash, to be followed by a merger (the Merger) of Acquisition Sub with and into the
Company, with the Company to continue as the surviving corporation. A Special Committee comprised
solely of our independent directors, and our Board of Directors, each has determined that the Offer
and the Merger are fair to, and in the best interests of, our stockholders (other than Danisco,
Eastman and their respective affiliates). In connection with the Acquisition Agreement, Danisco has entered into a definitive stock
purchase agreement (Stock Purchase Agreement) with Eastman Chemical Company (Eastman), the holder
of approximately 25 million shares of our common stock and 485 shares of our series A preferred
stock, under which Danisco will acquire all of the outstanding shares of our common stock held by
Eastman for $15 per share in cash and all of the outstanding shares of our series A preferred stock
held by Eastman for $44 million in 3




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cash. In the stock purchase agreement with Danisco, Eastman has agreed not to tender in the
Offer the shares of our common stock held by Eastman. The Acquisition Agreement is subject to certain conditions, including the tender of a majority
of the outstanding shares of our common stock other than those held by Danisco, Eastman, the
officers and directors of the Company and its subsidiaries and the respective affiliates of each of
the foregoing, receipt of regulatory approvals and other conditions set forth in the Acquisition
Agreement. Subject to those conditions, we currently expect the acquisition to be completed by May
31, 2005. If consummated, at the effective time of the Merger, all outstanding stock options, stock
appreciation rights, shares of restricted stock and restricted stock units outstanding under our
2002 Omnibus Incentive Plan and its predecessor plan, whether or not such awards have otherwise
become vested or exercisable, will be cashed out in a lump sum payment based upon the price of
$19.25 or such higher price as may be paid pursuant to the Offer. In certain instances, a change
in control price may be payable under the applicable plan if that price is higher than the price
paid in the Offer. During the pendency of the
Offer, we have suspended the right to exercise stock options. During 2004, our Bioproducts segment continued to generate all of our product revenues through
the sales of existing products as well as the commercialization of new products. As discussed
elsewhere in Item 1 of this Report, the Bioproducts segment also made important strides in its
progress on new applications including efforts to develop low cost enzymes for cellulosic biomass
conversion to ethanol, the advancement of our proprietary enzyme system for the elimination of
prion infectivity and our work with Dow Corning on the Silicon Biotechnology platform. In
addition, in November we launched our Defenz enzymes, a new line of decontamination enzymes to
combat nerve gas agents and organophosphate-based pesticides. Licensed from the U.S. Army Edgewood
Chemical Biological Center, these enzymes are believed to have advantages over traditional chemical
decontaminants such as being water soluble, non-flammable and non-corrosive. We are now marketing
this line to the military and civilian first responders such as fire departments, police
departments and hazardous materials teams. Our Bioproducts segment has been working to expand in certain key geographic areas including,
most notably, the Asia Pacific region. During 2004 we acquired majority ownership and assumed a
controlling interest in our Japanese joint venture, which has been renamed Genencor Kyowa Co. Ltd.
In January 2005 we announced plans to replace our current facility in Wuxi, China with a new
manufacturing facility in the Wuxi China National New and High Tech Industrial Development Zone.
We expect to operate this facility as a wholly-owned entity, and are in the process of purchasing
the remaining approximately 15 percent interest in our Chinese subsidiary from our joint venture
partner. The construction is expected to commence in the middle of 2005 with completion and
operations transfer from our existing Chinese facility expected to begin in late 2006. The
obligation to consummate this transaction is subject to certain conditions precedent including, but
not limited to, the receipt of Chinese governmental approvals. This year saw major activity within our Health Care segment as well. Early in the first
quarter, we initiated our first clinical trial of a therapeutic candidate, a Phase I safety and
immunogenicity study for a DNA-based therapeutic vaccine to treat hepatitis B. In March, we sold
our entire therapeutic vaccine program to Belgian biotechnology company Innogenetics N.V. We
recognized $10 million in license fees associated with this transaction and have the potential of
receiving up to $87 million in development milestones as Innogenetics advances this vaccine
program. In the event these vaccine products reach commercialization, we also would receive
royalty payments on product sales. With this transaction, our Health Care segment focused on building and advancing its targeted
biotherapeutics pipeline focused on cancer treatment. We then advanced our first product
candidate, GCR-8886/2141, for treating cancer into Investigational New Drug (IND) enabling
development with the launch of a formal development project. This candidate is based on Protein
Activated Chemotherapy (PACT), which is our proprietary version of the Antibody Directed Enzyme
Prodrug Therapy (ADEPT) platform for directing anti-cancer drugs to tumors. GCR-8886/2141 targets
significant unmet medical needs in colorectal and pancreatic carcinoma. In December, we added to
this pipeline through an exclusive worldwide patent license agreement from the Public Health
Service giving us the right to develop and commercialize two therapeutic product candidates for
cancer. These candidates were under development by the National Cancer Institute. The first
candidate, GCR-3888, is currently in a Phase II clinical study for the treatment of hairy cell
leukemia and in a Phase I clinical study in subsets of treatment-refractory pediatric acute
lymphoblastic leukemia, chronic lymphocytic leukemia and non-Hodgkins lymphoma. The second
candidate, GCR-8015, is an improved second-generation candidate in the IND enabling stage of
development for expanded subsets of patients with these hematologic malignancies. We trace our history to 1982 when Genencor, Inc. was formed as a joint venture between
Genentech, Inc. and Corning, Inc. In 1987, Eastman Kodak Company acquired a 25% interest in
Genencor, Inc. Genencor International, Inc. was incorporated in Delaware in 1989 and commenced
operations in 1990 when Cultor Ltd. and Eastman Kodak formed a joint venture in the industrial
biotechnology area and acquired Genencor, Inc. In 1993, Eastman Kodak transferred its 50% interest
in Genencor International, Inc. to 4




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Eastman Chemical Company. In 1999, Danisco A/S acquired Cultor Ltd., which is now known as
Danisco Finland OY. After our initial public offering and continuing to the present, Eastman
Chemical Company and its affiliates and Danisco A/S and its affiliates each own in excess of 40% of
our outstanding common stock as well as all of our outstanding preferred stock. Our Marketed Products Our Bioproducts segment currently competes in four core areas serving our industrial, consumer
and agri-processing markets: cleaning, textiles, grain processing, and food, feed and specialties.
In addition to the products we have developed for our core markets, we have also developed one
product for the personal care market and are working to develop others. Within these markets, and
taking into account our 2004 acquisition of a majority interest in Genencor Kyowa Co. Ltd., our
Bioproducts segment recognized $389.8 million in product revenues in 2004 through the sale of
approximately 420 products and formulations in more than 80 countries. We manufacture these
products at our eight Bioproducts manufacturing facilities located in the United States, Finland,
Belgium, China and Argentina. We market these products primarily through our direct sales
organizations in the United States, the Netherlands, Singapore, Japan, China, the United Kingdom,
Argentina and Brazil, as well as through other distribution channels in selected markets and
geographic areas. Cleaning Products Our cleaning products include protein degrading enzymes, such as proteases; starch degrading
enzymes, such as amylases; and cellulose degrading enzymes, such as cellulases and a guar degrading
mannanase enzyme. These products are formulated in granular, liquid, tablet and gel forms. Our
commercially available cleaning products include the following: Purafect:
    
    A family of high alkaline protease enzymes used in laundry and dishwashing products to
clean stains and soils containing proteins, such as blood, grass, milk, gravy and tomato
sauce;Properase:
    
    A high alkaline protease enzyme available in a variety of formulations used in low
temperature wash conditions to clean stains and soils containing proteins, such as blood,
grass, egg, milk, gravy and tomato sauce;Purastar:
    
    A series of amylase enzyme containing products used in laundry and dishwashing products
to remove starch-based stains and soils, such as chocolate, gravy, baby food, rice and
pasta;Puradax:
    
    A high alkaline cellulase enzyme product used in laundry products to provide fabric care
such as removing fuzz and pills and providing color brightening; andPurabrite:
    
    A mannanase enzyme used to remove residues left by guar-containing food, such as ice
cream, barbecue sauce, processed foods, and salad dressing, or personal care items, such as
hair styling aids and make-up.
 Textiles Products Our textiles products include cellulase, amylase and protease enzymes for applications such as
denim finishing, biofinishing of cotton and cellulosics, and desizing and treatment of wool and
silk. Additionally, we market catalase enzymes used to remove hydrogen peroxide during the textile
dyeing process. These products are available in a variety of formulations, including liquid and
granular forms, and at various concentrations useful under altered conditions, such as high or low
temperature and high or low pH conditions. Our commercially available textiles products include
the following: IndiAge:
    
    A family of cellulase products used for denim finishing and processing of
high-performance cellulosic fibers, such as lyocell;Primafast:
    
    An acid cellulase used in the processing of high-performance cellulosic fibers, such as lyocell;Optisize:
    
    A family of amylase products for low or high temperature desizing processes;OxyGone:
    
    A family of catalase products used by fabric dyers to eliminate residual hydrogen
peroxide in the dyeing process; and
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Protex:
    
    A family of protease products used in denim processing and the treatment of wool and
silk.
 Grain Processing Products We market our grain processing products to customers who process agricultural raw materials
such as barley, corn, wheat and soybeans to produce animal feed, food ingredients, industrial
products, sweeteners and renewable fuels. Our grain processing products are used to make products
as diverse as beer, sweeteners and fuel ethanol. Subsets of these products are referred to in this
Report as: sweeteners or carbohydrate processing and fuel ethanol or fermentation alcohol. Our
commercially available grain processing products include the following: Spezyme:
    
    A broad family of alpha amylase enzymes useful in high and low temperature liquefaction
of starch;Optidex and
Optimax:
    
    A series of glucoamylase and debranching enzymes and their blends used in the
hydrolysis of starch to glucose;Gensweet:
    
    A family of isomerase enzymes in both soluble and immobilized form used in the
production of high fructose corn syrup;Optimalt and
Clarase:
    
    Maltogenic enzymes used in the production of maltose syrups;Distillase:
    
    A glucoamylase enzyme used in the hydrolysis of starch to glucose for the production of alcohol;Fermenzyme:
    
    A product line of glucoamylase and protease enzyme blends used in the production of alcohol; andG-Zyme:
    
    A line of alpha amylases and glucoamylases for starch processing to produce sweeteners,
ethanol and other products.
 Food, Feed and Specialties Products Our food, feed and specialties products are used in the food industry for such purposes as to
improve baking, to process proteins more efficiently and to preserve foods. Additionally, we sell
products to improve animal feed and pet food, to treat animal hides in the leather industry, to
recover silver residue in photographic film processing, to improve pulp and paper processing, and
to decontaminate certain nerve gas agents and organphosphate-based pesticides. Our commercially
available food, feed and specialties products include the following: Multifect, Protex,
Laminex and
Multifresh:
    
    A full product line of protease, beta-glucanase, cellulase and xylanase enzymes used
for such diverse applications as brewing, contact lens cleaning, the production of potable
alcohol, waste processing, protein processing and the production of pet food;OxyGO and
Fermcolase:
    
    A line of catalase and glucose oxidase enzymes used in industrial and food processing; andDefenz:
    
    A line of enzymes capable of breaking down certain organophosphate based materials
including nerve agents such as soman and sarin.
 Personal Care Products We also currently market a high-performance protease used in Dawn Special Care, a hand dish
care product sold by The Procter & Gamble Company offering skin-softening benefits to consumers. 6




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Products in Development The continued success of our business depends on our ability to develop innovative products
that meet our customers needs in our target markets. Our ability to develop products for our
targeted markets, including health care, may be limited by our resources, our ability to develop
and maintain strategic alliances, and the licensing and development of necessary technology. To
date, we have financed operations and product development from the sale of products, the sale of
stock, research and development funding from our strategic partners, government grants, and
short-term and long-term borrowings. Bioproducts We currently have numerous product development programs ongoing in the target markets
associated with our Bioproducts segment. Our most important programs include the following: Silicon Biotechnology.Our alliance with the Dow Corning Corporation seeks to combine our
expertise in biotechnology and Dow Cornings expertise in silicon chemistry to create a new,
proprietary Silicon Biotechnology platform. We plan to jointly commercialize products developed by
the alliance. The alliance has filed important patent applications and established a business unit
to pursue its biosensor market opportunities. The patent applications have been filed in three
strategic areas that we expect to define the initial fields of the alliances activity. The first
is in biotransformations, where the tools of biotechnology are used to modify silicon to create new
materials with unique attributes or to create new, more environmentally efficient processes for
existing silicon-based materials. The second area covers delivery systemswhere silicon and
biological materials are combined to deliver active ingredients for application in a wide spectrum
of markets, such as cleaning, health care and personal care. The third area covers nano-scale
systemsfor biosensing devices and performance materials. The alliance also established its first
business venture to pursue opportunities for biosensors in the fields of consumer in-home medical
tests, drug discovery, biowarfare threat analysis, veterinary diagnostics, and environmental and
home monitoring of air, water and food. The alliance is expected to pursue commercialization
opportunities alone and in partnership with market leaders in these target markets. Personal Care.We are developing enzyme, protein and peptide ingredients for incorporation
into skin, hair and oral personal care products. As part of the path to the market, we have
entered into exclusive development collaborations with two major personal care companies.
Additionally, we are developing a series of products for the entire market. At least six of these
products have passed initial safety and toxicology screening. Some of these have also completed
preliminary in vivo or in vitro performance testing and are being sampled to selected potential
customers. Prion Infectivity.In August 2001, we announced an exclusive collaboration with the
predecessor of the United Kingdoms Health Protection Agency to develop technology to eliminate
prions, the infectious agent thought to cause mad cow disease as well as the human form of that
disease, and our research and development activities are continuing. The collaboration is
primarily focused on developing an enzyme-based method for treating surgical equipment, rendered
animal material and blood products to eliminate prion infectivity. Though incineration and high
caustic treatments of infected material have shown some degree of prion inactivation, these
conditions are not suitable for general applications due to incompatability with most materials and
worker safety issues. Previously published results have shown our proprietary enzymes can decrease
immunoreactive prion particles under more user-friendly conditions consistent with enzyme
applications. More recent in vivo studies using mouse model systems have confirmed that the
proprietary proteases can reduce the infectivity of prion particles in both infected mouse brain
homogenate as well as meat and bone meal spiked with infectious prions. We are currently awaiting
regulatory approval in the European Union for the decontamination of surgical instruments.
Specifically, a data package covering this application has been assembled in anticipation of a CE
certification in the European Union for the product. Biomass Conversion to Ethanol.The agricultural industry produces a vast amount of waste
product known as biomass. Some examples include cornstalks, rice hulls and corn stover.
Currently, the agricultural industry cannot economically convert biomass on a large scale into
useful chemicals such as ethanol. In 2000, we were awarded an initial three-year $17.0 million
partial matching funds contract by the National Renewable Energy Laboratory (NREL) to continue our
efforts in developing a low cost enzyme system for the economic conversion of biomass to ethanol.
In April 2003, we announced we had exceeded our project goal of using our integrated technology
platforms to deliver a 10-fold improvement in the economics of breaking down biomass into
fermentable sugars. We completed our work with NREL in July 2004 delivering approximately a
30-fold improvement based upon the original NREL metrics. We are continuing our efforts in this
area with a focus on application of the technology to new product opportunities. 7




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Health Care In 2001, we commenced implementation of our health care business strategy. Since this is a
more recent initiative for us, our product pipeline is not as mature as in the bioproducts area.
We expect to continue investing in internal research programs, external collaborations and other
strategic investments in order to increase our development pipeline. With the sale of our
therapeutic vaccine program to Innogenetics, we have focused our efforts on targeted
biotherapeutics for the treatment of cancer. Targeted Biotherapeutics.We believe the protein therapeutics market is growing significantly,
and we believe we have identified opportunities to use our molecular biology, immunology, protein
engineering and manufacturing skills to address key problems typically associated with protein
therapeutics and to discover and develop new protein therapeutics. We are leveraging our key capabilities and technologies in an important area of focus,
discovery and development of protein-based drugs for cancer treatment. We are using our expertise
in exploiting natural and synthetic diversity to develop new methods for targeting therapeutics to
cancer cells as opposed to healthy cells. For example, pursuant to our agreement with Seattle
Genetics, we are developing tumor-targeted enzymes that convert relatively non-toxic prodrugs into
cytotoxic drugs. The enzyme is concentrated specifically at the tumor site through either an
antibody or a novel protein that targets a specific antigen expressed on the tumor cells. The
catalytic activity of the enzyme then leads to a significantly increased concentration of the
cytotoxic moiety and increased cell death at the tumor site. We refer to this approach as PACT,
which is our proprietary version of a platform widely known as ADEPT. In addition, with the
execution of a license and Cooperative Research and Development Agreement (CRADA) with the Public
Health Service and National Cancer Institute, we are developing immunotoxins targeted to
hematologic cancers expressing the CD22 antigen. We are also undertaking early stages of research
to leverage the immunotoxin technology and create leads directed against other cancer types. We are also exploring opportunities to leverage our expertise in protein expression and
manufacturing for production of protein therapeutics. We completed construction and have made
substantial progress in the validation of a clinical manufacturing facility designed to satisfy the
current Good Manufacturing Practice (cGMP) regulations of the U.S. Food and Drug Administration
(FDA) in order to meet the needs of our Health Care drug discovery portfolio and to provide
strategic partnering opportunities. Another area of activity is protein engineering services for the pharmaceutical industry,
which addresses problems ranging from immunogenicity to pharmacokinetics. For example, using our
i-mune assay, we can identify epitopes in a protein that may be responsible for initiating an
immune response. Then, through protein engineering, these problematic epitopes can be modified,
prior to human testing thereby reducing the risk of an adverse immune response. We are applying
such approaches primarily to enhance our internal research and development programs. In 2004, we
also conducted studies under funded agreements with a pharmaceutical company to evaluate that
companys proprietary molecules using the i-mune assay. Research and Development We have a strong commitment to proprietary research as an essential component of our product
development effort. Technology developed in collaborations with third parties, as well as
technologies licensed from third parties, are also important sources of potential products for us. We have developed several related technology platforms that we apply in an integrated approach
we call i-biotech to the discovery, optimization, production and delivery of our products. Our
technology platforms supported the development of current commercial products, and we believe that
application of these technology platforms may also generate new product candidates in our target
markets. Our technology platforms include the following: Gene Discovery and Functional Genomics Gene discovery is a series of techniques used to identify diverse genes whose encoded proteins
are capable of solving customer needs or treating a target disease. We identify genes either on
the basis of their sequence or on the basis of the function of their encoded protein products.
With this information, we identify and develop potential products. Identifying genes of interest
can start with the analysis of genes found in diverse culture collections, analysis of genes that
are expressed under differentially defined conditions or direct analysis of the proteins expressed
in a cell or culture. We apply all three approaches to gene discovery. 8




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Molecular Evolution and Design Molecular evolution and design is the process or set of tools by which we accelerate the
natural evolutionary process in order to engineer or optimize gene products for their intended use,
including bioproducts market applications as well as second-generation biopharmaceutical
candidates. Using integrated tools for assay development, library generation, and robotic sample
handling, we can rapidly develop and screen diversity libraries for activities or gene expression.
These technologies are being applied to ongoing internal projects, including, for example, our
personal care, cancer therapeutics, and biomass conversion projects. In nature, evolution occurs at a very slow rate. We accelerate the evolutionary process to
engineer and evolve, or optimize, the function of the protein we identify in the discovery process.
We optimize a gene by changing or mutating its DNA sequence to produce a variant protein with a
modified function. This process is known as mutagenesis. We alter proteins at a single site, at
multiple sites or randomly over the entire length of the protein sequence. We employ several
advanced chemical and enzymatic methods for mutating the DNA sequence of genes. We insert these
altered genes into our proprietary host production organisms so that we can screen the variant
proteins they produce for the identification of product leads. Human Immunology The potential for human allergic response limits the application of some engineered enzymes.
To address this limitation, we have developed our human immunology, or i-mune, platform. This
platform centers on an assay that determines the human immune response to proteins. The human immune system is an extraordinary defense mechanism capable of rapidly responding to
invading pathogens and other foreign molecules. Our i-mune assay recreates the first steps of the
human immune response in an automated assay format. We take a target protein and divide it into a
series of small, easily synthesized pieces. Using our assay, we determine if the protein contains
any pieces capable of causing an immune response. We then use the tools of our molecular evolution
and design platform to modulate the response. We have shown that we can decrease the allergenic
potential of specific proteases and have in vivo evidence, which means occurring within a living
organism, that the in vitro assay, which means occurring outside a living organism, accurately
predicts human allergenic results. We believe the human immunology platform will allow us to determine the allergenic potential
of proteins, including those of therapeutic value, to recommend ways to reduce their allergenic
potential and, using our molecular evolution and design platform, to develop new materials with
reduced allergenic response profiles without human testing. We believe these technology platforms
may potentially lead to products in our target markets. Biomaterial Production Systems The term biomaterial refers to traditional biocatalysts, chemicals produced through
biological routes and novel biological materials, such as repeat sequence proteins or biosensors.
A key element of our i-biotech approach is the concurrent application of our biomaterial production
systems platform with our other technology platforms. Biomaterial production systems consist of
host production organisms that we have adapted to accept genes from other organisms, or foreign
genes, and produce the proteins encoded by these foreign genes together with a proprietary process
for growing our host production organisms, which we refer to as our proprietary fermentation
processes. We grow, or ferment, our host production organisms under controlled conditions, allowing
these organisms to grow, divide and efficiently produce optimized proteins. We have developed
numerous host production organisms backed by patented technology and process know-how. Metabolic Pathway Engineering Metabolic pathway engineering is a process we use to modify our host production organisms to
produce small molecules and chemicals, or biochemicals. Microorganisms make biochemicals through
sequences of enzyme-catalyzed reactions, referred to as pathways. In order to produce these
biochemicals, we often add new pathways or parts of pathways from a variety of organisms into our
host production organisms. Our approach to metabolic pathway engineering, referred to as DesignPath, is the integration
of a variety of tools including genomics and functional genomics. We begin with the known
metabolic pathways of our host production organisms and then reconstruct the pathways based upon
our analysis. Then we add new genes, identified through our gene discovery and functional genomics
platform and optimized through our molecular evolution and design platform. Additionally, we are
applying these tools to develop more efficient production hosts by designing strains that have
better carbon utilization and less by-product formation during 9




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the fermentation cycle. These programs integrate our discovery technologies into a powerful
solution to improve expression levels of products and the utilization of raw materials. Formulation Delivery Systems Once we have developed a desired biomaterial, we typically formulate it in a manner customized
for the intended use of the customer. Our patented formulations range from stable liquids to
multi-layer granular formulations, including our Enzoguard granular products, which have
sophisticated properties such as delayed release and oxidation barriers. These formulations protect
biomaterials against harsh chemical and environmental conditions. In addition, we have designed and
developed highly efficient fluidized coating equipment and processes to make our formulated
products. Strategic Alliances A key part of our strategy has been and we expect will continue to be forming strategic
alliances with industry leaders in our target markets. In forming commercial alliances, we seek
partners that share our desire and commitment to grow, hold or have access to significant market
share in the target market and are willing to fund or participate in research and development
efforts. We also fund external alliances to access, apply and develop technologies that are
strategic to our target markets. Some of our key strategic alliances are as follows: Bioproducts The Procter & Gamble Company.Our alliance with The Procter & Gamble Company began with our
predecessor company in 1984 and continues to the present. Through this relationship, we have
conducted joint research and development leading to the commercialization of five engineered
protease enzymes. This relationship has enabled the launch of major new brand initiatives
involving their flagship detergent products Tide and Ariel. Our alliance with The Procter & Gamble Company is based currently upon two principal
agreements. First, we are party to a master collaboration agreement, dated October 31, 2003, which
expires on October 31, 2006. This agreement provides a framework for cooperation in numerous areas
as mutually agreed, particularly laundry and cleaning products. Second, in November 2001, we
announced the signing of a five-year worldwide supply contract with The Procter & Gamble Company to
provide protease enzymes for laundry and dish detergents. The contract extends our two decade long
relationship and further solidifies our position with respect to the innovation and
commercialization of protease enzymes for liquid and dry formulation. Dow Corning Corporation.In October 2001, we entered into an agreement with Dow Corning
Corporation seeking to combine our expertise in biotechnology with Dow Cornings expertise in
silicon chemistry. In June 2004, the parties amended the agreement, among other things extending
the collaboration through 2005. The program is attempting to develop unique materials combining
the inorganic and biological worlds and to address customer needs in markets we serve today as well
as create opportunities in the nanotechnology, photonics and electronics markets. To date, the
companies have explored product opportunities in markets both companies serve and anticipate that
the alliance will see some of its first successes through the introduction of new, biologically
mediated silicon-based products for the life sciences, personal care, cleaning and textiles
markets. We have achieved certain milestones, and the alliance has established its first business
venture to pursue opportunities for biosensors in the fields of consumer in-home medical tests,
drug discovery, biowarfare threat analysis, veterinary diagnostics, and environmental and home
monitoring of air, water and food. Danisco A/S.In October 2000, we entered into a four-year minimum term research and
development agreement with Danisco, one of the worlds leading food ingredients companies. The
collaboration is directed at the development and production of innovative biotechnology derived
products for use in the food industry. The first joint project target reached commercialization in
July 2004. NatureWorks LLC.In September 2003, Cargill Dow, now known as NatureWorks LLC, chose us to be
its partner to create advanced enzyme systems for a biomass project supported by the United States
Department of Energy. This project builds on our previous work with NREL to develop enabling
enzyme systems essential for the enzymatic conversion of biomass to ethanol. Health Care Seattle Genetics, Inc.In January 2002, we formed a collaboration with Seattle Genetics, Inc.
to discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that
activate prodrugs. In July 2003, we paid Seattle Genetics an extension fee 10




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and extended the agreement for two additional years under modified terms. Under terms of the
amended agreement, we have a nonexclusive license to Seattle Geneticss proprietary ADEPT
technology for multiple targets, and each company may independently develop products utilizing the
other partys applicable technology. We expect to continue accessing Seattle Geneticss novel
prodrug program in support of our Health Care development efforts. Seattle Genetics may continue
its research and development efforts of its lead ADEPT molecule, SGN-17/19, without further funding
from us. National Cancer Institute.In December 2004, we signed a license agreement and CRADA with the
Public Health Service and National Cancer Institute to develop and possibly commercialize two
product candidates for hematologic malignancies, GCR-3888 (formerly BL22) and GCR-8015 (formerly
HA22) and possibly follow-on lead molecules. This program builds on our strengths in protein
engineering, preclinical development, manufacturing and clinical development and on the National
Cancer Institutes clinical development capabilities. Research Expenses A major portion of our operating expenses has been related to the research and development of
products. During the years ended December 31, 2004, 2003, and 2002, our total research and
development expenses were $75.8 million, $72.5 million, and $70.2 million, respectively. Of these
expenses, an estimated $7.6 million, $13.1 million, and $15.4 million, respectively, represent
total expenses incurred in conjunction with research collaborations partially funded by our various
partners. Our research and development efforts have been a primary source of our products and represent
an essential component of our business strategy. As of December 31, 2004, we had 253 employees
involved full-time in our research and development efforts (including research and development,
regulatory and therapeutics production facility personnel), 72 of whom hold
Ph.D. degrees and three of
whom hold M.D. degrees. Competition We face significant competition in the enzyme markets in which we currently compete. As we
develop products for the health care market and new sectors of the bioproducts markets, we face a
host of new competitors, including, for example, biotechnology and pharmaceutical companies. In the industrial and consumer markets, some competitors may have a stronger market position
and greater financial resources than we do. Specifically, in cleaning enzymes, we believe that
Novozymes A/S, our largest competitor, may have more product offerings and a greater market share
than we do. In food and feed enzymes, we believe that DSM N.V. and Novozymes A/S have greater
market shares and more product offerings than we do. Our products and development programs target the bioproducts and health care markets. There
are many commercially available products for each of these markets and for the specific consumer
problems and the specific diseases we may attempt to address in product development. A large
number of companies and institutions are spending considerable amounts of money and resources to
develop products in our target markets. Competition in our current and target markets is primarily driven by:  
    the ability to establish and maintain long-term customer relationships;  
    the ability to develop, maintain and protect proprietary products and technologies;  
    technology advances that lead to better products;  
    product performance, price, features and reliability;  
    in the case of health care products, clinical efficacy, safety, convenience, and compatibility with other drug products;  
    timing of product introductions;  
    manufacturing, sales and distribution capabilities;  
    technical support and service; and  
    breadth of product line. Any product we make in the future will also likely compete with products offered by our
competitors. If our competitors introduce data that show improved characteristics of their
products, improve or increase their marketing efforts or lower the price of their products, sales
of our products could decrease. We cannot be certain that any products we develop in the future
will compare favorably to products offered by our competitors or that our existing or future
products will compare favorably to any new products that are developed by our competitors. Our ability to be competitive also depends upon our
ability to attract and retain qualified personnel, obtain patent protection and otherwise develop
proprietary products or processes. 11




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Proprietary Rights The protection of our proprietary technologies and products is important to the success of our
business. We rely on a combination of patents, licenses, trade secrets and trademarks to establish
and protect our proprietary rights in our technologies and products. Our intellectual property
portfolio includes rights in technologies including specific Bioproducts and Health Care products
and product candidates and methods of use, production technology, and technology covering research
tools such as high-throughput gene discovery, molecular evolution, immunological screens and
metabolic pathway engineering. In 2004, we filed 74 new and continuation in part utility patent
applications in the U.S. Patent and Trademark Office. Of the new filings, 54 were directed
primarily at technology in the Bioproducts arena and 11 were directed primarily to technology in
the Health Care field. The remaining nine new filings were directed to basic technology relevant
across our programs. In addition, as evidence of the emphasis we place on the protection of our

intellectual property, we owned or controlled 24 patents granted by the U.S. Patent and Trademark
Office and 23 patents granted from the European Patent Office in 2004. As of December 31, 2004,
our worldwide intellectual property portfolio included 484 issued U.S. patents and 855 pending U.S.
patent applications. Despite our existing portfolio, we may not be able to obtain the patents or licenses to
technologies that we will need to develop products for our target markets. Patents may be issued
that would block our ability to obtain patents or to operate our business. In addition, patents
have a limited duration. Generally, patents issued in the United States have a term of 17 years
from the date of issue for patents issued from applications submitted prior to June 8, 1995.
Patents issued in the United States from applications submitted on or after June 8, 1995 have a
term of 20 years from the date of filing of the application. Patents in most other countries have
a term of 20 years from the date of filing the patent application. Patent applications are usually
not published until 18 months after they are filed. The publication of discoveries in scientific or
patent literature tends to lag behind actual discoveries by at least several months. As a result,
there may be patent applications or scientific discoveries of which we are not currently aware. Raw Materials The raw materials that we use are commercially available products from a number of independent
sources. Based on total raw material expenditures, more than 65% of them have alternate sources of
supply, with the remaining supply base being commercially available and interchangeable. Our top
twenty suppliers of raw materials account for approximately 72% of the total raw material purchases
we make to support our global manufacturing operations. Manufacturing and Supply Capabilities We own or lease eight Bioproducts manufacturing and distribution facilities and eleven
stand-alone Bioproducts distribution centers, making up a global supply chain spanning four
continents. Our supply organization has a proven capability to meet customer demands. This
involves quality certification, such as ISO 9001:2000, multi-site product qualification, delivery
capabilities and special custom supply requirements. We strive to produce materials in locations
and with processes that allow us to minimize manufacturing and distribution costs, inventory and
capital investment. We also have a therapeutics production facility to support our preclinical and
clinical Health Care efforts. Finally, we recently announced plans for the construction of a new
manufacturing facility in Wuxi, China to replace our existing Bioproducts facility in that region. Trademarks The following are our trademarks: GENENCOR, GENENCOR INTERNATIONAL, INDIAGE, PRIMAFAST,
OPTISIZE, PURAFECT, PROPERASE, PURASTAR, PURADAX, PURABRITE, SPEZYME, G-ZYME, OPTIDEX, DISTILLASE,
OPTIMAX, FERMENZYME, GENSWEET, OPTIMALT, CLARASE, MULTIFECT, MULTIFRESH, FERMCOLASE, LAMINEX,
OXYGO, I-MUNE, I-BIOTECH, DEFENZ, DESIGNPATH, DESTIGEN, OXYGONE, PACT, PRIONZYME, PROTEX and
ENZOGUARD. SILICON BIOTECHNOLOGY is a trademark of the Dow Corning Corporation and us. The
following trademarks are owned by the individual companies: DAWN SPECIAL CARE, TIDE and ARIEL (The
Procter & Gamble Company); ADEPT (Seattle Genetics, Inc.). Major Customers Our five largest customers collectively accounted for approximately 51% of our 2004 product
revenues, with our largest customer, The Procter & Gamble Company, accounting for more than 32% of
such revenues. Our five largest customers in 2004 were a collection of related purchasers in the
grain processing area that we identify as The Broin Group; Danisco Animal Nutrition  the feed
ingredients business unit of Danisco A/S, which was formerly known as Finnfeeds; Cargill,
Incorporated; The Procter & Gamble Company; and Reckitt Benckiser, plc. 12




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Geographical and Product Class Information The financial information concerning geographical areas and product class revenues set forth
in Note 15 of the financial statements contained in Item 8 of this Report is incorporated herein by
reference. Regulatory Environment Product Regulation  Bioproducts Regulatory agencies regulate our products according to their intended use. The FDA regulates
food, feed, cosmetic and pharmaceutical products based on their application. The FDA and the U.S.
Environmental Protection Agency (EPA) regulate non-drug biologically derived products. The U.S.
Department of Agriculture regulates plant, plant pest and animal products. The EPA regulates
biologically derived chemicals not within the FDAs jurisdiction or the jurisdiction of other
regulatory agencies. Although the food and industrial regulatory process can vary significantly in
time and expense from application to application, the timelines generally are shorter in duration
than the drug regulatory process and range from three months to three years. The European Union (EU) has attempted to replace national regulatory procedures for
biologically derived products with a consistent EU regulatory standard. However, some national
regulatory oversight remains. Regulation of enzymes used as processing aids is currently
accomplished through such national oversight although the EU Commission is pursuing regulations
covering all food use enzymes at the EU level. For enzymes used as additives in food or feed,
centralized legislation exists requiring review of the product application by the European Food
Safety Authority. Regulatory review of our products in Pacific Rim and Asian countries having approval or
registration processes ranges from three months to two years. Currently, enzymes used in food
require approval in Japan, Korea and Australia/New Zealand and registrations in several other
countries. Certain Asian countries and some countries in Latin America rely on United States and
European product registrations. Product Regulation  Health Care In the United States, all phases of the development and commercialization of pharmaceuticals
are regulated primarily under federal law and subject to rigorous FDA review and approval
processes. Before a pharmaceutical candidate can be tested in humans, it must be studied in
laboratory experiments and in animals to provide data to support its potential safety, and clinical
supplies must be produced under the FDAs cGMP regulations. These data are submitted to the FDA in
an IND for review and authorization to study the pharmaceutical product in humans. Only after the
FDA finds the IND enabling data to be acceptable can a company commence clinical trials in humans
designed to demonstrate that a pharmaceutical product is safe and effective for its intended use. These clinical trials are subject to federal regulations, are very expensive and usually take
many years. These studies are divided into three separate phases. In Phase I, studies are
conducted with a relatively small number of healthy human subjects or patients to assess the safety
of the product, dose tolerance, pharmacokinetics, metabolism, distribution and excretion. In Phase
II, the product is given to a limited target patient population to further assess safety and to
begin to assess efficacy and dose safety. If the results of these first two phases are favorable,
then Phase III studies are conducted in the target patient population with a number of subjects
large enough to statistically establish safety and efficacy of the product. Concurrent to the
clinical development, a company needs to also generate data on the manufacture and controls of the
pharmaceutical product. Upon the successful completion of Phase III and demonstration of the
ability to produce the product under cGMP conditions, a New Drug Application (NDA) or a Biologics
License Application (BLA) is submitted to the FDA. The clinical and manufacturing information
submitted with the application is reviewed by the FDA, which will approve the product for marketing
if it judges that, pursuant to current regulations, the data contained in the application support
the safety and efficacy claims and the manufacturing and controls data demonstrate the quality,
purity, safety and identity of the product. On average, it takes the FDA six to twelve months to
review and approve an NDA or BLA. Significant changes in manufacturing and controls of the product
or additional labeling claims pursued after approval of the initial application is obtained will
require submission of additional data to the FDA for review and approval. Regulatory procedures for licensing drug products in Europe are generally comparable to those
in the United States. Biologic products are reviewed through a centralized procedure that leads to
granting of a single license for the entire EU. 13




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Environmental Regulation We are subject to national, state, and local environmental laws and regulations, including
those governing the handling and disposal of hazardous wastes, wastewater, solid waste and other
environmental matters. Our research, development and manufacturing activities involve the
controlled use of hazardous materials, including chemical, radioactive and biological materials.
Although we believe that our safety procedures for handling and disposing of these materials comply
with applicable regulations, we cannot completely eliminate the risk of accidental contamination or
injury from these materials. In the event of an accident, we could be held liable for resulting
damages. We do not expect that compliance with the environmental regulations to which we are
subject will have a material effect on our capital expenditures, earnings or competitive position. Genetically Modified Microorganisms Genetically modified microorganisms and products derived from these organisms are regulated in
many countries around the world. In the United States, we voluntarily comply with the National
Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules at all of our
research and development facilities. We also comply with the EPAs regulation of intergeneric
microorganisms under the Toxic Substances Control Act. We design our production organisms and
processes to comply with regulatory principles and practices in both manufacturing and commercial
venues regardless of the location. By using production organisms that are classified as Good
Industrial Large Scale Practice or Biosafety Class I organisms, we are able to maximize
environmental and employee safety while minimizing regulatory concerns. Through this strategy, we
have been successful in gaining regulatory clearance to use our genetically modified microorganisms
in our manufacturing factories in the United States, Belgium and Finland and in our research
facilities in the United States and the Netherlands. Compliance To be able to commercialize our products around the world, we must ensure that they are safe
and suitable for their intended use and meet applicable regulatory requirements. Their manufacture
also must comply with all existing regulations at our manufacturing sites. In order to meet this
need, we have an experienced internal regulatory and environmental health and safety department
that is involved in projects from the earliest possible stage. Animal Welfare Act The Animal Welfare Act governs the humane handling, care, treatment and transportation of
certain animals used in research activities in the United States. Mice are currently not subject
to regulation under the Animal Welfare Act. However, the U.S. Department of Agriculture, which
enforces the Animal Welfare Act, is presently considering changing the regulations issued under the
Animal Welfare Act to include mice within its coverage. The Animal Welfare Act imposes a wide
variety of specific regulations on producers and users of animal subjects, including specifications
for the safe handling, care, treatment and transport of animals covered. Currently, we house no
animals at our facilities. We believe that our housing facility vendors and external toxicology
laboratories are in compliance with the Animal Welfare Act. Employees As of December 31, 2004, we had 1,271 active employees in our consolidated entities, including
83 with Ph.D. degrees and four with M.D. degrees. We may expand our research and development and
business operations and hire additional staff as we expand our technology and market opportunities
and establish new strategic alliances and customer relationships. We continue to search for
qualified individuals with interdisciplinary training and flexibility to address the various
aspects and applications of our technologies. None of our United States employees were represented
by a labor union as of December 31, 2004. Employees at several of our foreign locations are
covered by collective labor agreements, including employees in Argentina, Belgium, Finland, France,
Germany and the Netherlands. We strive to maintain strong working relationships with all the
employee representatives. Website Access To Reports Through our Internet website, we make available free of charge our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports
as soon as reasonably practicable after we electronically file such material with, or furnish it
to, the U.S. Securities and Exchange Commission (SEC). Our website
address is www.genencor.com,
and these reports can be accessed through the Investor Relations section of our website. By
including our website address in this Annual Report on Form 10-K, we do not intend to include or
incorporate by reference the information on our website into this Annual 14




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Report on Form 10-K, and under no circumstances shall such information be deemed to be
included in or incorporated by reference into this Annual Report on Form 10-K. Risk Factors Biotechnology and especially the development of products for the health care market are areas
of intense competition and high risk. Accordingly, significant risk factors, including those
described below could harm our business, financial condition, and/or results of operations. Risks Related to Our Business If we fail to develop products for the health care and bioproducts markets, we may not achieve an
acceptable return on our research and development expenditures or realize product revenues from
these markets. Our future success will depend in part on continuous, timely development and introduction of
new products that address evolving market requirements and are attractive to customers. 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 may be reluctant to
switch thereafter. In addition, our Health Care segment is a relatively new business strategy for
us and our future success in this segment will depend upon our ability to utilize our technologies
for the development and delivery of new products to the health care market. We intend to continue
to invest heavily in research and development to develop products for both our Bioproducts and
Health Care segments. To the extent that we fail to introduce new products, we could fail to obtain
an adequate return on these investments and could lose market share to our competitors, which may
be difficult to regain. The successful development of these 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 such
regulatory approvals may be delayed significantly;
    the product may not be economically viable because of manufacturing costs or other
factors, which are not known to us at this time;
    the product may not gain acceptance in the marketplace or we may fail to adequately
address our customers requests for modifications and improvements on our existing
products;
    our competitors may successfully introduce competing products into the market and
develop substantial market share before we are able to introduce our products; or
    the proprietary rights of others or competing products or technologies for the same
application may preclude us from commercializing the product. As a result of these factors and others, we may experience delays in the development and
introduction of new products in our existing bioproducts markets. Also due to these factors we may
never achieve an acceptable return on our research and development expenditures or realize product
revenues from our Health Care segment or in new bioproducts markets that we are targeting, such as
personal care products. We have yet to commercialize a Health Care product, our Health Care segment has a history of losses
and we expect to continue to incur losses in that segment for the foreseeable future. We have yet to commercialize a Health Care product, and our Health Care segment has incurred
net losses since we commenced implementation of our Health Care business strategy in 2001,
including net losses of $24.1 million in 2001, $40.9 million in 2002, $33.6 million in 2003 and
$23.3 million in 2004. We expect to incur additional losses for the foreseeable future as a result
of our research and development costs, including costs associated with conducting preclinical
development and clinical trials, which will continue to be substantial. Because of the numerous
risks and uncertainties associated with developing products in the Health Care segment, we are
unable to predict the extent of any future losses or when this segment will become profitable, if
ever. 15




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If we fail to enter into strategic alliances with partners in our target markets or if our existing
strategic alliances terminate, we may 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 have in the
past and expect to continue to form strategic alliances with industry leaders in our target markets
to gain access to funding, research and development and distribution channels. We may fail to
enter into the necessary strategic alliances or our existing strategic alliances may terminate,
each of which would limit our product development efforts and market opportunities. In addition,
our present or future strategic alliance partnerships could be harmed if:  
    we fail to meet our agreed upon research and development or other business objectives;
    we disagree with our strategic partners over material terms of the alliances, such as
manufacturing and distribution rights and the ownership and commercialization of
intellectual property resulting from the alliance; or
    we enter into a new strategic alliance or ownership structure that conflicts with the
business objectives of a pre-existing strategic alliance partner. Our strategic alliance partners may determine not to develop our products or may develop products
that compete with our products. In many cases, we have limited or no control over the resources that a strategic alliance
partner or collaborator may devote to our products. Our strategic alliance partners or
collaborators may not develop products arising out of our collaborative arrangements or devote
sufficient resources to the development, manufacture, marketing, or sale of these products. In
addition, a strategic alliance partner may determine to develop products that compete with our
products. If any of these situations were to occur, our product development efforts could be
adversely affected, particularly where we have given the strategic alliance partner exclusive
rights with respect to the development of a product. If we fail to independently raise additional capital when needed, we may be forced to delay, reduce
or eliminate some of our product development efforts. Developing and commercializing products for the bioproducts and health care markets requires
significant financial resources. To continue to capitalize on the existing and future market
opportunities we have identified, we may need to seek additional capital, which may occur through
the incurrence of indebtedness and/or private or public offerings of equity and debt securities.
Due to economic, market, geopolitical and other conditions beyond our control, we may not be able
to raise additional capital when needed for our business on acceptable terms or conditions, if at
all. If adequate financing is not available, we may be required to delay, reduce the scope of or
eliminate one or more of our research and development programs. If the demand for our cleaning market enzymes decreases, our revenues could significantly decline. Our cleaning market enzymes accounted for approximately 47% of our 2004 product revenues. If
the demand for cleaning enzymes decreases or alternative enzymes render our products
noncompetitive, our revenues could significantly decline. We are dependent on sales to a relatively small number of significant customers, and the loss of
any one of these customers could cause a significant decline in our revenues and profitability. Our five largest customers collectively accounted for approximately 51% of our product
revenues in 2004 with our largest customer, The Procter & Gamble Company, accounting for more than
32% of such revenues in 2004. Any one of these customers may reduce their level of business with
us. Should The Procter & Gamble Company or any of our other large customers decide to reduce or
terminate business with us, our revenues and profitability could decline significantly. We generally do not enter into long-term supply contracts with our customers, and changes in our
relationships with our customers could significantly harm our business and operating results. While we do have arrangements of various durations with some of our customers, we generally do
not enter into long-term supply agreements with our customers. As a result, we are routinely
involved in discussions with customers regarding the status of our 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, we expect that
our customer base will continue to change over time as will the nature of our 16




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relationships with individual customers, including major customers. These changes may
significantly harm our business and operating results. If our competitors are better able to develop and market products, it could reduce sales of our
products. We face significant competition in the markets in which we currently compete. As we develop
products for the bioproducts and health care markets, we face a host of new competitors, including,
for example, biotechnology and pharmaceutical companies. In the bioproducts markets, some
competitors may have a stronger market position and greater financial resources than we do.
Specifically, in cleaning enzymes, we believe that Novozymes A/S, our largest competitor, may have
more product offerings and a greater market share than we do. In food and feed enzymes, we believe
that DSM N.V. and Novozymes A/S have greater market shares and more product offerings than we do. Competition in our current and target markets is primarily driven by the following:  
    ability to establish and maintain long-term customer relationships;
    ability to develop, maintain and protect proprietary products and technologies;
    technology advances that lead to better products;
    product performance, price, features and reliability;
    in the case of health care products, clinical efficacy, safety, convenience, and compatibility with other drug products;
    timing of product introductions;
    manufacturing, sales and distribution capabilities;
    technical support and service; and
    breadth of product line. Any product we make in the future will also likely compete with products offered by our
competitors. If our competitors introduce data that show improved characteristics of their
products, improve or increase their marketing efforts or lower the price of their products, sales
of our products could decrease. We cannot be certain that any products we develop in the future
will compare favorably to products offered by our competitors or that our existing or future
products will compare favorably to any new products that are developed by our competitors. Our
ability to be competitive also depends upon our ability to attract and retain qualified personnel,
obtain patent protection and otherwise develop proprietary products or processes. We intend to acquire businesses, technologies and products; however, we may fail to realize the
anticipated benefits of such acquisitions and we may incur costs that could significantly
negatively impact our profitability. We intend to acquire other businesses, technologies and products in the future that we believe
are a strategic fit with our business. These transactions could include mergers, acquisitions,
strategic alliances and licensing agreements. If we undertake any transaction of this sort, we
will face a number of risks that may adversely impact our business, financial condition and results
of operations, including the following:  
    Integration Difficulties and Costs. The acquisition of another company may require us
to integrate our products, services and technologies with those of the acquired company.
We may not be able to successfully manage this integration or it may result in significant
and/or unexpected additional costs. Integration may also result in a substantial
distraction to our senior management and this distraction may delay or prevent us from
successfully pursuing our existing business strategies.
    Transaction Costs and Charges. As a result of acquiring businesses or entering into
other significant transactions, we have previously experienced significant charges to
earnings for merger and related expenses that may include transaction costs, closure costs
or costs related to the write-off of acquired in-process research and development. Similar
costs and charges could arise in future transactions and have a material adverse impact on
our results of operations for quarterly or annual periods and possibly have an adverse
impact upon the market price for our common stock.
    Loss of Employees. If we acquire another business, we could experience disruptions in
our employee base due to a variety of factors, including changes in compensation, reporting
relationships, future prospects and the direction and strategy of our business. As a
result of these disruptions and the general uncertainty often inherent in an acquisition,
key employees of both our business and the acquired company may seek employment elsewhere,
including with our competitors.
    Failure to Obtain Anticipated Benefits. When we acquire any business, product or
technology, we may not be able to create the technological, operating and other advantages
that our management initially expected. Failure to obtain anticipated benefits 17




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from an acquisition can result from many factors, including unanticipated contingent and other
liabilities, overlap among product and service lines, conflicts with customers and suppliers
and the inability to profitably utilize acquired technologies. These types of failures could
negatively impact both our profitability and the market price for our common stock.
    Adverse Impact of Acquisition Financing. If we use our common stock to finance any such
future acquisitions, our existing stockholders interest in us could be diluted. If we use
indebtedness to fund future acquisitions, the servicing of this indebtedness may negatively
impact our results of operations and the agreements governing such indebtedness may contain
financial, operating and other covenants that impose significant restrictions on our
business. If we are unable to secure or maintain adequate intellectual property protection or become involved
in an intellectual property dispute, it could significantly harm our financial results and ability
to compete. Our success depends in part on our ability to obtain patents and maintain adequate protection
of our other intellectual property for our technologies in the United States and globally. In
addition to protecting our own intellectual property rights, we must also avoid infringing patent
and other intellectual property rights of third parties, for example misappropriation of third
party owned trade secrets, and not breach any licenses, non-disclosure or other agreements that we
have entered into with third parties regarding technologies and products. However, the patent and
other intellectual property rights of biotechnology companies 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 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 or cause a loss of license derived income. In addition, third parties could
successfully challenge, invalidate or circumvent our issued patents or patents licensed to us, for
example through court, reexamination or opposition proceedings. Further, we must make judgments
regarding which aspects of our research and development activities to protect with patents.
Because we often must apply for patents significantly in advance of when we attempt to develop and
commercialize particular products, we may fail to apply for adequate patent protection in a
sufficiently timely manner for these products. As a result, we may not obtain the patents or
licenses to technologies that we will need to develop products for our target markets. In
addition, the laws of some foreign countries may also not protect our intellectual property rights
to the same extent as United States law or we may be unable to obtain any patent protection in some
foreign countries. Also, our patent portfolio includes patents that are nearing the end of their
period of protection. While we do not expect to experience a material adverse effect related to
patent expirations in the near term, the expiration of patents may submit us to new competition and
price pressures that may lead to a significant loss of product revenue. We also 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, consultants and customers. Nonetheless, unauthorized use or disclosure of our
confidential and proprietary information may occur in the future, and others may independently
develop substantially equivalent information and techniques or otherwise gain access to our trade
secrets. We typically file patent applications in countries that require publication of patent
applications within 18 months of the filing date which can diminish the value of trade secrets
described in the patent application. Extensive litigation regarding patents and other intellectual property rights is common in the
biotechnology industry and many companies in this industry have employed intellectual property
litigation as a way to gain competitive advantage. In the ordinary course of business, we
periodically receive notices of potential infringement of patents or misappropriation of trade
secrets owned 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. The outcome of any such litigation is inherently uncertain. Even if we are
successful, the litigation can be costly in terms of dollars spent and diversion of management
time. If a third party successfully claims an intellectual property right to technology we use, it
may force us to discontinue an important product or product line, alter our products and processes,
pay license fees, pay damages for past infringement or cease certain activities. Under these
circumstances, we may attempt to obtain a license to this intellectual property. However, we may
not be able to do so on commercially reasonable terms or at all. In addition, regardless of the
validity of such a claim, its mere existence may affect the willingness of one or more or our
customers to use or continue to use our products and, thereby, materially impair our business and
results of operations. 18




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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. If we lose our key personnel or are unable to attract and retain qualified personnel as necessary,
it could delay our product development programs and harm our research and development efforts. Our success depends to a significant degree upon the continued contributions of our executive
officers, management, and scientific staff. If we lose the services of one or more of these people,
we may be unable to achieve our business objectives. We may not be able to attract or retain
qualified employees in the future due to the intense competition for qualified personnel among
biotechnology and other technology-based businesses. If we are not able to attract and retain the
necessary personnel to accomplish our business objectives, we may experience constraints that will
adversely affect our ability to meet the demands of our strategic alliances in a timely fashion or
to support our internal research and development programs or our manufacturing and distribution
requirements. Although we believe we will be successful in attracting and retaining qualified
personnel, competition for experienced scientists and other technical personnel from numerous
companies and academic and other research institutions may limit our ability to do so on acceptable
terms. Our international operations are subject to a number of risks that could be costly in terms of
dollars spent, diversion of managements time and revenues and profits. In 2004, we derived approximately 58% of our product revenues from our foreign operations. In
addition, we have significant operations in a number of foreign countries, including Argentina,
Belgium, China, Finland and the Netherlands. 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, 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;
    disputes with governmental agencies and other bodies regarding our business, operations
and facilities in foreign jurisdictions;
    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. Foreign currency fluctuations could cause our revenues and profits to decline. Our foreign operations generate sales and incur expenses in local currency. As a result, we
are exposed to market risk related to 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. For example, product revenues denominated in Euros
accounted for approximately 40% of our total product revenues in 2004, and the fluctuations in the
currency exchange rate against the U.S. Dollar can have a significant impact on our reported
product revenues. Opposition to 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, particularly in the food and feed sectors. If we are not able to overcome
concerns relating to safety and environmental hazards of genetic engineering, the general public
may not accept our products or third party products that contain our products. This may also
prevent us from commercializing certain new products. In addition, negative public attitudes in a
number of countries toward genetically engineered products, particularly those in the EU, may
negatively influence laws and regulations governing the ownership or use of genetic material. 19




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If we become 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. Our 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. We lease or own approximately 34 facilities throughout the world. 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,
which must be transported to approved storage, treatment and disposal sites and facilities. We
cannot eliminate entirely the risk of contamination or the discharge of hazardous materials and any
resultant injury from these materials and wastes. Federal, state, local and foreign laws and
regulations govern the use, manufacture, storage, handling, transportation and disposal of these
materials and wastes. Third parties may sue us for any injury or contamination resulting from our
use or a third partys use of these materials. Any accident could partially or completely shut
down our affected 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. Legal restraints and required government approvals could delay or prevent our introduction of
products. Regulatory agencies regulate our products according to their intended use. The FDA regulates
food, feed, cosmetic and pharmaceutical products based on their application. The FDA and the EPA
regulate non-drug biologically derived products. The U.S. Department of Agriculture regulates
plant, plant pest and animal products. The EPA regulates biologically derived chemicals not within
the FDAs jurisdiction or the jurisdiction of other regulatory agencies. Although the food and
industrial regulatory process can vary significantly in time and expense from application to
application, the timelines generally are shorter in duration than the drug regulatory process and
range from three months to three years. Regulation of enzymes used as processing aids in Europe is
currently through national oversight. However, the European Union Commission is presently drafting
regulations covering all food use enzymes at the EU level. In Pacific Rim and Asian countries that
have approval or registration processes, these processes range from three months to two years.
Certain Asian countries and some countries in Latin America rely on United States and European
product registrations. In the United States, all phases of the development and commercialization of pharmaceuticals
are regulated primarily under federal law and subject to rigorous FDA review and approval
processes. The manufacturing process for pharmaceutical products is highly regulated, and
regulators may shut down manufacturing facilities that they believe do not comply with regulations.
The FDAs cGMP are extensive regulations governing manufacturing processes, stability testing,
record-keeping and quality standards. Regulatory procedures for licensing drug products in Europe
are comparable to those in the United States. Biologic products are reviewed through a centralized
procedure that leads to a single license for the entire EU. In addition, each product must receive
individual pricing approvals before it can be marketed. The process of obtaining these approvals
is expensive, often takes many years and can vary substantially based upon the type, complexity and
novelty of the products involved. These regulations may delay or prevent our introduction of new products, particularly with
respect to any health care products we develop, as we have limited experience with respect to the
laws and regulations relating to these products. Before we commercialize and sell any of our product candidates in our Health Care segment, we must
conduct clinical trials, which are expensive and have uncertain outcomes. Conducting clinical trials is a lengthy, time-consuming and expensive process. Before
obtaining regulatory approvals for the commercial sale of any products in our Health Care segment,
we must demonstrate through preclinical testing and clinical trials that our product candidates are
safe and effective for use in humans. We have incurred and will continue to incur substantial
expense for, and we have devoted and expect to continue to devote a significant amount of time to,
preclinical testing and clinical trials. Historically, companies have found that the results from preclinical testing and early
clinical trials have often not been predictive of results obtained in later clinical trials.
Similarly, a number of new drugs and biologics have shown promising results in clinical 20




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trials, but subsequently failed to establish sufficient safety and efficacy data to obtain
necessary regulatory approvals. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In
addition, we may encounter regulatory delays or rejections as a result of many factors, including
changes in regulatory policy during the period of product development. Our own ability to manufacture health care products is uncertain, which may make it more difficult
for us to develop and sell our products. In addition to the many other risks in developing health care products, if we determine to
manufacture our own health care products, we may encounter problems with the following:  
    production yields;
    quality control and assurance;
    availability of qualified personnel;
    adequate training of new and existing personnel;
    on-going compliance with our standard operating procedures;
    on-going compliance with FDA regulations;
    production costs; and
    development of advanced manufacturing techniques and process controls. Risks Related to Ownership of Our Common Stock If the ownership of our common stock continues to be highly concentrated with Danisco A/S and
Eastman Chemical Company, it may prevent our 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 and Danisco and their
affiliates, which we refer to as our major stockholders, each own approximately 42% of our
outstanding common stock. Moreover, pursuant to a stockholder agreement among Eastman, Danisco and
us, each of our major stockholders also has the right to nominate three of our ten directors. As a
result of their ownership percentage and their board nomination rights, the significant
stockholders have the ability, in the event they act together, to significantly influence
fundamental corporate transactions and other important issues, including the election of our
directors, the approval of merger transactions involving us, acquisitions and sales of assets,
amendments to our certificate of incorporation and bylaws, the incurrence of indebtedness and the
strategic direction of our business. Even if the major stockholders act independently of each
other, each has significant influence over corporate transactions requiring stockholder approval.
The concentration of ownership of our common stock may have the effect of either delaying or
preventing a change to our control favored by our other stockholders or accelerating or approving a
change to our control opposed by our other stockholders. As the major stockholders interests may
be different than ours and those of our stockholders, the influence of these stockholders could
create conflicts of interest between them and us with respect to the allocation of corporate
opportunities and between the major stockholders and other stockholders. If 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 of our stock into the
public market or the perception that these sales could occur. Our two major stockholders, for
example, each hold approximately 42% of our common stock. These stockholders are not subject to
any contractual restrictions on future sales of their shares. In addition, subject to limitations
regarding offering frequency and size, these stockholders may require us to file registration
statements to resell their shares under the Securities Act of 1933 (Securities Act) or to sell
their shares pursuant to any registration statement that we file on our own behalf. In addition, we have stock options, stock appreciation rights and restricted stock outstanding
with certain of our directors, officers, employees and consultants pursuant to our 2002 Omnibus
Incentive Plan, approved by our stockholders in May 2002, and its predecessor plan. We have filed
registration statements with respect to these plans and, as a result, the shares received upon
exercise of these options generally may be sold in the public market, subject to limitations
imposed by Rule 144 under the Securities Act that may apply to our affiliates. 21




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Our common stock price has been, and may continue to be, volatile, which may adversely affect the
value of an investment in our common stock. 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 common
stock may be affected by this type of market volatility, as well as by our own performance. During
the 12-month period ended December 31, 2004, the closing price of our common stock on the Nasdaq
Stock Market ranged from $12.35 to $16.96. The following factors, among other risk factors, may
have a significant affect 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, such as natural disasters or acts of terrorism;
    future royalties from product sales, if any, by our licensees; and
    sales of our common stock or other securities in the open market. In the past, stockholders have often instituted securities class action litigation after
periods of volatility in the market price of a companys securities. Recently, we have been named
in several lawsuits regarding the Acquisition Agreement, and we could incur substantial legal fees
in connection with, and our managements attention and resources could be diverted from operating
our business to respond to, these suits and any other litigation involving us. 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 and difficult to reduce quickly in a cost effective manner. 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. As a result of these and other factors, our quarterly revenue and operating
results have fluctuated in the past and are likely to do so in the future. If our operating
results in some quarters fail to meet the expectations of stock market analysts and investors, our
stock price would likely decline. Some of the factors that could cause our revenue and operating
results to fluctuate include the following:  
    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;
    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; and
    fluctuations in fees and royalty revenues due to the timing of milestone and other
payments. We also have incurred significant infrequently occurring charges within given quarters, such
as those incurred in conjunction with restructuring activities and recognized investment
income/expense from available-for-sale marketable securities. 22




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Item 2. Properties We lease or own 34 facilities throughout the world. Our nine global manufacturing facilities,
with eight currently serving our Bioproducts segment and one constructed to serve our Health Care
segment, are located in Cedar Rapids, Iowa; Rochester, New York; Beloit, Wisconsin; Hanko and
Jamsankoski, Finland; Brugge, Belgium; Jiangsu Province, China and Province De Cordoba, Argentina,
represent approximately four million liters of fermentation capacity and provide the base for our
19 global distribution centers. We also have 14 administrative and sales offices included in the
34 facilities. We lease our principal offices located in 154,783, 43,944, and 29,000 square feet
of space in Palo Alto, California, Rochester, New York, and Leiden, the Netherlands, respectively,
and each site serves both of our business segments. The leases for these facilities expire in
2017, 2009 and 2019, respectively. We believe that our facilities are in good operating condition
and that all real property owned or leased is adequate for all present and near term uses. Information concerning each of our manufacturing facilities is as follows: Site
    
    Ownership
    
    Business SegmentCedar Rapids
    
    Owned
    
    BioproductsGenencor International, Inc.Cedar Rapids, IowaHanko
Genencor International OY
    
    Leased, 50 year term
expiring 2029
    
    BioproductsHanko, FinlandBrugge
    
    Owned
    
    BioproductsGenencor International BVBABrugge, BelgiumJamsankoski
    
    Owned
    
    BioproductsGenencor International OYJamsankoski, FinlandArroyito
    
    Owned
    
    BioproductsGenencor International Argentina, S.A.Province De Cordoba, ArgentinaRochester Center for Development and
Commercialization (RCDC)
Genencor International, Inc.
Rochester, New York
    
    Leased, 50 year term
expiring 2040, with
right to purchase for
$1.00
    
    BioproductsRochester Therapeutic Production
Center
Genencor International, Inc.
    
    Building beneficially owned
on same leased parcel as RCDC
    
    Health CareRochester, New YorkBeloit
    
    Owned
    
    BioproductsGenencor International Wisconsin, Inc.Beloit, WisconsinWuxi 
Genencor (Wuxi) Bio-Products Co., Ltd.
Jiangsu Province, P.R. of China
    
    Governmental land use
rights to use land
    
    Bioproducts
 In January 2005 we announced our plans to build a new manufacturing facility in the Wuxi China
National New and High Tech Industrial Development Zone to replace our current facility in Wuxi,
China. The new site is approximately 20 acres, which includes room for future expansion, and is
expected to house sales support, customer service, technical and logistical support and warehouse
operations in addition to manufacturing operations. 23




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Item 3. Legal Proceedings Proceedings Related to the Danisco Acquisition On January 27, 2005, Genencor, certain of its officers and directors and Danisco were named in
a purported class action complaint filed in the Court of Chancery of the State of Delaware. The
case was captioned Zappolla v. Genencor International, Inc. et al., No. 1052-N. This complaint
alleged that defendants entered into the Acquisition Agreement without having engaged in fair and
open negotiations with all potential bidders, without having performed an active market check
and/or open auction for sale of Genencor, and that the consideration to be paid pursuant to the
Acquisition Agreement is inadequate. The complaint also alleged that the individuals named as
defendants have acted and are acting contrary to their fiduciary duty to seek to maximize
stockholder value. The plaintiff sought to, among other things, enjoin the proposed acquisition of
Genencor by Danisco. As described below, this case was subsequently consolidated and the plaintiffs
and defendants have entered a memorandum of understanding that, if approved by the Delaware
Chancery Court, will result in a dismissal with prejudice of all claims in the consolidated case. A second purported class action complaint was filed against Genencor, certain of its officers
and directors, Danisco and Eastman in the Court of Chancery of the State of Delaware on January 27,
2005. The case is captioned Mirfred Partners LLC v. Genencor International, Inc. et al., No.
1053-N.This complaint alleged that the consideration to be paid pursuant to the Acquisition
Agreement is inadequate and was fixed arbitrarily by Genencors major stockholders. The plaintiff
sought to enjoin the proposed acquisition of Genencor by Danisco, or alternatively sought
rescission and putting aside of the proposed acquisition or awarding rescissory damages if the
proposed acquisition were completed, and awarding compensatory damages and other relief. As
described below, this case was subsequently consolidated and the plaintiffs and defendants have
entered a memorandum of understanding that, if approved by the Delaware Chancery Court, will result
in a dismissal with prejudice of all claims in the consolidated case. A third purported class action complaint was filed on January 27, 2005 against Genencor and
certain of its officers and directors in the Superior Court of the State of California, County of
Santa Clara. The case is captioned Rice v. Genencor International, Inc., et al., No. 105CV 034734.
This complaint alleges that Genencors directors violated their fiduciary duties in connection with
the proposed acquisition and that the plaintiff and other members of the purported class will not
receive their fair portion of the value of Genencors assets and business and will be prevented
from obtaining the real value of their equity ownership of Genencor. The plaintiff seeks, among
other things, to enjoin the proposed acquisition of Genencor by Danisco. Genencor is defending
the claims alleged in this lawsuit. A fourth purported class action was filed on February 4, 2005 against Genencor and its
directors, Eastman and Danisco in the Court of Chancery of the State of Delaware. The case is
captioned Sloboda v. Genencor International, Inc. et al., No. 1072-N.This complaint alleged that
the consideration to be paid pursuant to the Acquisition Agreement is inadequate, does not reflect
Genencors improving potential, is based on access by Danisco and Eastman to internal financial
information about Genencor, and that Danisco and Eastman have material conflicts of interest and
that they and the Genencor directors are breaching their fiduciary duties. The plaintiff sought to
enjoin the proposed acquisition of Genencor by Danisco, or alternatively sought rescission and
putting aside of the proposed acquisition or awarding rescissory damages if the proposed
acquisition were completed, and awarding compensatory damages and other relief including attorneys
and experts fees and expenses. As described below, this case was subsequently consolidated and the
plaintiffs and defendants have entered a memorandum of understanding that, if approved by the
Delaware Chancery Court, will result in a dismissal with prejudice of all claims in the
consolidated case. A fifth purported class action was filed on February 8, 2005 against Genencor, certain of its
officers and directors, and Danisco in the Superior Court of the State of California, County of
Santa Clara. The case is captioned John Baker, On Behalf of Himself and All Others Similarly
Situated vs. Genencor International, Inc., et al., No. 105CV 035309. This complaint alleges that
Genencors directors violated their fiduciary duties in connection with the proposed acquisition
and that the plaintiff and other members of the purported class will not receive their fair portion
of the value of Genencors assets and business and will be prevented from obtaining the real value
of their equity ownership of Genencor. The plaintiff seeks, among other things, to enjoin the
proposed acquisition of Genencor by Danisco. Genencor is defending the claims alleged in this
lawsuit. On February 17, 2005, the Delaware Chancery Court consolidated the Zappolla, Mirfred, and
Slobodaactions into a single consolidated action captioned In re Genencor International Inc.
Shareholders Litigation, No. 1052-N. On February 24, 2005, the plaintiffs in the consolidated
Delaware action filed an amended complaint containing the same allegations as were in the Zappolla,
Mirfred, and Slobodacomplaints, as well as additional allegations that disclosure documents filed
with the SEC failed to adequately disclose all material information related to Daniscos tender
offer. 24




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On March 9, 2005, the plaintiffs and defendants in this consolidated Delaware action executed
a memorandum of understanding that, subject to Chancery Court approval, will result in a dismissal
with prejudice of all claims by the plaintiffs. The memorandum of understanding provides for
supplemental disclosures related to the Offer and the Merger, requests that the Chancery Court
certify (for settlement purposes only) a class of plaintiffs consisting of all record holders of
shares of the Companys common stock from January 26, 2005 through the effective time of the Merger
(the Class), and contains a release of all claims by members of the Class asserted in the amended
complaint in this consolidated Delaware action and related to the Acquisition Agreement, the Stock
Purchase Agreement, the Offer, the Merger, or any public disclosures by the defendants related to
the foregoing. Genencor, its chief executive officer, and certain of its directors named as defendants filed
a motion to stay the Riceand Bakeractions in California on February 28, 2005. Following full
briefing by both plaintiffs and defendants, the California Superior Court is scheduled to hear that
motion on May 10, 2005. Other Proceedings Broin and Associates filed a complaint in U.S. District Court South Dakota, Southern Division,
against Genencor on December 15, 2004 alleging misappropriation of trade secrets, breach of
contract and unjust enrichment in connection with Genencors development and commercialization of
raw starch hydrolysis technology for fuel ethanol production. The case is captioned Broin and
Associates, Inc. v. Genencor International, Inc. No. 04-4202. A First Amended Complaint was filed
with the same court and served on Genencor on January 25, 2005. The First Amended Complaint
purports to allege seven causes of action including misappropriation of trade secrets, breach of
express contract, breach of implied agreement of confidentiality, tortious interference with
business expectancy, conversion, deceit, fraud and unjust enrichment. Broins prayer for relief
requests a preliminary and permanent injunction against Genencor, compensatory and economic
damages, punitive damages, disgorgement of profits, costs and attorneys fees. On February 14,
2005, Genencor filed a motion to dismiss certain of the alleged causes of action on the ground that
Broins allegations fail to state a claim. Genencor is defending the claims alleged in this
lawsuit. On or about July 16, 2004, three former employees of Genencor in Rochester, New York commenced
a lawsuit in the United States District Court for the Western District of New York in which they
alleged that Genencor had discriminatorily discharged each of them in violation of the Age
Discrimination in Employment Act, the Older Workers Benefit Protection Act, and the New York Human
Rights Law. The case is captioned Kerry Kourofsky, Wayne Newman, and William Speer v. Genencor
International, Inc. No. 04-CV-6327L(F).In the lawsuit, the plaintiffs are seeking an award from
the court that includes compensation for the value of lost back pay and benefits, front pay,
compensatory damages, punitive damages and attorneys fees. Genencor is defending the claims
alleged in this lawsuit. 
 Item 4. Submission of Matters to a Vote of Security Holders  No matter was submitted to a vote of security holders during the fourth quarter of 2004. 25




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PART II. 
  Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Our common stock is traded on the Nasdaq Stock Market under the symbol GCOR. The following
table sets forth the high and low sale prices per share of common stock, as reported on the Nasdaq
Stock Market, during the periods indicated. PriceHigh
    
    
    LowYear ended December 31, 2003:First Quarter
    
    $
    12.45
    
    
    $
    8.37Second Quarter
    
    $
    17.00
    
    
    $
    10.02Third Quarter
    
    $
    17.49
    
    
    $
    14.46Fourth Quarter
    
    $
    16.60
    
    
    $
    14.22Year ended December 31, 2004:First Quarter
    
    $
    16.06
    
    
    $
    12.35Second Quarter
    
    $
    16.49
    
    
    $
    13.30Third Quarter
    
    $
    16.77
    
    
    $
    13.48Fourth Quarter
    
    $
    16.96
    
    
    $
    14.83
 The number of shares of our common stock outstanding as of March 1, 2005 was 60,119,648. As
of such date there were approximately 5,000 holders of our common stock. Our two largest
stockholders, Eastman and Danisco, owned, in the aggregate, 50,000,000 shares of our common stock. We did not pay any dividends on our common stock in 2003 or 2004. While we are permitted to
pay dividends, we currently expect to retain our future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying cash dividends to our common
stockholders in the foreseeable future. We had outstanding promissory notes of $14.6 million at December 31, 2001. This amount
related to the exercise of stock options and purchase of restricted shares by our executive
officers during April 2000. In November 2001, we allowed our executive officers to surrender
349,910 vested, restricted shares to us at a value of $5.6 million, to pay principal and interest
due on these notes. On August 21, 2002, in order to eliminate all stock-related loans, the
executive officers surrendered 1,429,864 restricted shares at a value of $10.77 per share, to make
full payment of the outstanding principal and accrued interest on their obligations under these
notes. We hold the surrendered shares as treasury stock. 26




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Item 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with our
consolidated financial statements, the notes to our consolidated financial statements, and
Managements Discussion and Analysis of Financial Condition and Results of Operations included
elsewhere in this Report. We derived the statement of operations and balance sheet data for the
five-year period ended December 31, 2004 from our audited consolidated financial statements.
Historical results are not necessarily indicative of future results. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Amounts in thousands, except per share data)Consolidated Statements of OperationsRevenues:Product revenue
    
    $
    389,827
    
    
    $
    362,143
    
    
    $
    329,337
    
    
    $
    311,110
    
    
    $
    300,978Fees and royalty revenues
    
    
    20,590
    
    
    
    21,019
    
    
    
    20,741
    
    
    
    14,908
    
    
    
    15,252Total revenues
    
    
    410,417
    
    
    
    383,162
    
    
    
    350,078
    
    
    
    326,018
    
    
    
    316,230Operating expenses:Cost of products sold
    
    
    225,749
    
    
    
    207,483
    
    
    
    186,383
    
    
    
    172,986
    
    
    
    172,265Research and development
    
    
    75,809
    
    
    
    72,534
    
    
    
    70,190
    
    
    
    60,103
    
    
    
    50,858Sales, marketing and business development
    
    
    38,902
    
    
    
    33,735
    
    
    
    33,027
    
    
    
    28,845
    
    
    
    27,539General and administrative
    
    
    40,506
    
    
    
    33,559
    
    
    
    34,635
    
    
    
    29,913
    
    
    
    25,818Amortization of intangible assets
    
    
    4,684
    
    
    
    5,682
    
    
    
    5,563
    
    
    
    9,966
    
    
    
    10,478Restructuring and related charges
    
    
    
    
    
    
    
    
    
    
    16,427
    
    
    
    
    
    
    
    Other (income)/expense
    
    
    (8,372
    )
    
    
    (2,081
    )
    
    
    (3,409
    )
    
    
    (507
    )
    
    
    (2,391
    )Total operating expenses
    
    
    377,278
    
    
    
    350,912
    
    
    
    342,816
    
    
    
    301,306
    
    
    
    284,567Operating income
    
    
    33,139
    
    
    
    32,250
    
    
    
    7,262
    
    
    
    24,712
    
    
    
    31,663Non operating expenses/(income):Investment expense/(income)
    
    
    
    
    
    
    1,018
    
    
    
    1,500
    
    
    
    
    
    
    
    (16,577
    )Interest expense
    
    
    4,829
    
    
    
    6,667
    
    
    
    8,587
    
    
    
    10,433
    
    
    
    10,474Interest income
    
    
    (3,614
    )
    
    
    (3,960
    )
    
    
    (5,207
    )
    
    
    (10,069
    )
    
    
    (7,752
    )Total non operating expenses/(income)
    
    
    1,215
    
    
    
    3,725
    
    
    
    4,880
    
    
    
    364
    
    
    
    (13,855
    )Income before income taxes
    
    
    31,924
    
    
    
    28,525
    
    
    
    2,382
    
    
    
    24,348
    
    
    
    45,518Provision for/(benefit from) income taxes
    
    
    5,746
    
    
    
    5,717
    
    
    
    (3,415
    )
    
    
    6,574
    
    
    
    14,108Net income
    
    $
    26,178
    
    
    $
    22,808
    
    
    $
    5,797
    
    
    $
    17,774
    
    
    $
    31,410Net income available/(loss applicable) to
holders of common stock
    
    $
    18,903
    
    
    $
    15,533
    
    
    $
    (1,478
    )
    
    $
    10,499
    
    
    $
    24,135Earnings/(loss) per common share:Basic
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    (0.02
    )
    
    $
    0.18
    
    
    $
    0.44Diluted
    
    $
    0.31
    
    
    $
    0.26
    
    
    $
    (0.02
    )
    
    $
    0.17
    
    
    $
    0.42Weighted average common shares:Basic
    
    
    59,434
    
    
    
    58,767
    
    
    
    59,257
    
    
    
    59,888
    
    
    
    54,504Diluted
    
    
    61,204
    
    
    
    60,680
    
    
    
    59,575
    
    
    
    61,069
    
    
    
    56,855
 December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Amounts in thousands)Consolidated Balance Sheet DataWorking capital
    
    $
    257,650
    
    
    $
    223,044
    
    
    $
    203,043
    
    
    $
    233,511
    
    
    $
    248,236Total assets
    
    
    752,113
    
    
    
    712,422
    
    
    
    654,922
    
    
    
    648,998
    
    
    
    642,932Total long-term debt and capital leases
    
    
    36,436
    
    
    
    65,308
    
    
    
    90,887
    
    
    
    117,735
    
    
    
    150,215Total liabilities
    
    
    186,710
    
    
    
    199,735
    
    
    
    216,915
    
    
    
    240,767
    
    
    
    238,706Redeemable preferred stock
    
    
    184,300
    
    
    
    177,025
    
    
    
    169,750
    
    
    
    162,475
    
    
    
    155,200Total stockholders equity
    
    
    381,103
    
    
    
    335,662
    
    
    
    268,257
    
    
    
    245,756
    
    
    
    249,026
 A number of items impact the comparability of the selected consolidated financial data:  In 2004, our Health Care segment sold its therapeutic vaccine program to Innogenetics
N.V. Upon transfer of certain intellectual property, contractual relationships and technologies
to Innogenetics, we recognized fees during the quarter ended June 30, 2004 totaling $10.0
million.  In 2004, we assumed majority ownership and controlling interest of our Japanese joint
venture, now known as Genencor Kyowa Co. Ltd., in which we have had an equity position since
1996. The financial position, results of operations and cash flows of the joint venture have
been included in our consolidated financial statements beginning April 1, 2004.  In 2003, we sustained damage to our finished bioproducts inventory in the second quarter of
2003 as a result of an accident in a third party warehouse in Rotterdam, the Netherlands. At the
end of the first quarter of 2004, we reached a final settlement of our accident-related claim
with our insurer totaling approximately $21.0 million and recorded a net gain of $8.3 million. 27




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 In 2002, we implemented a plan to restructure our supply infrastructure which included
our manufacturing facilities in Elkhart, Indiana and Argentina, which resulted in restructuring
and related charges of $16.4 million. This plan was completed in 2002.  In 2002, we acquired Genencor International Wisconsin, Inc., formerly known as Enzyme
Bio-Systems Ltd. (EBS), for $35.8 million. We also acquired the brewing and enzyme business of
Rhodia Food UK Limited for $8.9 million.  In 2002, our executive officers surrendered 1.4 million restricted shares with a value
$10.77 per share to eliminate all stock-related loans.  In 2002, we paid our first of five annual installments of $28.0 million on long-term
debt on March 30.  In 2001, $28.0 million of long-term debt which was due March 30, 2002 was reclassified
to current maturities of long-term debt.  In 2000, we completed an initial public offering of 8.05 million shares of common stock
at a price of $18.00 per share, including 7.0 million shares of common stock issued July 28, 2000
in the initial offering and 1.05 million shares of common stock issued August 25, 2000 pursuant
to the exercise of the underwriters over-allotment option. The combined net proceeds raised
from the initial offering and the over-allotment option were $132.7 million.  In 2000, we realized a gain on the sale of marketable equity securities of $16.6 million,
$10.2 million tax-effected, and recognized back royalties in connection with a settlement of
patent infringement claims of $3.5 million, $2.1 million tax-effected. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read
in conjunction with the consolidated financial statements and notes to those statements included in
Item 8 of this Report. In addition to disclosing results for the years ended December 31, 2004 and
2003 that are determined in accordance with United States Generally Accepted Accounting Principles
(GAAP), the Company also discloses non-GAAP financial measures that exclude the effects of
restructuring and related charges recorded in the 2002 period on consolidated net income available
to common stockholders and diluted earnings per share and on the operating income of its
Bioproducts segment. The Company is presenting non-GAAP financial measures excluding the effects of
the restructuring and related charges because the Company believes it is useful for investors in
assessing the Companys financial results compared to the same period in the prior year. Within the
text, in connection with each non-GAAP financial measure presented, the Company has presented the
most directly comparable financial measure calculated in accordance with GAAP and has provided a
reconciliation of the differences between the non-GAAP financial measure with its most directly
comparable financial measure calculated and presented in accordance with GAAP. Executive Summary Leveraging over twenty years of experience, we use our molecular technologies to develop
products and deliver services for varied markets, some on a global basis. Since our research and
commercial expertise and competencies are at the molecular level, we can produce products and
deliver services to many different types of industries. Our current revenues result primarily from
the sale of enzyme products as ingredients or processing aids to the cleaning, textiles,
carbohydrate processing (formerly referred to as sweeteners), fermentation alcohol and food, feed
and specialties markets, and from research funding, fees and royalties. In 2004, we expended $48.4
million on our Bioproducts research and development programs. In addition to developing products
for our current Bioproducts markets, we are also involved in Bioproducts research projects and
programs that are directed toward providing new products and services in the emerging fields of
biomaterials, biochemicals and nanobiotechnology. Furthermore, we expended $27.4 million in 2004 on
our Health Care research and development programs. We believe that this diversification of our
research and development expenditures will increase the probability of achieving success in our
commercial portfolio and result in increased value for our stockholders. For the year ended December 31, 2004 net income available to common stockholders was $18.9
million, or $0.31 per diluted share, compared to $15.5 million or $0.26 per diluted share during
the same period in 2003. Product revenues increased by 8% to
$389.8 million, compared to $362.1 million in 2003. Total revenues for 2004 were $410.4
million, compared to $383.2 million for the same period in 2003. Fees and royalty revenues were
$20.6 million in 2004 as compared to $21.0 million in the prior year. For the year ended December
31, 2004, we generated $33.1 million in operating income and $62.6 million in cash flow from
operations. We also 28




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invested $25.3 million in purchases of property, plant and equipment and made
our third annual installment payment of $28.0 million on our senior debt. Our Bioproducts segment continues to generate all of our product revenues. In 2004, our
Bioproducts segment set a product revenue record for the Company, driven by increased revenue in
the North American, European and Asia Pacific regions. Particular strength was seen in the
fermentation alcohol, carbohydrate processing and the food, feed and specialties markets. We
manufacture our products at our eight Bioproducts manufacturing facilities located in the United
States, Finland, Belgium, China and Argentina. We conduct our sales and marketing activities
through our direct sales organizations in the United States, the Netherlands, Singapore, Japan,
China, United Kingdom, Argentina and Brazil and through other distribution channels in selected
markets and geographies. In 2004, we derived approximately 58% of our revenues from our foreign
operations. To meet anticipated market expansion in China and other Asia Pacific countries, we recently
announced plans to build a new manufacturing facility in Wuxi, China. Once completed, the
Bioproducts segment plans to transfer operations and personnel from its existing facility in
downtown Wuxi to the new manufacturing complex. In April 2004, we also assumed majority ownership
and controlling interest of our Japanese joint venture with Kyowa Hakko Kogyo Co. Ltd. This
venture has been renamed Genencor Kyowa Co. Ltd. During 2004, we continued to make significant progress on new applications within the
Bioproducts segment. Our progress in developing low cost enzymes for cellulosic biomass conversion
to ethanol has exceeded the contractual goals of NREL and the Department of Energy. Based upon
NRELs model, our scientists have achieved an estimated 30-fold improvement in enzyme cost for the
process. As biorefineries come on line, we expect to be ready with technology instrumental to
bioethanol production. We continued our progress in commercializing new products for the safety
and protection opportunities within our specialty business category. Licensed from the U.S. Army
Edgewood Chemical Biological Center, the Defenz line of enzymes neutralize specific nerve agents
and organophosphate-based pesticides. These products have a potential customer base among military
and civilian first responders such as hazardous materials teams, and fire and police departments.
Prionzyme, a proprietary enzyme for the elimination of prion infectivity, is currently awaiting EU
regulatory review. Prions are widely seen as the causative agent for Bovine Spongiform
Encephalopathy, commonly known as mad cow disease, and its human form, Cruetzfelt-Jacob Disease.
Once approved, we expect to commercialize the product for use in decontaminating surgical
instruments. Efforts also continued in other Bioproducts projects, including personal care and the
Silicon Biotechnology platform. In our Health Care segment, we recognized $10.0 million in fees during 2004 from the
technology transfer of our therapeutic vaccine program to Innogenetics N.V. As further discussed
under the heading Technology Transfer within this Item 7, we sold our therapeutic vaccine program
to Innogenetics in March 2004. During the second quarter, we completed the transfer to
Innogenetics of sponsorship of the IND and Phase I clinical trial for our lead hepatitis B product
candidate, plus intellectual property, research compounds and various third party relationships.
This transaction has the potential to generate additional milestone and royalty revenues for us in
the future. The Health Care segment is now focused entirely on discovery, in-licensing and
development of therapeutic products for the oncology market. Accordingly, our Health Care segment continued to make progress in 2004 focusing its attention
and resources on targeted cancer biotherapeutics. As previously announced, we advanced our first
product candidate for treating cancer into IND enabling development earlier this year. The lead
product candidate is intended to target significant unmet medical needs in colorectal and
pancreatic cancer. In December 2004, we signed an exclusive worldwide patent license agreement giving us the
right to develop and commercialize two therapeutic product candidates from the Public Health
Service and the National Cancer Institute. One of the proteins is currently in Phase II clinical
studies for the treatment of hairy cell leukemia. Also underway is Phase I clinical testing in
subsets of treatment-refractory pediatric acute lymphoblastic leukemia, chronic lymphocytic
leukemia and non-Hodgkins lymphoma. The other protein, for expanded subsets of patients with
these hematologic malignancies, is in the IND-enabling stage of development. A CRADA between
Genencor and the Public Health Service and National Cancer Institute was also executed in support
of advancing the two product candidates and follow-on research initiatives. As more completely discussed under the heading Warehouse
Inventory Loss within this Item 7,
we settled our insurance claim from the 2003 third-party warehouse accident, resulting in a net
gain of $8.3 million, which is included in other income for 2004. 29




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Acquisition by Danisco On January 27, 2005, we entered into the Acquisition Agreement with Danisco and Acquisition
Sub, providing for the Offer to acquire all of the outstanding shares of common stock of the
Company not otherwise owned by Danisco or its subsidiaries for $19.25 per share, net to the seller
in cash, to be followed by the Merger of Acquisition Sub with and into the Company, with the
Company to continue as the surviving corporation. A Special Committee comprised solely of our
independent directors, and our Board of Directors, each has determined that the Offer and the
Merger are fair to, and in the best interests of, our stockholders (other than Danisco, Eastman and
their respective affiliates). In connection with the Acquisition Agreement, Danisco has entered into a definitive stock
purchase agreement with Eastman, the holder of approximately 25 million shares of our common stock
and 485 shares of our series A preferred stock, under which Danisco will acquire all of the
outstanding shares of our common stock held by Eastman for $15 per share in cash and all of the
outstanding shares of our series A preferred stock held by Eastman for $44 million in cash. In the
stock purchase agreement with Danisco, Eastman has agreed not to tender in the Offer the shares of
our common stock held by Eastman. The Acquisition Agreement is subject to certain conditions, including the tender of a majority
of the outstanding shares of our common stock other than those held by Danisco, Eastman, the
officers and directors of the Company and its subsidiaries and the respective affiliates of each of
the foregoing, receipt of regulatory approvals and other conditions set forth in the Acquisition
Agreement. Subject to those conditions, we currently expect the acquisition to be completed by May
31, 2005. If consummated, at the effective time of the Merger, all outstanding stock options, stock
appreciation rights, shares of restricted stock and restricted stock units outstanding under our
2002 Omnibus Incentive Plan and its predecessor plan, whether or not such awards have otherwise
become vested or exercisable, will be cashed out in a lump sum payment based upon the price of
$19.25 or such higher price as may be paid pursuant to the Offer. In certain instances, a change
in control price may be payable under the applicable plan if that price is higher than the price
paid in the Offer. During the pendency of the
Offer, we have suspended the right to exercise stock options. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. In preparation of those financial
statements, we apply various accounting policies. We also make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Although
our accounting policies and certain estimates and assumptions are disclosed within the notes to our
consolidated financial statements, the following is a discussion of the accounting policies,
estimates and assumptions we believe are most critical. Principles of Consolidation Our consolidated financial statements include the accounts of all majority-owned subsidiaries.
Investments in affiliates in which we have the ability to exercise significant influence, but not
control, are accounted for by the equity method, which means that our investment in those entities
is adjusted at each balance sheet date to reflect capital contributions made, dividends received
and our respective share of such affiliates earnings or losses. All other investments in
affiliates, which are not material to our financial statements, are carried at cost. In the normal
course of business, we engage in transactions among our affiliated entities. These intercompany
transactions are eliminated in our consolidated financial statements. All of our investments are
in operating or corporate holding companies, some of which may qualify under the definition of
variable interest entities as defined in Financial Accounting Standards Board (FASB) Interpretation
No. 46R Consolidation of Variable Interest Entities. While we have no material investments in
variable interest entities, all such investments have been appropriately reflected in the
consolidated financial statements or otherwise disclosed in the notes thereto. Revenue Recognition Our revenues consist of product revenues and fees and royalty revenues. Fees and royalty
revenues consist primarily of funded research, technology and license fees and royalties. Our
revenues are heavily influenced by business with our major customers. Please refer to the
discussion under the heading Major Customers included in Item 1 of this Report. 30




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Product Revenue Revenue from product sales is recognized upon shipment to customers. We can group our
existing products into three general categories: enzymes that break down protein, enzymes that
break down starch and enzymes that break down cellulose. Funded Research Research funding revenues result from collaborative agreements with various parties,
including the U.S. Government, whereby we perform research activities and receive revenues that
partially reimburse expenses incurred. Under such agreements we retain a proprietary interest in
the products and technology developed. These expense reimbursements primarily consist of direct
expense sharing arrangements and milestone payments. Revenues related to expense sharing
arrangements are recorded as the underlying expenses are incurred. Milestone payments are
contingent upon successful completion of research activities and are recognized upon satisfaction
of those contingencies. Upfront research funding payments are recognized as revenues on a
straight-line basis over the term of the underlying research agreement. Our funded research
revenues are fully dependent upon our progress on the underlying collaborative research projects
and can vary from period to period. Technology and License Fees Fees from the sale of technology are recognized upon completion of the required technology
transfer and substantial satisfaction of any performance related responsibilities. License fees
are recognized on a straight-line basis over the term defined in the license agreement. In the
event there is no defined term, such as with permanent licenses, license fees are recognized upon
substantial satisfaction of any performance related responsibilities. Our technology and license
fees can vary from period to period as a result of the number and timing of such transactions. Royalty Revenue Royalty revenue is recognized in accordance with the underlying contract terms. Research and Development We expense research and development costs as incurred. Research and development expenses
include, but are not limited to, expenses for services rendered related to our funded research
activities. Accordingly, in the event our funded research revenues fluctuate from period to
period, the related research and development expenses may also fluctuate. Investments In Equity Securities We hold minority interests in equity securities of certain publicly traded and privately held
companies having operations or technology within our strategic areas of focus. While we are
selective in making such investments, once we have obtained the securities, we are at risk for
fluctuations in their fair market value. If these securities experience declines in value which we
consider to be other than temporary, we will record an impairment charge to the extent of that
decline in value. Poor operating results experienced by these entities or adverse changes in
market conditions in the future may cause losses or an inability to recover our carrying value of
these investments. In 2003, we recorded an investment loss of $1.0 million as a result of such
circumstances. Long-Lived Assets Our long-lived assets consist primarily of property, plant and equipment, goodwill, and other
intangible assets. Other intangible assets primarily include patents, licenses, technology, and
customer lists. Investments in long-lived assets are initially recorded at acquisition cost. We
recognize depreciation on all property, plant and equipment, except land, using the straight-line
method over the estimated useful lives of the assets, which range from 3-40 years. We also
amortize our other intangible assets, except technology, on a straight-line basis over estimated
lives of 5-20 years. Land, goodwill and technology are considered to have
indefinite useful lives and are therefore not subject to depreciation or amortization. At
least annually, we evaluate whether the remaining useful lives of our depreciable and amortizable
assets are appropriate. Changes in these useful lives can result in either increases or decreases
in the amount of depreciation and amortization expense recorded in our statement of operations,
reflecting shorter or longer lives, respectively. In addition, we regularly assess all of our long-lived assets for impairment when events or
circumstances indicate their carrying amounts may not be recoverable. This is accomplished by
comparing the expected undiscounted future cash flows of the assets with 31




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the respective carrying
amount as of the date of assessment. Should aggregate future cash flows be less than the carrying
value, a write-down would be required, measured as the difference between the carrying value and
the fair value of the asset. Fair value is estimated either through independent valuation or as the
present value of expected future cash flows. If the expected undiscounted future cash flows exceed
the respective carrying amount as of the date of assessment, no impairment is recognized. Our judgments related to the expected useful lives of long-lived assets and our ability to
realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by
factors such as the ongoing maintenance and improvements of the assets, changes in economic
conditions and changes in operating performance. While we believe the long-lived asset amounts
recorded in our balance sheet are properly stated as of December 31, 2004, as we make future
assessments of the ongoing expected cash flows and carrying amounts of our long-lived assets these
factors could cause us to realize material impairment charges. Defined Benefit Pension and Postretirement Plans As part of our overall employee benefits program, we have defined benefit pension plans and a
defined benefit postretirement plan. The assets, liabilities and related expense of these plans are
determined on an actuarial basis and are affected by the estimated market-related value of plan
assets, estimates of the expected return on plan assets, discount rates, rates of increase of
health care costs, rates of future compensation increases and other assumptions inherent in these
valuations. Our actuarial consultants also use subjective factors such as withdrawal and mortality
rates. The actuarial assumptions used may differ materially from actual results due to changing
market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants. We annually review the assumptions underlying the actuarial calculations and make
changes to these assumptions as necessary. Stock-Based Compensation The Genencor International, Inc. 2002 Omnibus Incentive Plan (the OI Plan) became effective on
May 30, 2002 upon approval by the stockholders at our Annual Meeting of Stockholders. Employees,
outside directors, consultants, advisors and independent contractors retained by us are eligible to
participate in the OI Plan. The OI Plan allows for the grant, at not less than 100% of the market
value as of the date of grant, of non-qualified and incentive stock options to purchase our common
stock and stock appreciation rights (SARs), based on the underlying value of the our common stock.
The OI Plan also allows for the grant of restricted and unrestricted stock awards, performance
shares (stock or stock-based awards contingent upon attaining performance objectives) or
performance units (units valued by reference to chosen criteria). Under the terms of the OI Plan,
we have the ability to grant awards representing up to 6.8 million shares of common stock. In
addition, any shares remaining, or shares that become available under the predecessor plan will be
available for grant of awards under the OI Plan. Generally, stock options and SARs vest and become
exercisable, ratably over a three-year period and expire 10 years from their grant date.
Restrictions, if any, on stock awards generally expire at the end of a three-year period. We currently use the intrinsic value method to account for stock-based employee compensation
in accordance with Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to
Employees. Under the intrinsic value method, no compensation expense is recorded for grants of
stock-based awards when the grants have an exercise price equal to the fair market value of our
common stock at the date of grant. Should the exercise price be below the fair market value on the
date of grant, we record this difference as a component of stockholders equity and amortize it as
a charge to operations over the vesting period of the stock-based award. For more information
regarding our stock-based awards, including pro forma disclosures of compensation expense had we
employed the fair value method under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition Disclosure, please refer to Note 13  Employee Benefit Plans included
within Item 8 of this Report. In addition, as discussed below under the heading New Accounting
Standards, in December 2004 the FASB issued a revision to SFAS No. 123, effective for interim and
annual periods beginning after June 15, 2005, which will require a change to accounting for
stock-based employee compensation under a fair value method in the third quarter of 2005. Income Taxes The provision for/(benefit from) income taxes included within our statements of operations is
based upon pretax financial accounting income and is calculated using the liability method.
Deferred tax assets and liabilities are determined based on differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Significant estimates are required in determining
our provision for/(benefit from) income taxes. Various internal and external factors may have
favorable or unfavorable effects on our future consolidated effective tax rate. These factors
include, but are not limited to, changes in tax laws, regulations and/or rates, changing
interpretations of existing laws or regulations, future acquisitions or mergers, future levels of
research and development spending, future levels of capital expenditures, 32




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and changes in overall
levels of pretax earnings. Furthermore, we operate within multiple taxing jurisdictions and are
subject to audit by regulatory authorities in these jurisdictions. These tax audits can involve
complex issues, which may require an extended period of time to resolve. We believe that we have
appropriately calculated our provision for/(benefit from) income taxes in light of these
uncertainties. Furthermore, as described in Note 14  Income Taxes included within Item 8 of this Report, our
results of operations for the year ended December 31, 2004 do not reflect the impact of the
American Jobs Creation Act of 2004 (the Jobs Act). We have not completed the process of evaluating
our position with respect to the indefinite reinvestment of foreign earnings to take into account
the possible election of the repatriation provisions contained in the Jobs Act. Summary of Results In 2004, we reported net income available to common stockholders of $18.9 million, or $0.31
per diluted share, compared to net income available to common stockholders of $15.5 million, or
$0.26 per diluted share for 2003. Results of Operations Comparison of the Years Ended December 31, 2004 and 2003 Revenues.Total revenues for the year ended December 31, 2004 increased $27.2 million, or 7%,
to $410.4 million from the year ended December 31, 2003, due to an increase in product revenues. Product Revenues.Product revenues for the year ended December 31, 2004 increased $27.7
million, or 8%, to $389.8 million from the year ended December 31, 2003. For the year ended
December 31, 2004, unit volume/mix grew 6% along with a positive currency impact of 4%, while
average prices fell 2%. Volume/mix increased primarily in our food, feed and specialties,
fermentation alcohol, cleaning and carbohydrate processing markets. Regionally, North American product revenues for the year ended December 31, 2004 increased
$5.9 million, or 4%, to $158.8 million from the year ended December 31, 2003, driven primarily by
increased sales to our fermentation alcohol, carbohydrate processing and food, feed and specialties
markets, partially offset by decreased sales to our cleaning and textiles markets. Product revenues
in Europe, Africa and the Middle East for the year ended December 31, 2004 increased $20.8 million,
or 14%, to $167.6 million from the year ended December 31, 2003, driven primarily by increased
sales to our cleaning, textiles, carbohydrate processing and food, feed and specialties markets,
partially offset by decreased sales to our fermentation alcohol markets. Our product revenues for
the year ended December 31, 2004 in Latin America decreased $1.8 million, or 13%, to $12.4 million
from the year ended December 31, 2003, due primarily to decreased sales to our cleaning, food, feed
and specialties and carbohydrate processing markets, partially offset by increased sales to our
textiles market. Product revenues in the Asia Pacific region for the year ended December 31, 2004
increased $2.8 million, or 6%, to $51.0 million from the year ended December 31, 2003, driven
primarily by increased sales to our food, feed and specialties, cleaning, carbohydrate processing
and fermentation alcohol markets, partially offset by a decrease in sales to our textiles market. Fees and Royalty Revenues.Fees and royalty revenues decreased $0.4 million, or 2%, to $20.6
million for the year ended December 31, 2004 from the year ended December 31, 2003. Funded research revenues decreased $11.2 million, or 58%, to $8.2 million for the year ended
December 31, 2004 from the year ended December 31, 2003. 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 $1.3 million, or 46%, to $4.1 million for the year ended December 31, 2004 from the year
ended December 31, 2003 primarily due to funding pursuant to our work with Cargill Dow, now known
as NatureWorks LLC, on a U.S. Department of Energy supported biorefinery project and funding
provided by NREL to develop an enzymatic process to convert biomass into ethanol. Funded research
revenues provided by customers decreased $12.5 million, or 75%, to $4.1 million for the year ended
December 31, 2004 from the year ended December 31, 2003 due primarily to a reduction in funding
from our strategic alliance with the Dow Corning Corporation. Royalty revenues are based on the sales of licensees products produced using our technology.
These royalties increased $0.2 million, or 14%, to $1.6 million for the year ended December 31,
2004 from the year ended December 31, 2003. 33




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License fees for the year ended December 31, 2004 increased $0.6 million, to $0.8 million from
the year ended December 31, 2003. These fees are related to the sale of rights to third parties
for the use of our technology and patents to manufacture products. Other fees were $10.0 million for the year ended December 31, 2004, due to the recognition of
$10.0 million from the technology transfer of our therapeutic vaccine program to Innogenetics N.V.,
as more completely discussed within this Item 7 under the heading Technology Transfer. Operating Expenses Cost of Products Sold.Cost of products sold increased $18.2 million, or 9%, to $225.7
million for the year ended December 31, 2004 from the year ended December 30, 2003. Our expanded
sales volume/mix increased costs by $8.0 million, along with increases of $7.7 million due to the
impact of the U.S. Dollar against foreign currencies, primarily the Euro and increases of $2.5
million due to higher unit production costs. Gross Profit and Margins from Products Sold.Gross profit from products sold increased $9.5
million, or 6%, to $164.1 million for the year ended December 31, 2004 from the year ended December
31, 2003. The overall increase was primarily driven by a favorable product/volume mix and a $7.3
million increase due to impact of the U.S. Dollar against foreign currencies, primarily the Euro.
These increases were partially offset by a reduction in average prices and increased production
costs. Gross margin on product revenue decreased to 42.1% for the year ended December 31, 2004
from 42.7% for the year ended December 31, 2003, primarily driven by the impact of lower average
selling prices. Research and Development.Research and development expenses primarily consist of the
personnel-related, consulting, and facilities costs incurred in connection with our research
activities in Palo Alto, California, and Leiden, the Netherlands. These expenses increased $3.3
million, or 5%, to $75.8 million for the year ended December 31, 2004 from the year ended December
31, 2003, due primarily to an increase in personnel-related costs, including salaries, benefits,
travel expenses and other costs of $3.9 million, facilities expense of $0.6 million and other
expenses that totaled $0.6 million, partially offset by a decrease in incentive compensation costs
of $0.2 million and outside services of $1.6 million. As a part of total research and development
expenses, estimated expenses related to research collaborations partially funded by customers
decreased $5.5 million, or 42%, to $7.6 million for the year ended December 31, 2004 from the year
ended December 31, 2003. 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 $5.2 million, or 15%, to $38.9 million for the year ended December 31,
2004 from the year ended December 31, 2003, due primarily to increased personnel-related costs,
including salaries, benefits and travel expenses of $3.6 million, outside services of $0.6 million,
supplies of $0.2 million, facilities costs and other expenses that totaled $0.8 million, partially
offset by a decrease in incentive compensation costs of $0.1 million. General and Administrative.General and administrative expenses include the costs of our
corporate executive, finance, information technology, legal, human resources, and communications
functions. In total, these expenses increased $6.9 million, or 21%, to $40.5 million for the year
ended December 31, 2004 from the year ended December 31, 2003 due primarily to increased outside
services of $4.7 million, personnel-related costs, including salaries, benefits, and travel
expenses of $2.2 million. Amortization of Intangible Assets.We amortize our definite-lived intangible assets,
consisting primarily of patents, licenses and customer lists, on a straight-line basis over their
estimated useful lives. Amortization expense decreased $1.0 million, or 18%, to
$4.7 million for the year ended December 31, 2004 from the year ended December 31, 2003 due
primarily to certain assets becoming fully amortized by year end 2004. Other Income and Expense.Other income for the year ended December 31, 2004 increased $6.3
million, to $8.4 million from the year ended December 31, 2003. The primary driver of this
increase was the $8.3 million net gain recorded during the quarter ended March 31, 2004, resulting
from the final settlement of our insurance claim related to the third party warehouse accident in
Rotterdam, the Netherlands that occurred in the second quarter of 2003. For the year ended
December 31, 2003, we recorded a net gain of $1.9 million related to the settlement of certain
commercial matters with a customer. Deferred Compensation.We measure deferred compensation for options granted to employees as
the difference between the grant price and the fair value of our common stock on the date we
granted the options. 34




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We measure deferred compensation for restricted stock and stock based awards granted to
employees based on the number of granted restricted shares and the fair market value on the grant
date. These amounts are recorded as a component of stockholders equity and amortized as a charge
to operations over the vesting period of the awards. In total, amortization of deferred stock-based compensation expense was $0.7 million and $0.8
million in 2004 and 2003, respectively, and was reported in our Consolidated Statements of
Operations as follows (in millions): 2004
    
    
    2003Cost of products sold
    
    $
    
    
    
    $
    Research and development
    
    
    0.1
    
    
    
    0.3Sales, marketing and business development
    
    
    
    
    
    
    0.1General and administrative
    
    
    0.6
    
    
    
    0.4Total amortization of deferred compensation expense
    
    $
    0.7
    
    
    $
    0.8
 Non Operating Expense and Income Investment Expense.We recorded an investment loss of $1.0 million for the year ended
December 31, 2003, as a result of our assessment of an other than temporary decline in the fair
market value of an investment in certain common stock. Interest Income. Interest income decreased $0.4 million, or 10%, to $3.6 million for the year
ended December 31, 2004 from the year ended December 31, 2003 due mainly to lower interest rates
associated with U.S. Dollar and the Euro. Income Taxes.The effective income tax rate for the year ended December 31, 2004 was 18%,
compared to 20% for the year ended December 31, 2003. Factors affecting the Companys estimated
annual effective income tax rate include increased operating expenses, the statutory income tax
rates in foreign jurisdictions and the relative amount of income in each jurisdiction, certain
items which are not deductible for tax purposes, and research and experimentation tax credits. In
addition, the annual effective rate for both years includes the effect of estimated valuation
allowances on certain deferred tax assets. Comparison of the Years Ended December 31, 2003 and 2002 Revenues.Total revenues for the year ended December 31, 2003 increased $33.1 million, or 9%,
to $383.2 million from the year ended December 31, 2002, due to an increase in product revenues and
fees and royalty revenues. Product Revenues.Product revenues for the year ended December 31, 2003 increased $32.8
million, or 10%, to $362.1 million from the year ended December 31, 2002. For the year ended
December 31, 2003, unit volume/mix grew 7% along with a positive currency impact of 7%, while
average prices fell 4%. The volume/mix increase was primarily driven by increased sales to our
food, feed and specialties markets. Also, we had increased volume/mix sales to our cleaning, fuel
ethanol, sweetener and textiles markets. Regionally, North American product revenues for the year ended December 31, 2003 decreased
$3.8 million, or 2%, to $152.9 million from the year ended December 31, 2002, driven primarily by
decreased sales to our sweetener, cleaning and textiles markets, partially offset by increased
sales to our fuel ethanol and food, feed and specialties markets. Product revenues in Europe,
Africa and the Middle East for the year ended December 31, 2003 increased $28.7 million, or 24%, to
$146.8 million from the year ended December 31, 2002, driven primarily by increased sales to our
food, feed and specialties, cleaning, sweetener and textiles markets, partially offset by decreased
sales to our fuel ethanol market. Our product revenues for the year ended December 31, 2003 in
Latin America increased $1.3 million, or 10%, to $14.2 million from the year ended December 31,
2002, due primarily to increased sales
to our sweeteners, food, feed and specialties and textiles markets, partially offset by
decreased sales to our cleaning market. Product revenues in the Asia Pacific region for the year
ended December 31, 2003 increased $6.6 million, or 16%, to $48.2 million from the year ended
December 31, 2002, driven primarily by increased sales to our cleaning, textiles, sweetener, food,
feed and specialties and fuel ethanol markets. Fees and Royalty Revenues.Fees and royalty revenues increased $0.3 million, or 1%, to $21.0
million for the year ended December 31, 2003 from the year ended December 31, 2002. Funded research revenues decreased $0.1 million, or 1%, to $19.4 million for the year ended
December 31, 2003 from the year ended December 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 decreased
$0.9 million, or 24%, to $2.8 million for the year ended December 35




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31, 2003 from the year ended
December 31, 2002, primarily due to completion of our initial agreement with the NREL to develop
improvements in the enzymatic process to convert biomass into ethanol. Funded research revenues
provided by customers increased $0.8 million, or 5%, to $16.6 million for the year ended December
31, 2003 from the year ended December 31, 2002, primarily driven by funding from our strategic
alliance with the Dow Corning Corporation. Royalty revenues are based on the sales of customers products produced using our technology.
These royalties increased $0.3 million, or 27%, to 1.4 million for the year ended December 31,
2003 from the year ended December 31, 2002. License fees for the year ended December 31, 2003 increased $0.1 million to $0.2 million from
the year ended December 31, 2002. These fees are related to the sale of rights to third parties
for the use of our technology and patents to manufacture products. Operating Expenses Cost of Products Sold.Cost of products sold increased $21.1 million, or 11%, to $207.5
million for the year ended December 31, 2003 from the year ended December 30, 2002. Our expanded
sales volume/mix increased costs by $13.5 million, along with increases of $13.7 million due to the
impact of the U.S. Dollar against foreign currencies, primarily the Euro. These increases were
partially offset by lower unit production costs of $6.1 million. Gross Profit and Margins from Products Sold.Gross profit from products sold increased $11.7
million, or 8%, to $154.6 million for the year ended December 31, 2003 from the year ended December
31, 2002. This increase in gross profit was primarily driven by a $9.7 million favorable impact of
the weaker U.S. Dollar against foreign currencies, primarily the Euro, lower unit production costs
of $6.1 million and the sales volume/mix increase of 7%. These increases were partially offset by
the 4% decline in average selling prices. As a result of these factors however, gross margin on
product revenue decreased to 42.7% for the year ended December 31, 2003 from 43.4% for the year
ended December 31, 2002, primarily driven by the impact of lower average selling prices. Research and Development.Research and development expenses primarily consist of the
personnel-related, consulting, and facilities costs incurred in connection with our research
activities in Palo Alto, California, and Leiden, the Netherlands. These expenses increased $2.3
million, or 3%, to $72.5 million for the year ended December 31, 2003 from the year ended December
31, 2002, due primarily to an increase in personnel-related costs, including salaries, benefits,
travel expenses and other costs of $5.0 million and facilities expense of $0.5 million, partially
offset by a decrease in incentive compensation costs of $0.5 million, outside services of $2.5
million and supply costs of $0.3 million. As a part of total research and development expenses,
estimated expenses related to research collaborations partially funded by customers decreased $2.3
million, or 15%, to $13.1 million for the year ended December 31, 2003 from the year ended December
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 $0.7 million, or 2%, to $33.7 million for the year ended December 31, 2003
from the year ended December 31, 2002, due primarily to increased personnel-related costs,
including salaries, benefits and travel expenses of $0.8 million and other expenses that totaled
$1.2 million, partially offset by a decrease in incentive compensation costs of $1.3 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 $1.0 million, or
3%, to $33.6 million for the year ended December 31, 2003 from the year ended December 31,
2002 due primarily to decreased outside services of $2.4 million, incentive compensation costs of
$0.9 million and advertising and promotions costs of $0.5 million, partially offset by a increase
in personnel-related costs, including salaries, benefits, and travel expenses of $2.7 million. Amortization of Intangible Assets.We amortize our definite-lived intangible assets,
consisting primarily of patents, licenses and customer lists, on a straight-line basis over their
estimated useful lives. Amortization expense increased $0.1 million, or 2%, to $5.7 million for
the year ended December 31, 2003 from the year ended December 31, 2002 due primarily to the
purchase of intangible assets on December 31, 2002, discussed below under the heading
Acquisition, partially offset by certain assets becoming fully amortized during 2003. Other Income and Expense.Other income and expense relates primarily to foreign currency
exchange gains and losses on transactions denominated in other than the functional currency of the
entity in which the transaction occurred. Other income for the year ended December 31, 2003
decreased $1.3 million, or 38%, to $2.1 million from the year ended December 31, 2002, primarily
due to a decrease in the Argentine Peso and Euro-driven foreign currency transaction gains of $2.7
million from 2002, partially offset by a net gain of $1.9 million on settlement of certain
commercial matters with a customer in 2003. 36




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Deferred Compensation.We measure deferred compensation for options granted to employees as
the difference between the grant price and the fair value of our common stock on the date we
granted the options. On June 6, 2003, we granted 46,500 shares of restricted common stock to certain executive
officers. These restricted shares were granted at fair market value at the date of grant and the
restrictions on these awards expire three years from the date of grant. Deferred compensation
expense of $0.7 million was recorded in connection with these awards and was determined based on
the number of granted restricted shares and the fair market value on the grant date. This amount
was recorded as a component of stockholders equity and will be amortized as a charge to operations
over the vesting period of the awards. On November 6, 2002, we granted 75,000 shares of restricted common stock to our chief
executive officer. These restricted shares were granted at fair market value at the date of grant
and the restrictions on the award expire three years from the date of grant. Deferred compensation
expense of $0.8 million was recorded in connection with the award and was determined based on the
number of granted restricted shares and the fair market value on the grant date. This amount was
recorded as a component of stockholders equity and will be amortized as a charge to operations
over the vesting period of the award. In connection with the grant of stock options to employees during 2000, amortization of
deferred compensation expense for the year ended December 31, 2003 was $0.4 million. For the year
ended December 31, 2002, these awards resulted in an expense of $3.2 million, which included the
acceleration of deferred compensation expense related to elimination of all stock-related loans
resulting from the surrender to us of approximately 1.4 million restricted shares by certain
executive officers. In total, amortization of deferred stock-based compensation expense was $0.8 million and $3.7
million in 2003 and 2002, respectively, and was reported in our Consolidated Statements of
Operations as follows (in millions): 2003
    
    
    2002Cost of products sold
    
    $
    
    
    
    $
    0.4Research and development
    
    
    0.3
    
    
    
    0.7Sales, marketing and business development
    
    
    0.1
    
    
    
    1.3General and administrative
    
    
    0.4
    
    
    
    1.3Total amortization of deferred compensation expense
    
    $
    0.8
    
    
    $
    3.7
 Non Operating Expense and Income Investment Expense.We recorded an investment loss of $1.0 million for the year ended
December 31, 2003, as a result of our assessment of an other than temporary decline in the fair
market value of an investment in certain common stock. For the year ended December 31, 2002 we
recorded an investment loss of $1.5 million, resulting from an impairment loss on certain preferred
stock. Interest Income. Interest income decreased $1.2 million, or 23%, to $4.0 million for the year
ended December 31, 2003 from the year ended December 31, 2002 due mainly to lower interest rates
associated with U.S. Dollar and the Euro. Income Taxes.The effective income tax rate for the year ended December 31, 2003 was a 20% tax
expense, compared to a 143% tax benefit for the year ended December 31, 2002. Factors that affect
our estimated annual effective income tax rate include increased research and development
expenditures in the United States, the statutory income tax rates in foreign jurisdictions and the
relative amount of income in each jurisdiction, other operating expense increases and other items
which are not deductible for tax purposes, and research and experimentation tax credits. In
addition, the estimated annual effective rate for the year ended December 31, 2003 includes the
effect of estimated valuation allowances on certain U.S. tax credits. The effective rate for the
year ended December 31, 2002 was driven by estimated annual tax benefits from operating losses in
high tax jurisdictions, partially offset by taxes on operating income generated in low tax
jurisdictions. The rate for the year ended December 31, 2002 also included the effect of the
restructuring and related charges. The tax benefit related to these restructuring and related
charges was approximately $6.1 million for the year ended December 31, 2002. 37




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Financial Results by Segment Our managerial financial reporting provides information that aligns with the two-segment
structure of Bioproducts and Health Care. Accordingly, we have provided financial segment data for
the years ended December 31, 2004, 2003 and 2002. The Bioproducts segment develops and delivers products and services for the industrial,
consumer and agri-processing markets to a global customer base. All of our current product
revenues are derived from this segment. For the years ended December 31, 2004, 2003 and 2002, the
Bioproducts segment achieved operating income of $56.2 million, $65.4 million, and $44.6 million,
respectively. For the year ended December 31, 2002, Bioproducts recorded restructuring and related
costs of $16.4 million. Before these restructuring and related charges, the segment would have

reported operating income of $61.0 million for the year ended December 31, 2002. The Health Care segment is primarily engaged in the performance of research and development,
securing intellectual property and the establishment of strategic investments and collaborations in
support of our product objectives in the health care market. For the years ended December 31, 2004,
2003 and 2002, the Health Care segment experienced operating losses of $23.3 million, $33.6
million, and $40.9 million, respectively. For the year ended December 31, 2004, the Health Care
segment recognized fees totaling $10.0 million from the technology transfer of our therapeutic
vaccine program to Innogenetics N.V. Acquisitions 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. Due to the effect of foreign currency
translation, additional acquisition costs and the sale of certain acquired assets, the adjusted
purchase price was $10.5 million as of December 31, 2003. 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 in our results of operations beginning January 1, 2003. During February 2002, we acquired EBS, now known as Genencor International Wisconsin, Inc.,
from Corn Products International, Inc. for a total cash purchase price of $35.8 million and the
assumption of $1.0 million in debt. As part of this transaction, we entered into a seven-year
supply agreement for a majority of Corn Products International, Inc.s North American enzyme
requirements. The acquisition has been accounted for under the purchase method. Technology Transfer During March 2004, our Health Care segment sold its therapeutic vaccine program to
Innogenetics N.V. Upon transfer of certain intellectual property, contractual relationships and
technologies to Innogenetics, we recognized fees during the quarter ended June 30, 2004 totaling
$10.0 million. We expect to receive further payments as development milestones are achieved. Once
products are commercialized, we may receive royalty payments on future product sales. Joint Venture On April 1, 2004 we assumed majority ownership and controlling interest of our Japanese joint
venture with Kyowa Hakko Kogyo Co. Ltd., in which we have had an equity position since 1996. This
ownership change resulted from the joint ventures partial repurchase of the other owners share.
This venture has been renamed Genencor Kyowa Co. Ltd. The financial position, results of
operations and cash flows of the joint venture have been included in our consolidated financial
statements beginning April 1, 2004. Warehouse Inventory Loss We sustained damage to our finished bioproducts inventory in the second quarter of 2003 as a
result of an accident in a third party warehouse in Rotterdam, the Netherlands. In the first
quarter of 2004, we reached a final settlement of our accident-related claim with our insurer
totaling approximately $21.0 million and recorded a net gain of $8.3 million. China Expansion On January 6, 2005 we announced our plans to build a new manufacturing facility in the Wuxi
China National New and High Tech Industrial Development Zone. We are in the process of purchasing
the remaining approximately 15 percent interest in Genencor (Wuxi) Bio-Products Co. Ltd. from our
joint venture partner, the Wuxi Enzyme Factory, and intend to operate the new facility as a wholly
owned subsidiary. Once completed, we plan to transfer operations and personnel from our existing
manufacturing facility in downtown Wuxi to the new facility. The new site is approximately 20
acres, which includes room for future expansion and is expected to feature upgraded equipment and
provide significant fermentation capacity to produce a wide range of products in Genencors 38




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portfolio. The new facility is also expected to house sales support, customer service, technical
and logistical support as well as warehouse operations. Related Party Transactions Danisco A/S and its affiliates purchased products from us for approximately $19.0 million,
$13.0 million and $11.0 million during the years ended December 31, 2004, 2003, and 2002,
respectively. We purchased products from and/or through these related parties for approximately
$10.0 million, $10.0 million, and $8.0 million during the years ended December 31, 2004, 2003 and
2002, respectively. In October 2000, we signed an exclusive agreement with Danisco for the
development of innovative bioingredients for the food industry. During the years ended December
31, 2004, 2003 and 2002, we received approximately $0.4 million, $1.5 million and $1.1 million,
respectively, in fees and royalty revenues under this agreement. Also, we received approximately
$0.1 million in fees and royalty revenues from a Danisco affiliate during both 2004 and 2003, and
approximately $0.4 million during 2002 under a collaboration agreement for the development and
commercialization of enzymes for the animal feed market. At December 31, 2004 and 2003, we had amounts due from Danisco of approximately $2.3 million
and $1.4 million, respectively. At December 31, 2004 and 2003, we had amounts due to Danisco of
approximately $0.4 million and $0.5 million, respectively. We had outstanding relocation-related notes receivable with balances totaling $0.2 million and
$3.4 million from our officers at December 31, 2004 and 2003, respectively. The notes are
non-interest bearing and are due at the conclusion of five years from the date of issuance.
Accordingly, interest income is imputed at 3.97% per year on the notes, with an offset recorded as
compensation expense. The December 31, 2003 balance of $3.4 million included relocation-related
notes receivable from certain of our officers, including a $1.2 million note from Richard J.
Ranieri, Senior Vice President of Human Resources, and a $1.4 million note from Raymond J. Land,
Senior Vice President and Chief Financial Officer. Both of these loans commenced in 2000, were
non-interest bearing and were due five years from their date of issuance. During the third quarter
of 2004, Genencor purchased the residences of Mr. Land and Mr. Ranieri and paid part of the
purchase price of these properties by canceling the $1.4 million that Mr. Land was indebted to
Genencor under a promissory note dated April 2000 and the $1.2 million that Mr. Ranieri was
indebted to Genencor under a promissory note dated March 2000. The total purchase price for the
Land residence was $2.8 million and the total purchase price for the Ranieri residence was $2.4
million. While third party appraisals were used to confirm that the purchase price for each
residence approximated the fair market value of the property, the transactions resulted in deemed
compensation of $0.1 million to Mr. Land and $0.1 million to Mr. Ranieri. Each of the two officers,
together with his spouse, then entered into a lease with Genencor for his residence providing for a
lease term of up to 36 months. Mr. Ranieri and his spouse elected to terminate their residential
lease with Genencor in December 2004. On June 6, 2003, we granted 46,500 shares of restricted common stock to certain executive
officers. These restricted shares were granted at fair market value at the date of grant and the
restrictions on these awards expire three years from the grant date. Deferred compensation expense
of $0.7 million was recorded in connection with these awards and was determined based on the number
of granted restricted shares and the fair market value on the grant date. This amount was recorded
as a component of stockholders equity and will be amortized as a charge to operations over the
vesting period of the awards. During November 2002, we granted 75,000 shares of restricted common stock to our chief
executive officer. These restricted shares were granted at fair market value at the date of grant
and the restrictions on the award expire three years from the grant date. Deferred compensation
expense of $0.8 million was recorded in connection with the award and was determined based on the
number of granted restricted shares and the fair market value on the grant date. This amount was
recorded as a component of stockholders equity and will be amortized as a charge to operations
over the vesting period of the award. We also had outstanding promissory notes of $14.6 million at December 31, 2001. This amount
related to the exercise of stock options and purchase of restricted shares by our executive
officers during April 2000. In November 2001, we allowed these executive officers to surrender
349,910 vested, restricted shares at a value of $5.6 million to pay principal and interest due on
these notes. On August 21, 2002, in order to eliminate all stock-related loans, our executive
officers surrendered 1,429,864 restricted shares at a value of $10.77 per share to make full
payment of the outstanding principal and accrued interest on their obligations under these notes.
We are holding the surrendered shares as treasury stock. 39




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Liquidity and Capital Resources Our funding needs consist primarily of capital expenditures, research and development
activities, sales and marketing expenses, and expenses for general corporate purposes. We have
financed our operations primarily through cash from the sale of products, the sale of stock,
research and development funding from partners, government grants, and short-term and long-term
borrowings. We believe that our current cash and cash equivalent balances plus funds to be provided from
our current year operating activities, together with those available under our line of credit, will
satisfy our funding needs for at least the next twelve months. Factors that could negatively
impact our cash position include, but are not limited to, future levels of product revenues, fees
and royalty revenues, expense levels, capital expenditures, acquisitions, and foreign currency
exchange rate fluctuations. As of December 31, 2004, cash and cash equivalents totaled $169.3 million. The funds were
invested in short-term instruments, including, A-1/P-1 and A-2/P-2 rated commercial paper,
certificates of deposit, AAA and AA rated medium term notes, institutional money market funds and
bank deposits. Cash provided by operations was $62.6 million, $37.7 million and $38.5 million for the years
ended December 31, 2004, 2003, and 2002, respectively. The increase of $24.9 million for the year
ended December 31, 2004 from the year ended December 31, 2003 was generated principally by the
receipt of cash from our insurer in settlement of our accident-related claim for damage sustained
to our finished bioproducts inventory in the second quarter of 2003 as discussed above under the
heading Warehouse Inventory Loss and the sale of our vaccine technology as discussed above under
the heading Technology Transfer, partially offset by changes in operating assets and liabilities.
The decrease of $0.8 million for the year ended December 31, 2003 from the year ended December 31,
2002 was driven by an increase in operating earnings, net of non-cash items such as depreciation
and amortization, which was more than offset by changes in operating assets and liabilities,
principally due to our efforts to rebuild inventories and settle our outstanding receivable
relative to the warehouse accident that occurred in the second quarter of 2003. Cash used in investing activities was $19.6 million, $31.6 million and $65.7 million for the
years ended December 31, 2004, 2003, and 2002, respectively. The decrease of cash used of $12.0
million for the year ended December 31, 2004 from the year ended December 31, 2003 was driven
primarily by the recognition of cash and cash equivalents of our joint venture with Kyowa Hakko
Kogyo Co. Ltd. of $3.8 million at April 1, 2004 due to our assumption of a controlling interest in
that venture, as discussed above under the heading Joint Venture. Also impacting this decrease
in cash used was a $7.5 million decrease in property, plant and equipment purchases for the year
ended December 31, 2004 from the year ended December 31, 2003. During the third quarter of 2003,
construction was completed on our facility for the clinical-scale manufacture of human therapeutic
proteins in Rochester, New York. Overall, purchases of property, plant and equipment totaled $25.3
million, $32.8 million and $19.6 million for the years ended December 31, 2004, 2003, and 2002,
respectively. A significant portion of this spending included process improvement projects at our
manufacturing and research and development facilities and information technology enhancements.
This spending also included the purchase of officers residences during the third quarter of 2004
as discussed above under the heading Related Party Transactions. Capital projects in process at
December 31, 2004 relate primarily to further manufacturing process improvements and information
technology system enhancements. Cash used in investing activities decreased $34.1 million for the year ended December 31, 2003
from the year ended December 31, 2002. This was driven primarily by the 2002 acquisitions of EBS
and the brewing and enzyme business of Rhodia Food UK Limited totaling $44.7 million and the
purchase of equity securities in 2002 of $4.5 million, partially offset by the increase in 2003
capital expenditures of $13.2 million. Also, cash used in investing activities for 2003 included
$1.1 million in proceeds from the sale of certain acquired assets as discussed above in
Acquisitions. Cash used in financing activities was $24.5 million, $20.4 million, and $26.7 million for the
years ended December 31, 2004, 2003 and 2002, respectively, which reflects our $28.0 million annual
installment payments made on our senior debt in each period. The increase in cash used of $4.1
million for the year ended December 31, 2004 from the year ended December 31, 2003 was driven
primarily by payments on notes payable of one of our foreign affiliates and fewer stock option
exercises. The decrease in cash used of $6.3 million for the year ended December 31, 2003 from the
year ended December 31, 2002 was primarily a result of a 2003 increase in cash provided by the
exercise of stock options. No dividends were paid to common stockholders during 2004, 2003, and 2002. 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 40




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senior note agreement restrict the payment of
dividends or other distributions in cash or other property to the extent the payment puts us in
default of these covenants. Such covenants include, but are not limited to, maintaining a debt to
total capitalization of no greater than 55% and a maximum ratio of debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) of 3.5:1. At December 31, 2004 we had a $40.0 million revolving credit facility with a syndicate of
banks, which is available for general corporate purposes. The credit facility, which consists of a
credit agreement, makes available to us $40.0 million of committed borrowings and expires on
December 23, 2006. The credit facility carries fees of 0.25% on the amount of unborrowed principal
under the agreement. As of December 31, 2004, 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 $56.0 million. Annual
installment payments of $28.0 million commenced on March 30, 2002. We are currently in compliance
with the financial covenants included in the senior note agreement. Contractual Obligations The following table summarizes our contractual obligations as of December 31, 2004 (in
millions): Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsLong-term debt(1)
    
    $
    61.6
    
    
    $
    33.2
    
    
    $
    28.2
    
    
    $
    0.1
    
    
    $
    0.1Capital leases(2)
    
    
    11.4
    
    
    
    1.0
    
    
    
    2.0
    
    
    
    2.0
    
    
    
    6.4Operating leases(2)
    
    
    41.4
    
    
    
    4.1
    
    
    
    8.0
    
    
    
    7.7
    
    
    
    21.6Purchase obligations(3)
    
    
    7.3
    
    
    
    5.8
    
    
    
    1.5
    
    
    
    
    
    
    
    Collaborations(4)
    
    
    6.6
    
    
    
    3.4
    
    
    
    1.9
    
    
    
    1.2
    
    
    
    0.1Other long-term
liabilities(5)
    
    
    9.5
    
    
    
    1.4
    
    
    
    3.3
    
    
    
    1.4
    
    
    
    3.4Total
    
    $
    137.8
    
    
    $
    48.9
    
    
    $
    44.9
    
    
    $
    12.4
    
    
    $
    31.6
 Notes to contractual obligations table: 1
    
    
    
    As more fully described in Note 10  Notes Payable and Long-term Debt in Item 8 of
this Report, our payments under long-term debt are primarily driven by the annual
installment payments made on our senior debt through March 2006.2
    
    
    
    Our capital leases primarily relate to our administrative office in Leiden, the
Netherlands and a wastewater treatment facility proximate to our manufacturing facility in
Brugge, Belgium. While our operating leases include certain other facilities and
equipment, they principally relate to our administrative offices in Palo Alto, California
and Rochester, New York.3
    
    
    
    Purchase obligations are agreements to purchase goods or services that are
enforceable and legally binding upon us. Included in this category are capital commitments
and agreements to purchase raw materials with fixed volumes and prices. We expect to
receive consideration (goods or services) for these purchase obligations. The purchase
obligations do not represent our entire anticipated future purchases, including those of a
routine nature, such as utilities, maintenance, consulting and supplies, which are
purchased as needed. Also, we generally do not purchase raw materials through contracts
with fixed volumes, since the majority of our raw materials consist of products
commercially available from a number of independent sources, which have readily available
substitutes.4
    
    
    
    We have several research and commercial programs and collaborations under which we
may receive or become obligated to pay research funding, royalty, milestone and other
payments. These are highly dependent upon various conditions, such as the success of
research and development activities and the level of sales of commercialized products.5
    
    
    
    Other long-term liabilities primarily represent pension and postretirement
obligations and severance payments which are to be paid over time as a result of previous
restructuring activities. Please refer to Note 13  Employee Benefit Plans of Notes to
Consolidated Financial Statements for more information regarding our pension and
postretirement obligations.
 41




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Off-Balance Sheet Arrangements An off-balance sheet arrangement includes any contractual obligation, agreement or transaction
involving an unconsolidated entity under which we 1) have made guarantees, 2) have a retained or
contingent interest in transferred assets, or a similar arrangement, that serves as credit,
liquidity or market risk support to that entity for such assets, 3) have an obligation under
certain derivative instruments, or 4) have any obligation arising out of a material variable
interest in such an entity that provides financing, liquidity, market risk or credit risk support
to us, or that engages in leasing, hedging or research and development services with us. We assess our contracts in accordance with FASB Interpretation No. 45 Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. Guarantees and claims arise during the ordinary course of business from relationships
with suppliers, customers and strategic partners when we undertake an obligation to guarantee the
performance of others if specified triggering events occur. Non-performance under a contract could
trigger an obligation. These potential claims include actions based upon alleged exposures to
products, intellectual property and environmental matters, and other indemnifications. The
ultimate effect on future financial results is not subject to reasonable estimation because
considerable uncertainty exists as to the final outcome of these claims. However, while the
ultimate liabilities resulting from such claims may be significant to results of operations in the
period recognized, we are not aware of any such claims that we believe will have a material adverse
effect on our consolidated financial statements. Furthermore, we have no arrangements of the types described in the other three categories that
we believe may have a material current or future adverse effect on our consolidated financial
statements. New Accounting Standards In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
This Position supersedes FSP No. 106-1 of the same title, which was issued in January 2004. FSP
No. 106-1 permitted employers that sponsor postretirement benefit plans which provide prescription
drug benefits to retirees to make a one-time election to defer accounting for any effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP No. 106-2 provides
guidance on accounting for the effects of the new Medicare prescription drug legislation by
employers whose prescription drug benefits are actuarially equivalent to the drug benefit under
Medicare Part D. For all public companies that sponsor one or more plans with more than 100
participants, the Position is effective as of the first interim or annual period beginning after
June 15, 2004. The adoption of FSP No. 106-2 had no material impact on the Companys financial
position or results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an Amendment of ARB No. 43,
chapter 4. This Statement amends the guidance to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage). This statement
requires that items such as idle facility expense, excessive spoilage, double freight and
rehandling costs be recognized as current-period charges regardless of whether they meet the
criterion of abnormal. This statement requires that the allocation of fixed production overheads
to the cost of conversion be based on the normal capacity of the production facility. This
statement is effective for fiscal years beginning after June 15, 2005. We are currently assessing
the impact of this new standard on our financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB Opinion No. 29. This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. This statement is effective for fiscal years beginning after June 15,
2005. We will apply the provisions of the statement to exchanges of nonmonetary assets after the
effective date as they occur. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is
a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. This
Statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. The Statement also
addresses transactions in which an entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entitys equity instruments or that may be settled by the
issuance of those equity instruments. Accordingly, it changes the required accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award (with
limited exceptions). That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. This 42




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Statement is effective as of the
beginning of the first interim or annual reporting period that begins after June 15, 2005 and we
will adopt the standard in the third quarter of fiscal 2005. The Statement provides three
alternative transition methods we can apply upon adoption of the standard: the modified
prospective method, which would require application of the requirements of the Statement to new or
modified awards after the effective date, or the modified retrospective method, which would allow
for application of the requirements of the Statement to awards for all prior years presented or to
only prior interim periods in the year of adoption. While the pro-forma disclosures under the
original version SFAS No. 123, which are included in Note 13  Employee Benefit Plans within Item 8
of this Report, indicate that the impact of this new standard may be material to our consolidated
financial statements upon adoption, we are currently in the process of assessing the impact on our
consolidated financial statements as well as the transition method we will select upon adoption of
the Statement. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Foreign currency risk and interest rate risk are the primary sources of our market risk.
Foreign operations accounted for approximately 58% of our 2004 product revenues. We believe that we
partially mitigate this risk by having manufacturing facilities located in several locations around
the world, which means that our costs are often denominated in the same currency as our product
revenues. We may manage the foreign currency exposures that remain through the use of foreign
currency forward contracts, currency options and off-setting currency loans where deemed
appropriate. We do not use these instruments for speculative purposes. At December 31, 2004 the
Company had $7.0 million in forward exchange contracts outstanding. The contract maturities were
no longer than three months. We recorded $0.1 million in foreign currency gains related to forward
contracts in the statement of operations for the year ended December 31, 2004. As of December 31, 2004, cash and cash equivalents totaled $169.3 million. Of this amount,
$95.9 million was denominated in Euros. The remainder, or $73.4 million, was primarily denominated
in U.S. Dollars. Other than the third installment of $28.0 million due in March 30, 2005 under our
6.82% senior notes discussed under the heading Liquidity and Capital Resources in Item 7 of this
Report, short-term debt outstanding at December 31, 2004 was not significant. To the extent U.S.
Dollar and Euro interest rates fluctuate either up or down, the return on the cash investments will
also fluctuate. To the extent such Euro cash investments remain outstanding, we will be subject to
the risks of future foreign exchange fluctuations and the impact on the translation of these cash
investments into U.S. Dollars. Interest Rates Our interest income is sensitive to changes in the general level of short-term interest rates
primarily in the United States and Europe. In this regard, changes in the U.S. Dollar and Euro
currency rates affect the interest earned on our cash equivalents, short-term investments, and
long-term investments. Our interest expense is generated primarily from fixed rate debt. The $56.0
million 6.82% senior notes outstanding at December 31, 2004 mature evenly in installments of $28.0
million per year. Annual installment payments commenced March 30, 2002 with two remaining annual
installments due on March 30, 2005 and March 30, 2006. Foreign Currency Exposure During the year ended December 31, 2004, we derived approximately 58% of our revenues from
foreign operations. Economic conditions in countries where we conduct business and changing
foreign currency exchange rates affect our financial position and results of operations. We are
exposed to changes in foreign exchange rates in Europe, Latin America, and Asia. The Euro and
Argentine Peso present our most significant foreign currency exposure risk. Changes in foreign
currency exchange rates, especially the strengthening of the U.S. Dollar, may have an adverse
effect on our financial position and results of operations as they are expressed in U.S. Dollars.
Our manufacturing and administrative operations for Latin America are located in Argentina. A
significant part of our Latin American revenues are denominated in U.S. Dollars. Net foreign
exchange gains from U.S. Dollar/Euro and U.S. Dollar/Argentine Peso transactions were $0.1 million
for the year ended December 31, 2004. Management monitors foreign currency exposures and may in the ordinary course of business
enter into foreign currency forward contracts or options contracts related to specific foreign
currency transactions or anticipated cash flows. These contracts generally cover periods of nine
months or less and are not material. We recorded a gain of $0.1 million in the statement of
operations for the year ended December 31, 2004 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. 43




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Other The risk factors discussed in Item 1 of this Report are incorporated herein by reference to
the degree they address market risk. 44




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Item 8. Financial Statements and Supplementary Data 
 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of
Genencor International, Inc. We have completed an integrated audit of Genencor International, Inc. and subsidiaries 2004
consolidated financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below. Consolidated financial statements and financial statement schedule In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of Genencor
International, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report on Internal Control
Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2004 based on criteria established in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Frameworkissued by the COSO. The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. 45




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Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP
San Jose, California
March 14, 2005 46




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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data)
 December 31,2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    169,261
    
    
    $
    144,301Short-term investments
    
    
    20,400
    
    
    
    22,250Trade accounts receivable (less allowance for doubtful accounts of $2,243 in
2004 and $2,034 in 2003)
    
    
    65,543
    
    
    
    58,249Inventories
    
    
    79,906
    
    
    
    64,159Prepaid expenses and other current assets
    
    
    30,026
    
    
    
    32,970Deferred income taxes
    
    
    6,130
    
    
    
    3,283Total current assets
    
    
    371,266
    
    
    
    325,212Property, plant and equipment, net
    
    
    235,754
    
    
    
    232,902Investments and other assets
    
    
    58,092
    
    
    
    61,731Goodwill
    
    
    29,380
    
    
    
    29,380Intangible assets, net
    
    
    43,951
    
    
    
    47,075Deferred income taxes
    
    
    13,670
    
    
    
    16,122Total assets
    
    $
    752,113
    
    
    $
    712,422Liabilities, Redeemable Preferred Stock and Stockholders EquityCurrent liabilities:Notes payable
    
    $
    4,999
    
    
    $
    5,926Current maturities of long-term debt
    
    
    28,213
    
    
    
    28,249Accounts payable and accrued expenses
    
    
    61,184
    
    
    
    49,143Interest payable on long-term debt
    
    
    955
    
    
    
    1,432Accrued employee benefits
    
    
    18,265
    
    
    
    17,415Deferred income taxes
    
    
    
    
    
    
    3Total current liabilities
    
    
    113,616
    
    
    
    102,168Long-term debt
    
    
    28,393
    
    
    
    58,466Capital lease obligation
    
    
    8,043
    
    
    
    6,842Deferred income taxes
    
    
    22,579
    
    
    
    21,441Other long-term liabilities
    
    
    13,374
    
    
    
    10,681Minority interest
    
    
    705
    
    
    
    137Total liabilities
    
    
    186,710
    
    
    
    199,735Commitments and contingencies
    
    
    
    
    
    
    Redeemable preferred stock:7 1/2% cumulative series A preferred stock, without par value, authorized
1 shares, 1 shares issued and outstanding
    
    
    184,300
    
    
    
    177,025Stockholders equity:Common stock, par value $0.01 per share, 200,000
shares authorized, 61,586 and 60,991 shares issued
at December 31, 2004 and 2003, respectively
    
    
    616
    
    
    
    610Additional paid-in capital
    
    
    367,043
    
    
    
    359,344Treasury stock, 1,780 shares at cost
at December 31, 2004 and 2003
    
    
    (21,030
    )
    
    
    (21,030
    )Deferred stock-based compensation
    
    
    (489
    )
    
    
    (1,036
    )Retained earnings
    
    
    19,492
    
    
    
    589Accumulated other comprehensive income/(loss)
    
    
    15,471
    
    
    
    (2,815
    )Total stockholders equity
    
    
    381,103
    
    
    
    335,662Total liabilities, redeemable preferred stock and stockholders equity
    
    $
    752,113
    
    
    $
    712,422
 The accompanying notes are an integral part of the consolidated financial statements. 47




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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
 For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Revenues:Product revenue
    
    $
    389,827
    
    
    $
    362,143
    
    
    $
    329,337Fees and royalty revenues
    
    
    20,590
    
    
    
    21,019
    
    
    
    20,741Total revenues
    
    
    410,417
    
    
    
    383,162
    
    
    
    350,078Operating expenses:Cost of products sold
    
    
    225,749
    
    
    
    207,483
    
    
    
    186,383Research and development
    
    
    75,809
    
    
    
    72,534
    
    
    
    70,190Sales, marketing and business development
    
    
    38,902
    
    
    
    33,735
    
    
    
    33,027General and administrative
    
    
    40,506
    
    
    
    33,559
    
    
    
    34,635Amortization of intangible assets
    
    
    4,684
    
    
    
    5,682
    
    
    
    5,563Restructuring and related charges
    
    
    
    
    
    
    
    
    
    
    16,427Other (income)
    
    
    (8,372
    )
    
    
    (2,081
    )
    
    
    (3,409
    )Total operating expenses
    
    
    377,278
    
    
    
    350,912
    
    
    
    342,816Operating income
    
    
    33,139
    
    
    
    32,250
    
    
    
    7,262Non operating expenses/(income):Investment expense
    
    
    
    
    
    
    1,018
    
    
    
    1,500Interest expense
    
    
    4,829
    
    
    
    6,667
    
    
    
    8,587Interest income
    
    
    (3,614
    )
    
    
    (3,960
    )
    
    
    (5,207
    )Total non operating expenses
    
    
    1,215
    
    
    
    3,725
    
    
    
    4,880Income before income taxes
    
    
    31,924
    
    
    
    28,525
    
    
    
    2,382Provision for/(benefit from) income taxes
    
    
    5,746
    
    
    
    5,717
    
    
    
    (3,415
    )Net income
    
    $
    26,178
    
    
    $
    22,808
    
    
    $
    5,797Net income available/(loss applicable) to
holders of common stock
    
    $
    18,903
    
    
    $
    15,533
    
    
    $
    (1,478
    )Earnings/(loss) per common share:Basic
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    (0.02
    )Diluted
    
    $
    0.31
    
    
    $
    0.26
    
    
    $
    (0.02
    )Weighted average common shares:Basic
    
    
    59,434
    
    
    
    58,767
    
    
    
    59,257Diluted
    
    
    61,204
    
    
    
    60,680
    
    
    
    59,575
 The accompanying notes are an integral part of the consolidated financial statements. 48




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##### Table of Contents



GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Amounts in thousands)
 Notes Receivable
    
    
    Retained
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Deferred
    
    
    for
    
    
    Earnings/
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Treasury
    
    
    Stock-Based
    
    
    Common
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Capital
    
    
    Stock
    
    
    Compensation
    
    
    Stock
    
    
    Deficit)
    
    
    (Loss)/Income
    
    
    EquityBalances, December 31, 2001
    
    $
    599
    
    
    $
    345,655
    
    
    $
    (5,630
    )
    
    $
    (3,517
    )
    
    $
    (14,647
    )
    
    $
    (13,466
    )
    
    $
    (63,238
    )
    
    $
    245,756Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,797
    
    
    
    
    
    
    
    5,797Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,399
    
    
    
    23,399Unrealized holding losses ($4,480 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,824
    )
    
    
    (2,824
    )Minimum pension liability
adjustment ($2,573 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,123
    )
    
    
    (2,123
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,452Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,249Surrender of restricted shares
    
    
    
    
    
    
    503
    
    
    
    (15,400
    )
    
    
    (503
    )
    
    
    14,647
    
    
    
    
    
    
    
    
    
    
    
    (753
    )Employee Stock Purchase Plan
    
    
    2
    
    
    
    1,539
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,541Exercise of employee stock options
    
    
    1
    
    
    
    791
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    792Deferred stock-based compensation
    
    
    
    
    
    
    807
    
    
    
    
    
    
    
    (807
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,746Conversion of stock appreciation rights to
stock options
    
    
    
    
    
    
    83
    
    
    
    
    
    
    
    (83
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options granted to non-employees
    
    
    
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201Preferred stock dividend accrued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,275
    )
    
    
    
    
    
    
    (7,275
    )Balances, December 31, 2002
    
    
    602
    
    
    
    349,579
    
    
    
    (21,030
    )
    
    
    (1,164
    )
    
    
    
    
    
    
    (14,944
    )
    
    
    (44,786
    )
    
    
    268,257Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,808
    
    
    
    
    
    
    
    22,808Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,850
    
    
    
    36,850Unrealized holding losses ($4,275 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,714
    
    
    
    2,714Adjustment for losses included
in earnings ($451 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    284Minimum pension liability
adjustment ($2,573 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,123
    
    
    
    2,123Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,971Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,779Deferred stock-based compensation
    
    
    1
    
    
    
    674
    
    
    
    
    
    
    
    (675
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase Plan
    
    
    2
    
    
    
    1,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,414Exercise of employee stock options
    
    
    6
    
    
    
    6,615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,621Tax effect on exercise of employee stock options
    
    
    
    
    
    
    962
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    962Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    803
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    803Conversion of restricted shares to restricted
stock units
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options granted to non-employees
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101Preferred stock dividend accrued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,275
    )
    
    
    
    
    
    
    (7,275
    )Balances, December 31, 2003
    
    
    610
    
    
    
    359,344
    
    
    
    (21,030
    )
    
    
    (1,036
    )
    
    
    
    
    
    
    589
    
    
    
    (2,815
    )
    
    
    335,662Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,178
    
    
    
    
    
    
    
    26,178Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,631
    
    
    
    20,631Unrealized holding losses ($1,421 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (895
    )
    
    
    (895
    )Minimum pension liability
adjustment ($2,231 pre-tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,450
    )
    
    
    (1,450
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,286Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,464Employee Stock Purchase Plan
    
    
    1
    
    
    
    1,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,689Exercise of employee stock options
    
    
    5
    
    
    
    4,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,849Tax effect on exercise of employee stock options
    
    
    
    
    
    
    991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    991Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    723Preferred stock dividend accrued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,275
    )
    
    
    
    
    
    
    (7,275
    )Balances, December 31, 2004
    
    $
    616
    
    
    $
    367,043
    
    
    $
    (21,030
    )
    
    $
    (489
    )
    
    $
    
    
    
    $
    19,492
    
    
    $
    15,471
    
    
    $
    381,103
 The accompanying notes are an integral part of the consolidated financial statements. 49




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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
 For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    26,178
    
    
    $
    22,808
    
    
    $
    5,797Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    36,890
    
    
    
    35,662
    
    
    
    33,191Amortization of deferred stock-based compensation
    
    
    723
    
    
    
    803
    
    
    
    3,746Non-cash portion of a gain on settlement
    
    
    
    
    
    
    (1,328
    )
    
    
    Non-cash portion of restructuring and related charges
    
    
    
    
    
    
    
    
    
    
    9,495Loss on disposition of property, plant and
equipment
    
    
    156
    
    
    
    438
    
    
    
    488Loss from impairment of investment in equity securities
    
    
    
    
    
    
    1,018
    
    
    
    1,500(Increase) decrease in operating assets:Trade accounts receivable
    
    
    (2,416
    )
    
    
    (554
    )
    
    
    699Inventories
    
    
    (12,324
    )
    
    
    (3,841
    )
    
    
    1,096Prepaid expenses and other current assets
    
    
    1,429
    
    
    
    (6,846
    )
    
    
    (4,495
    )Investments and other assets
    
    
    2,959
    
    
    
    (8,988
    )
    
    
    (7,386
    )Increase (decrease) in operating liabilities:Accounts payable and accrued expenses
    
    
    8,650
    
    
    
    (1,707
    )
    
    
    (6,717
    )Interest payable on long-term debt
    
    
    (480
    )
    
    
    (478
    )
    
    
    (473
    )Accrued employee benefits
    
    
    580
    
    
    
    4,045
    
    
    
    (808
    )Other
    
    
    241
    
    
    
    (3,305
    )
    
    
    2,333Net cash provided by operating activities
    
    
    62,586
    
    
    
    37,727
    
    
    
    38,466Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (25,298
    )
    
    
    (32,849
    )
    
    
    (19,550
    )Purchases of intangible assets
    
    
    
    
    
    
    
    
    
    
    (100
    )Purchases of short-term investments
    
    
    (34,050
    )
    
    
    (30,350
    )
    
    
    (45,200
    )Proceeds from the sale of short-term investments
    
    
    35,900
    
    
    
    30,350
    
    
    
    47,950Proceeds from notes receivable
    
    
    500
    
    
    
    
    
    
    
    Proceeds from the sale of property, plant and equipment
    
    
    211
    
    
    
    133
    
    
    
    414Proceeds from the sale of acquired assets
    
    
    
    
    
    
    1,145
    
    
    
    Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (44,734
    )Assumption of controlling interest in joint venture
    
    
    3,751
    
    
    
    
    
    
    
    Payment to acquire equity securities
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Payments related to prior acquisition
    
    
    (632
    )
    
    
    
    
    
    
    Net cash (used in) investing activities
    
    
    (19,618
    )
    
    
    (31,571
    )
    
    
    (65,720
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    4,848
    
    
    
    6,615
    
    
    
    791Proceeds from Employee Stock Purchase Plan
    
    
    1,782
    
    
    
    1,525
    
    
    
    1,507Surrender of restricted shares
    
    
    
    
    
    
    
    
    
    
    (198
    )Net payments on notes payable of foreign affiliate
    
    
    (2,749
    )
    
    
    (205
    )
    
    
    (565
    )Payment of long-term debt
    
    
    (28,333
    )
    
    
    (28,366
    )
    
    
    (28,277
    )Net cash (used in) financing activities
    
    
    (24,452
    )
    
    
    (20,431
    )
    
    
    (26,742
    )Effect of exchange rate changes on cash
    
    
    6,444
    
    
    
    11,825
    
    
    
    10,724Net increase (decrease) in cash and cash equivalents
    
    
    24,960
    
    
    
    (2,450
    )
    
    
    (43,272
    )Cash and cash equivalents  beginning of year
    
    
    144,301
    
    
    
    146,751
    
    
    
    190,023Cash and cash equivalents  end of year
    
    $
    169,261
    
    
    $
    144,301
    
    
    $
    146,751
 The accompanying notes are an integral part of the consolidated financial statements. 50




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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data) 1  Description of the Company and Accounting Policies Genencor International, Inc. and subsidiaries (the Company) is a diversified biotechnology
company that develops and delivers products and services to the industrial, consumer,
agri-processing and health care markets. The Companys current products include novel enzymes used
in the cleaning, textiles, carbohydrate processing, fermentation alcohol and food, feed and
specialties markets. The principal geographical markets for the products are North America, Latin
America, Europe and Asia. The Company is in the process of applying its proven and proprietary
technologies to address new opportunities in the industrial, consumer, agri-processing and health
care industries. Significant accounting policies are as follows: Principles of Consolidation The consolidated financial statements include the accounts of all majority-owned subsidiaries.
Investments in affiliates in which the Company has the ability to exercise significant influence,
but not control, are accounted for by the equity method. All other investments in affiliates are
carried at cost. Intercompany transactions are eliminated. All investments in variable interest
entities are accounted for in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 46R Consolidation of Variable Interest Entities. The Company has no material
investments in variable interest entities and all such investments have been appropriately
reflected in the consolidated financial statements or otherwise disclosed in the notes thereto. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents and Short-Term Investments Cash and cash equivalents consist of cash, money market funds, commercial paper and bank
deposits with original maturity dates of three months or less from the date of purchase.
Short-term investments primarily consist of investment grade variable rate debt obligations, which
are asset backed and categorized as available-for-sale securities. The carrying amounts of cash
and cash equivalents and short-term investments approximate their fair values due to their short
maturities or variable interest rates, which typically reset approximately every 30 days. As a
result of the resetting variable rates, despite the long-term nature of their stated contractual
maturities, the Company has the ability to quickly liquidate its short-term investments.
Accordingly, the Company had no cumulative unrealized or realized holding gains or losses from its
short-term investments. All income generated from cash and cash equivalents and short-term
investments is recorded as interest income. Revenue Recognition Revenues consist of product revenues and fees and royalty revenues. Fees and royalty revenues
consist primarily of funded research, technology and license fees and royalties. Product Revenue Revenue from product sales is recognized upon shipment to customers. 51




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Funded Research Research funding revenues result from collaborative agreements with various parties,
including the U.S. Government, whereby the Company performs research activities and receives
revenues that partially reimburse expenses incurred. Under such agreements the Company retains a
proprietary interest in the products and technology developed. These expense reimbursements
primarily consist of direct expense sharing arrangements and milestone payments. Revenues related
to expense sharing arrangements are recorded as the underlying expenses are incurred. Milestone
payments are contingent upon successful completion of research activities and are recognized upon
satisfaction of those contingencies. Upfront research-funding payments are recognized as revenues
on a straight-line basis over the term of the underlying research agreement. Technology and License Fees Fees from the sale of technology are recognized upon completion of the required technology
transfer and substantial satisfaction of any performance related responsibilities. License fees
are recognized on a straight-line basis over the term defined in the license agreement. In the
event there is no defined term, such as with permanent licenses, license fees are recognized upon
substantial satisfaction of any performance related responsibilities. Royalty Revenue Royalty revenue is recognized in accordance with the underlying contract terms. Research and Development Research and development costs are expensed as incurred. Research and development includes
expenses for services rendered related to the Companys funded research activities. Inventories Inventories are stated at the lower of cost or market, cost being determined using the
first-in, first-out (FIFO) method. Property, Plant and Equipment All property, plant and equipment is stated at acquisition cost. Depreciation for financial
statement purposes is calculated using the straight-line method over the estimated useful lives of
the assets. Land improvements and buildings are depreciated over 10-40 years, with a weighted
average estimated useful life of 21 years, and machinery and equipment over 3-15 years, with a
weighted average estimated useful life of 13 years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the length of the applicable lease term. Property under
capital lease is amortized over the lease term. Maintenance and repair expenditures are expensed as
incurred. Included in machinery and equipment is computer hardware and software developed or
obtained for internal use which is amortized over 3-5 years. Goodwill Goodwill consists of the excess of cost over the net assets of acquired businesses. Goodwill
is not amortized, but is tested at least annually for impairment. Intangible Assets Intangible assets consist of two major classes, other amortizable assets and technology.
Other amortizable assets consist primarily of patents, licenses, and customer lists. These
definite-lived intangibles are amortized on a straight-line basis over their remaining useful
lives. Patents, licenses and customer lists are amortized over 5-20 years with a weighted average
estimated useful life of 16 years. Technology has been determined to have indefinite useful lives.
Indefinite-lived intangibles are not amortized and are tested for impairment on an annual basis or
when events and circumstances exist requiring impairment testing. No amortization expense was
recorded for these assets for the years ended December 31, 2004 and 2003. 52




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Impairment of Long-Lived Assets The Company regularly assesses all of its long-lived assets for impairment when events or
circumstances indicate their carrying amounts may not be recoverable. This is accomplished by
comparing the expected undiscounted future cash flows of the assets with the respective carrying
amount as of the date of assessment. Should aggregate future cash flows be less than the carrying
value, a write-down would be required, measured as the difference between the carrying value and
the fair value of the asset. Fair value is estimated either through independent valuation or as the
present value of expected future cash flows. If the expected undiscounted future cash flows exceed
the respective carrying amount as of the date of assessment, no impairment is recognized. Foreign Currency All assets and liabilities of non-U.S. subsidiaries are translated at exchange rates in effect
at the balance sheet dates. Translation gains and losses are included in determining comprehensive
income. All income statement amounts are translated at the average of the daily exchange rates in
effect during each month. The Company, on occasion, may use forward exchange contracts and options to hedge its exposure
in foreign currencies. Option and forward exchange contracts are used to minimize the impact of
foreign currency fluctuations on the Companys revenues and costs and are not used to engage in
speculation. At December 31, 2004 the Company had $7,000 in forward exchange contracts outstanding.
The contract maturities were no longer than three months. At December 31, 2003 the Company had no
options or forward exchange contracts outstanding. Foreign currency transaction net gains are included in other operating income/expense. Total
foreign currency transaction net gains were $71 in 2004, $385 in 2003 and $3,107 in 2002. Financial Instruments The determination of fair value of financial instruments, consisting of cash and cash
equivalents, short-term investments, accounts receivable, obligations under accounts payable,
accrued expenses, and debt instruments is based on interest rates available to the Company and
comparisons to quoted market prices for the same or similar issues. At December 31, 2004 and 2003,
the fair value of these financial instruments approximated carrying value. Investments in Marketable Equity Securities All of the Companys investments in marketable equity securities are considered
available-for-sale and are recorded at fair value within prepaid expenses and other current assets
or investments and other assets. Unrealized gains and losses, calculated as the difference between
fair value and cost of the security on a specific identification basis, are recorded as a component
of comprehensive income, net of tax. Gross unrealized losses on available-for-sale securities were $2,159 at December 31, 2004,
$738 at December 31, 2003 and $5,504 at December 31, 2002. The fair market value of
available-for-sale securities was $6,464 at December 31, 2004, $7,885 at December 31, 2003 and
$4,136 at December 31, 2002. The deferred tax asset related to these unrealized losses was $799 at
December 31, 2004, $273 at December 31, 2003 and $2,041 at December 31, 2002. Investment Expense/Income The Company recorded an investment loss of $1,018 during the year ended December 31, 2003, as
a result of the Companys assessment of an other than temporary decline in the fair market value
of an investment in certain common stock. During 2002, the Company recorded an impairment loss of
$1,500 on its investment in certain preferred stock. These amounts are included in investment
expense as part of total non operating expenses/(income) for the respective periods. There were no
sales of marketable equity securities during the years ended December 31, 2004, 2003 or 2002. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. This standard requires, among other things, recognition of
deferred tax assets and liabilities for future tax consequences, measured by enacted rates
attributable to temporary differences between financial statement and income tax bases of 53




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assets and liabilities, and net operating loss and tax credit carryforwards to the extent that
realization of such benefits is more likely than not. Major Customers In 2004, two customers accounted for 39% of sales and 36% of accounts receivable. In 2003,
two customers accounted for 41% of sales and 39% of accounts receivable. Comprehensive Income The provisions of SFAS No. 130, Reporting Comprehensive Income establish standards for
reporting and presentation of comprehensive income and its components. This Statement requires
reporting by major components and as a single total, all changes in stockholders equity from
non-stockholder sources. The Company has chosen to display comprehensive income in the
Consolidated Statements of Changes in Stockholders Equity. Stock-Based Compensation The Company uses the intrinsic value method to account for stock-based employee compensation
in accordance with Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to
Employees. Refer to Note 13 for the pro forma amounts had compensation cost for the Companys
stock option plans been determined based on the fair value method under the current requirements of
SFAS No. 123 Accounting for Stock-based Compensation. Guarantees The Company assesses its contracts in accordance with Financial Accounting Standards Board
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. Guarantees and claims arise during the ordinary
course of business from relationships with suppliers, customers and strategic partners when the
Company undertakes an obligation to guarantee the performance of others if specified triggering
events occur. Non-performance under a contract could trigger an obligation of the Company. These
potential claims include actions based upon alleged exposures to products, intellectual property
and environmental matters, and other indemnifications. The ultimate effect on future financial
results is not subject to reasonable estimation because considerable uncertainty exists as to the
final outcome of these claims. However, while the ultimate liabilities resulting from such claims
may be significant to results of operations in the period recognized, management does not
anticipate they will have a material adverse effect on the Companys consolidated financial
statements. Earnings Per Share The provisions of SFAS No. 128, Earnings per Share, require the disclosure of basic and
diluted earnings per share. Basic earnings/(loss) per share is computed based on the weighted
average number of common shares outstanding during the period. In arriving at income
available/(loss applicable) to common stockholders, undeclared and unpaid cumulative preferred
stock dividends of $7,275 are deducted for each year presented. Diluted earnings/(loss) per share reflects the potential dilution that could occur if dilutive
securities and other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the net income available/(loss
applicable) to common stockholders of the Company. As a result of stock-based awards outstanding
under the Companys 2002 Omnibus Incentive Plan and its predecessor plan, the Stock Option and
Stock Appreciation Right Plan (SOAR Plan), there were dilutive securities in 2004, 2003 and 2002.
The weighted-average impact of these has been reflected in the calculation of diluted
earnings/(loss) per share for the respective periods presented. 54




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The following table reflects the calculation of basic and diluted earnings/(loss) per common
share for the years ended December 31: 2004
    
    
    2003
    
    
    2002Net income
    
    $
    26,178
    
    
    $
    22,808
    
    
    $
    5,797Less: Accrued dividends on preferred stock
    
    
    (7,275
    )
    
    
    (7,275
    )
    
    
    (7,275
    )Net income available/(loss applicable) to holders of common stock
    
    $
    18,903
    
    
    $
    15,533
    
    
    $
    (1,478
    )Weighted average common shares:Basic
    
    
    59,434
    
    
    
    58,767
    
    
    
    59,257Effect of stock-based awards
    
    
    1,770
    
    
    
    1,913
    
    
    
    318Diluted
    
    
    61,204
    
    
    
    60,680
    
    
    
    59,575Earnings/(loss) per common share:Basic
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    (0.02
    )Diluted
    
    $
    0.31
    
    
    $
    0.26
    
    
    $
    (0.02
    )
 New Accounting Pronouncements In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
This Position supersedes FSP No. 106-1 of the same title, which was issued in January 2004. FSP
No. 106-1 permitted employers that sponsor postretirement benefit plans which provide prescription
drug benefits to retirees to make a one-time election to defer accounting for any effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP No. 106-2 provides
guidance on accounting for the effects of the new Medicare prescription drug legislation by
employers whose prescription drug benefits are actuarially equivalent to the drug benefit under
Medicare Part D. For all public companies that sponsor one or more plans with more than 100
participants, the Position is effective as of the first interim or annual period beginning after
June 15, 2004. The adoption of FSP No. 106-2 had no material impact on the Companys financial
position or results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an Amendment of ARB No. 43,
chapter 4. This Statement amends the guidance to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage). This statement
requires that items such as idle facility expense, excessive spoilage, double freight and
rehandling costs be recognized as current-period charges regardless of whether they meet the
criterion of abnormal. This statement requires that the allocation of fixed production overheads
to the cost of conversion be based on the normal capacity of the production facility. This
statement is effective for fiscal years beginning after June 15, 2005. The Company is currently
assessing the impact of this new standard on its financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB Opinion
No. 29. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a result of the
exchange. This statement is effective for fiscal years beginning after June 15, 2005. The Company
will apply the provisions of the statement to exchanges of nonmonetary assets after the effective
date as they occur. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is
a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion
No. 25 Accounting for Stock Issued to Employees and its related implementation guidance. This
Statement establishes standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services. The Statement also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are based on the fair value of
the entitys equity instruments or that may be settled by the issuance of those equity instruments.
Accordingly, it changes the required accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123R requires a public entity to
measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in exchange for the award.
This Statement is effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005 and the Company will adopt the standard in the third quarter of
fiscal 2005. The Statement provides three alternative transition methods the Company can apply
upon adoption of the standard: the modified prospective method, which would require application of
the requirements of the Statement to new or modified awards after the effective date, or the
modified retrospective method, which would allow for application of the 55




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requirements of the Statement to awards for all prior years
presented or to only prior interim periods in the year of adoption. While the pro-forma
disclosures under the original version SFAS No. 123, which are included in Note 13  Employee
Benefit Plans, indicate that the impact of this new standard may be material to the Companys
consolidated financial statements upon adoption, the Company is currently in the process of
assessing the impact on its consolidated financial statements as well as the transition method the
Company will select upon adoption of the Statement. Reclassifications Reclassifications have been made to prior year amounts to conform to the current year
presentation, including reclassifying $22,250, primarily consisting of variable rate debt
obligations, from the previously reported classification as cash and cash equivalents to short-term
investments as of December 31, 2003. Corresponding adjustments were also made to the Consolidated
Statements of Cash Flows for fiscal 2003 and 2002 to reflect the purchases of and the proceeds from
sale of short-term investments within investing activities rather than as a component of cash and
cash equivalents. Previously reported cash and cash equivalents as of December 31, 2002 and 2001
were also adjusted by $22,250 and $25,000, respectively, to reflect similar short-term investments
in those periods. 2  Acquisitions 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. Due to the effect of foreign currency
translation, additional acquisition costs and the sale of certain acquired assets, the adjusted
purchase price was $10,501 as of December 31, 2003. The acquisition included technology, product
lines and personnel, and expanded the Companys bioproducts portfolio and technical service
capabilities in the food, feed and specialties enzyme market. 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. As more fully
described in Note 9, this acquisition consisted entirely of intangible assets. During February 2002, the Company acquired EBS, now known as Genencor International Wisconsin,
Inc., from Corn Products International, Inc. for a total cash purchase price of $35,809 and the
assumption of $974 in debt. As part of this transaction, the Company entered into a seven-year
supply agreement for a majority of Corn Products International, Inc.s North American enzyme
requirements. The acquisition has been accounted for under the purchase method in accordance with
SFAS No. 141. The acquired entitys results of operations have been consolidated with the
Companys results of operations since the acquisition date. 3 Joint Venture On April 1, 2004 the Company assumed majority ownership and controlling interest of the
Companys joint venture with Kyowa Hakko Kogyo Co. Ltd., in which the Company has had an equity
position since 1996. This ownership change resulted from the joint ventures partial repurchase of
the other owners share. This venture has been renamed Genencor Kyowa Co. Ltd. The financial
position, results of operations and cash flows of the joint venture have been included in the
Companys consolidated financial statements beginning April 1, 2004. 4  Restructuring and Related Charges During February 2002, as a result of the acquisition of EBS and general economic conditions in
Latin America, including the devaluation of the Argentine peso, the Company engaged in a plan to
restructure its overall supply infrastructure by ceasing operations at its Elkhart, Indiana plant
and downsizing its Argentine facilities. There were 119 positions eliminated as a result of this
restructuring. All affected employees were notified immediately of the restructuring plan. As of
December 31, 2002, all 119 employees had terminated their employment with the Company. As a result of the plan, restructuring and related charges of $16,427 were recorded in the
Companys operating earnings for the year ended December 31, 2002. These charges were primarily
driven by employee severance and related costs of approximately $3,762, costs to dismantle portions
of the restructured facilities of $1,000, costs to terminate long-term utility agreements of $319,
other costs totaling $239, and $9,495 for property, plant and equipment that was deemed impaired as
it would no longer be utilized by the Company after the restructuring. The impairment charge was
determined based on remaining book value, as the Company believed there was no active market in
which to sell the specific assets. Full implementation was completed in the fourth quarter of
2002. In addition, the Company recorded costs related to the restructuring, such as those related
to the transition of activities between Elkhart 56




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and Beloit, of $1,612 as incurred during the year
ended December 31, 2002. At December 31, 2003 and 2002, the Company had a
remaining liability of $447 and $805 respectively, related to this restructuring. As of
December 31, 2004 there was no remaining liability related to this
restructuring. 5  Fees and Royalty Revenues Fees and royalty revenues included the following for the years ended December 31: 2004
    
    
    2003
    
    
    2002Funded research
    
    $
    8,162
    
    
    $
    19,416
    
    
    $
    19,533License fees
    
    
    836
    
    
    
    190
    
    
    
    75Royalties
    
    
    1,592
    
    
    
    1,413
    
    
    
    1,133Other
    
    
    10,000
    
    
    
    
    
    
    
    Fees and royalty revenues
    
    $
    20,590
    
    
    $
    21,019
    
    
    $
    20,741
 In October 2001, the Company entered into a strategic alliance with Dow Corning Corporation to
create a new proprietary technology platform for the development of new biomaterials. For the
years ended December 31, 2004, 2003 and 2002, the Company recorded $3,209, $13,989 and $11,554
respectively, in research funding revenues from this alliance. The initial stage of this alliance
was completed at the end of 2003. Other fees were $10,000 for year ended December 31, 2004 as more completely discussed below
under Note 6 Technology Transfer. 6  Technology Transfer During March 2004, the Companys Health Care segment sold its therapeutic vaccine program to
Innogenetics N.V. Upon transfer of certain intellectual property, contractual relationships and
technologies to Innogenetics, the Company recognized fees during the quarter ended June 30, 2004
totaling $10,000. The Company expects to receive further payments as development milestones are
achieved. If products are commercialized, the Company would also receive royalty payments on
future product sales. 7  Inventories Inventories consisted of the following at December 31: 2004
    
    
    2003Raw materials
    
    $
    10,035
    
    
    $
    7,682Work-in-progress
    
    
    9,750
    
    
    
    9,106Finished goods
    
    
    60,121
    
    
    
    47,371Inventories
    
    $
    79,906
    
    
    $
    64,159
 The Company sustained damage to its finished bioproducts inventory in the second quarter of
2003 as a result of an accident in a third party warehouse in Rotterdam, the Netherlands. At the
end of the first quarter of 2004, the Company reached a final settlement of its accident-related
claim with its insurer totaling approximately $21,000 and recorded a
net gain of $8,300, which was included in other income for 2004. 57




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8  Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31: 2004
    
    
    2003Land and buildings
    
    $
    161,824
    
    
    $
    147,714Machinery and equipment
    
    
    352,867
    
    
    
    311,505Construction-in-progress
    
    
    7,863
    
    
    
    20,969522,554
    
    
    
    480,188Less: Accumulated depreciation
    
    
    (286,800
    )
    
    
    (247,286
    )Property, plant and equipment, net
    
    $
    235,754
    
    
    $
    232,902
 Depreciation expense was $32,206 in 2004, $29,980 in 2003, and $27,628 in 2002. Construction-in-progress at December 31, 2004 and 2003, includes process improvement projects
at our manufacturing and research and development facilities as well as information technology
enhancements. Also the Company completed construction of the Rochester, New York facility for the
clinical-scale manufacturing of human therapeutic proteins during 2003. The facility is designed
to produce pharmaceutical grade materials for preclinical and clinical studies. Assets under capital lease are included in property, plant and equipment as follows at
December 31: 2004
    
    
    2003Land and buildings
    
    $
    15,927
    
    
    $
    15,669Machinery
and equipment
    
    
    1,044
    
    
    
    16,971
    
    
    
    15,669Less: Accumulated depreciation
    
    
    (4,963
    )
    
    
    (4,197
    )Capital lease assets, net
    
    $
    12,008
    
    
    $
    11,472
 The Company leases certain facilities and equipment under operating leases. Rent expense relating to all operating leases was $5,296 for 2004, $4,730 for 2003 and $4,657
for 2002. Non-cancelable future minimum rental payments under significant leases consist of the
following for the years ending December 31: Operating
    
    
    Capital2005
    
    $
    4,084
    
    
    $
    9932006
    
    
    3,987
    
    
    
    9932007
    
    
    3,961
    
    
    
    9932008
    
    
    3,950
    
    
    
    9932009
    
    
    3,770
    
    
    
    993Thereafter
    
    
    21,619
    
    
    
    6,387Total minimum lease payments
    
    $
    41,371
    
    
    
    11,352Less: Amount representing interest
    
    
    
    
    
    
    (3,309
    )Capital lease obligation
    
    
    
    
    
    $
    8,043
 9 Goodwill and Other Intangible Assets In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the
Company does not amortize 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 periodically evaluates 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 are amortized over a
weighted average useful life of 16 years using the straight-line method. These assets are expected
to have no residual value once they are fully amortized. As of December 31, 2004 all of the
Companys goodwill and intangible assets are related to the Bioproducts segment. 58




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The following table summarizes the changes in each major class of intangible assets from January 1,
2003 through December 31, 2004: Intangible AssetsOtherAmortizableTechnology
    
    
    Assets
    
    
    Total
    
    
    GoodwillBalances, January 1, 2003
    
    $
    15,617
    
    
    $
    65,429
    
    
    $
    81,046
    
    
    $
    29,384Acquired intangible assets
    
    
    
    
    
    
    2,850
    
    
    
    2,850
    
    
    
    Foreign currency
translation and other
adjustments
    
    
    214
    
    
    
    5,312
    
    
    
    5,526
    
    
    
    (4
    )Balances: December 31, 2003
    
    
    15,831
    
    
    
    73,591
    
    
    
    89,422
    
    
    $
    29,380Less: Accumulated amortization
    
    
    
    
    
    
    (42,347
    )
    
    
    (42,347
    )Intangible assets, net
    
    $
    15,831
    
    
    $
    31,244
    
    
    $
    47,075Balances: January 1, 2004
    
    $
    15,831
    
    
    $
    73,591
    
    
    $
    89,422
    
    
    $
    29,380Foreign currency
translation and other
adjustments
    
    
    17
    
    
    
    2,648
    
    
    
    2,665
    
    
    
    Balances: December 31, 2004
    
    
    15,848
    
    
    
    76,239
    
    
    
    92,087
    
    
    $
    29,380Less: Accumulated
amortization
    
    
    
    
    
    
    (48,136
    )
    
    
    (48,136
    )Intangible assets, net
    
    $
    15,848
    
    
    $
    28,103
    
    
    $
    43,951
 In conjunction with the acquisition of the brewing and enzyme business of Rhodia Food UK
Limited discussed in Note 2, the Company has completed the segregation of acquired intangible
assets among major classes. At December 31, 2003 the total purchase price of $10,501 was separated
into major classes of intangible assets. Other intangible assets of $10,287 are being amortized
over a period of approximately 15 years starting January 1, 2003. The remaining $214 has been
classified as technology. This technology has been determined to have an indefinite life and will
not be amortized. During 2004, the Companys other amortizable intangible assets were increased by $2,648 due to
the impact of foreign currency translation. In November 2003, in conjunction with the settlement of certain commercial matters, the
Company obtained a license agreement valued at $2,850, which will be amortized over a period of
approximately 10 years. Estimated annual amortization expense is as follows: 2005
    
    $
    4,1002006
    
    
    3,8002007
    
    
    2,5002008
    
    
    1,3002009
    
    
    1,100
 Amortization expense was $4,684 in 2004, $5,682 in 2003 and $5,563 in 2002. 59




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10  Notes Payable and Long-Term Debt Notes payable and long-term debt consisted of the following at December 31: 2004
    
    
    20036.82% senior notes with payments of
$28,000 due annually, which commenced March
30, 2002
    
    $
    56,000
    
    
    $
    84,000Notes payable of the Companys Chinese
affiliate with principal payments due in 2004
and 2005. Interest rates on the notes range
from 1.75% to 5.31%
    
    
    4,999
    
    
    
    7,738Other
    
    
    606
    
    
    
    90361,605
    
    
    
    92,641Less: Current maturities
    
    
    (33,212
    )
    
    
    (34,175
    )Long-term debt
    
    $
    28,393
    
    
    $
    58,466
 The senior note agreements contain various financial covenants, which among other things,
require the maintenance of certain financial ratios. The most significant of these relate to debt
to total capital; total debt as a multiple of earnings before interest, taxes, depreciation and
amortization (EBITDA); and minimum consolidated net worth. The Company is currently in compliance
with all of its financial covenants. At December 31, 2004, principal obligations on notes payable and long-term debt are as
follows: 2005
    
    $
    33,2122006
    
    
    28,1782007
    
    
    922008
    
    
    712009
    
    
    9Thereafter
    
    
    43Total
    
    $
    61,605
 On December 23, 2003, the Company entered into a $40,000 revolving credit facility with a
syndicate of banks, which is available for general corporate purposes. The credit facility makes
available to the Company $40,000 of committed borrowings and expires on December 23, 2006. The
credit facility carries fees of 0.25% on the amount of unborrowed principal under the agreement.
As of December 31, 2004 and 2003, there were no borrowings under the facility. 11  Redeemable Preferred Stock On December 1, 1991, the Company and its stockholders agreed to exchange $97,000 of advances
from stockholders (including interest payable of $12,604) for 0.97 shares of no par value, 71/2%
cumulative series A preferred stock (Series A preferred stock). Dividends are cumulative from the
date of issuance and are subtracted from net income in 2004, 2003 and 2002 in determining net
income available/(loss applicable) to common stockholders. The Series A preferred stock was
authorized and issued on May 5, 1992 and has no voting rights except as required by law or in
respect to certain matters involving the Series A preferred stock. The shares are redeemable at any
time in whole or in part for $100,000 per share plus accrued unpaid dividends to the date of
redemption. The total redemption value of the Series A preferred stock at December 31, 2004 and
2003 in the amounts of $184,300 and $177,025, respectively, is classified on the Companys balance
sheet as Redeemable cumulative series A preferred stock and includes $87,300 and $80,025 of accrued
and unpaid dividends, respectively. The liquidation value is $100,000 per share plus accrued
dividends to be paid on a pro rata basis from assets available after payment of debt and prior to
any distribution on common stock. 12  Stockholders Equity In addition to the Series A preferred stock, the Company has the authority to issue 1,000
shares of preferred stock having a par value of $.01 per share. No such shares have been issued as
of December 31, 2004. While the Company is permitted to pay dividends, certain covenants of the Companys 6.82%
Senior Notes restrict the payment of dividends or other distributions in cash or other property to
the extent the payment puts the Company in default of these covenants. Such covenants include, but
are not limited to, the maintenance of debt to total capitalization of no greater than 55% and the
maintenance of a maximum ratio of debt to EBITDA of 3.5:1. 60




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No dividend was declared or paid to common stockholders in 2004, 2003 or 2002. Accumulated other comprehensive income/(loss) consists of the following: Foreign
    
    
    Marketable
    
    
    
    
    
    
    AccumulatedCurrency
    
    
    Securities
    
    
    
    
    
    
    OtherTranslation
    
    
    Valuation
    
    
    Minimum Pension
    
    
    ComprehensiveAdjustment
    
    
    Adjustment
    
    
    Liability
    
    
    (Loss)/IncomeBalances, December 31, 2001
    
    $
    (62,599
    )
    
    $
    (639
    )
    
    $
    
    
    
    $
    (63,238
    )Current period change
    
    
    23,399
    
    
    
    (2,824
    )
    
    
    (2,123
    )
    
    
    18,452Balances, December 31, 2002
    
    
    (39,200
    )
    
    
    (3,463
    )
    
    
    (2,123
    )
    
    
    (44,786
    )Current period change
    
    
    36,850
    
    
    
    2,998
    
    
    
    2,123
    
    
    
    41,971Balances, December 31, 2003
    
    
    (2,350
    )
    
    
    (465
    )
    
    
    
    
    
    
    (2,815
    )Current period change
    
    
    20,631
    
    
    
    (895
    )
    
    
    (1,450
    )
    
    
    18,286Balances, December 31, 2004
    
    $
    18,281
    
    
    $
    (1,360
    )
    
    $
    (1,450
    )
    
    $
    15,471
 The change in the marketable securities valuation adjustment for the year ended December 31,
2004 includes unrealized holding losses of $895 ($1,421 pre-tax) on the Companys
available-for-sale securities. Major stockholders of the Company are Eastman Chemical Company (Eastman) and Danisco A/S
(Danisco), with each holding approximately 42% of the common stock outstanding and 50% each of the
Series A preferred stock outstanding. On November 30, 2001, executive officers of the Company surrendered 350 vested, restricted
shares to the Company at a value of $16.09 per share, to pay principal and interest due on notes
receivable for restricted common stock on January 27, 2002 by each respective officer. The
surrendered shares were recorded as treasury stock, accounted for under the cost method. On August 21, 2002, in order to eliminate all stock-related loans, executive officers of the
Company surrendered 1,430 restricted shares at a value of $10.77 per share, to make full payment of
the outstanding principal and interest on obligations under notes issued in connection with their
purchase of restricted common stock. The Company recorded the surrendered shares as treasury
stock, accounted for under the cost method. As of December 31, 2002, the balance on these notes
was eliminated. 13  Employee Benefit Plans 2002 Omnibus Incentive Plan On March 12, 2002, the Company adopted the Genencor International, Inc. 2002 Omnibus Incentive
Plan (the OI Plan). The OI Plan became effective on May 30, 2002 upon approval by the stockholders
at the Annual Meeting. The OI Plan serves as a successor plan to the SOAR Plan. Employees,
outside directors, consultants, advisors and independent contractors retained by the Company are
eligible to participate in the OI Plan. The OI Plan allows for the grant, at not less than 100% of
the market value as of the date of grant, of non-qualified and incentive stock options to purchase
the Companys common stock and stock appreciation rights (SARs), based on the underlying value of
the Companys common stock. The OI Plan also allows for the grant of restricted and unrestricted
stock awards, performance shares (stock or stock-based awards contingent upon attaining performance
objectives) or performance units (units valued by reference to chosen criteria). Under the terms
of the OI Plan, the Company has the ability to grant awards representing up to 6,800 shares of
common stock of which 5,362 stock options and 122 restricted stock-based awards were outstanding
as of December 31, 2004. In addition, any shares remaining, or shares that become available under
the SOAR Plan will be available for grant of awards under the OI Plan. Generally, stock options
and SARs vest and become exercisable, ratably over a three-year period. These options expire 10
years from their grant date. Restrictions, if any, on stock awards generally expire at the end of
a three year period. 61




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Stock Option and Stock Appreciation Right Plan On December 9, 1999, the Company adopted the SOAR Plan. Employees, outside directors,
consultants and advisors of the Company were eligible to participate in the SOAR Plan. The SOAR
Plan allowed for the grant, generally at market value as of the date of grant, of incentive or
non-statutory stock options to purchase the Companys common stock and stock appreciation rights
(SARs), based on the underlying value of the Companys common stock. Under the terms of the SOAR
Plan, the Company had the ability to grant stock options and SARs representing up to 9,000 shares
of common stock, of which 5,373 stock options and 10 SARs remained outstanding as of December 31,
2004. Options vest ratably over a three-year period and expire 10 years from their grant date.
SARs vest 50% after three years, the remaining 50% after four years, and expire 10 years from their
grant date. The OI Plan replaced the SOAR Plan. The following table summarizes the stock option activity for the years ending: Weighted Average
    
    
    Exercisable
    
    
    Weighted AverageOptions
    
    
    Exercise Price
    
    
    Options
    
    
    Exercise PriceOptions
outstanding at
December 31,
2001
    
    
    6,131
    
    
    $
    11.19
    
    
    
    1,841
    
    
    $
    10.97Granted
    
    
    3,012
    
    
    
    10.98
    
    
    
    Exercised
    
    
    (82
    )
    
    
    9.70
    
    
    
    Forfeited
    
    
    (205
    )
    
    
    11.13
    
    
    
    Options outstanding
at December 31,
2002
    
    
    8,856
    
    
    
    11.13
    
    
    
    4,359
    
    
    $
    11.02Granted
    
    
    1,695
    
    
    
    14.46
    
    
    
    Exercised
    
    
    (614
    )
    
    
    10.77
    
    
    
    Forfeited
    
    
    (90
    )
    
    
    13.18
    
    
    
    Options outstanding
at December 31,
2003
    
    
    9,847
    
    
    
    11.71
    
    
    
    6,608
    
    
    $
    11.06Granted
    
    
    1,556
    
    
    
    15.97
    
    
    
    Exercised
    
    
    (476
    )
    
    
    10.19
    
    
    
    Forfeited
    
    
    (192
    )
    
    
    14.06
    
    
    
    Options outstanding
at December 31,
2004
    
    
    10,735
    
    
    
    12.35
    
    
    
    7,792
    
    
    $
    11.42
 The following table summarizes additional information about stock options outstanding as of
December 31, 2004: Options OutstandingWeighted Average
    
    
    
    
    
    
    
    
    
    Options ExercisableRange of
    
    
    
    
    
    Remaining Contract
    
    
    Weighted Average
    
    
    
    
    
    
    Weighted AverageExercise Prices
    
    Number
    
    
    Life
    
    
    Exercise Price
    
    
    Number
    
    
    Exercise Price$ 8.00 - $10.00
    
    
    4,044
    
    
    
    5.21
    
    
    $
    9.70
    
    
    
    4,002
    
    
    $
    9.70$10.01- $15.00
    
    
    4,444
    
    
    
    7.79
    
    
    $
    12.44
    
    
    
    3,007
    
    
    $
    11.89$15.01- $20.00
    
    
    2,140
    
    
    
    8.47
    
    
    $
    16.59
    
    
    
    676
    
    
    $
    17.51$20.01- $25.00
    
    
    89
    
    
    
    5.82
    
    
    $
    22.97
    
    
    
    89
    
    
    $
    22.97$25.01- $34.00
    
    
    18
    
    
    
    5.78
    
    
    $
    28.87
    
    
    
    18
    
    
    $
    28.8710,735
    
    
    
    6.94
    
    
    $
    12.35
    
    
    
    7,792
    
    
    $
    11.42
 Under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the Company has
elected to continue to account for stock options in accordance with the provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees. Had compensation cost for the Companys stock
options been determined consistent with the provisions of SFAS No. 123, the weighted average grant
date fair value of options granted in 2004, 2003 and 2002 is summarized below: 62




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##### Table of Contents



2004
    
    
    2003
    
    
    2002Fair
    
    
    Exercise
    
    
    Fair
    
    
    Exercise
    
    
    Fair
    
    
    ExerciseValue
    
    
    Price
    
    
    Value
    
    
    Price
    
    
    Value
    
    
    PriceFor all
options granted in each year, their exercise price
equaled grant date
market value
    
    $
    4.85
    
    
    $
    15.97
    
    
    $
    5.70
    
    
    $
    14.46
    
    
    $
    4.46
    
    
    $
    10.99
 The fair value of options at date of grant was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions: 2004
    
    
    2003
    
    
    2002Expected life
    
    4 years
    
    4 years
    
    4 yearsInterest rate
    
    
    3.51
    %
    
    
    2.33
    %
    
    
    3.31
    %Volatility
    
    
    31.9
    %
    
    
    47.4
    %
    
    
    47.3
    %Dividend yield
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 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
available/(loss applicable) and earnings/(loss) per share would have been reduced to the pro forma
amounts shown below: Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income available/(loss applicable) to
holders of common stock as reported
    
    $
    18,903
    
    
    $
    15,533
    
    
    $
    (1,478
    )Add: Stock-based employee compensation expense
included in reported net income available/ (loss
applicable), net of related tax
    
    
    108
    
    
    
    317
    
    
    
    981Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effect
    
    
    (5,108
    )
    
    
    (5,716
    )
    
    
    (7,407
    )Pro forma net
income available/(loss applicable)
    
    $
    13,903
    
    
    $
    10,134
    
    
    $
    (7,904
    )Earnings/(loss) per share:Basic  as reported
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    (0.02
    )Basic  pro forma
    
    
    0.23
    
    
    
    0.17
    
    
    
    (0.13
    )Diluted  as reported
    
    
    0.31
    
    
    
    0.26
    
    
    
    (0.02
    )Diluted  pro forma
    
    
    0.23
    
    
    
    0.17
    
    
    
    (0.13
    )
 The pro forma figures in the preceding table may not be representative of pro forma amounts in
future years. SARs are accounted for under the provisions of APB Opinion No. 25 as interpreted by FASB
Interpretation No.28 (FIN 28), Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans, an interpretation of APB Opinions No. 15 and 25. FIN 28 requires that
compensation expense be recognized over the vesting period for any increase in the estimated market
value of the underlying stock. Decreases in the estimated market value of the underlying stock in
subsequent periods would cause compensation expense to be reduced in that period although the
related accrued liability would never be reduced below zero. In 2004, 2003 and 2002, the Company
recorded compensation expense of $5 and $60 and compensation income of $47, respectively, to
reflect the change in the market value of common stock during the period in relation to the grant
price of the Companys outstanding SARs. At December 31, 2004 and 2003 there were 10 and 12 SARs outstanding respectively, of which 9
and 5 were exercisable as of December 31, 2004 and 2003, respectively. Restricted Stock Awards On June 6, 2003, the Company granted 47 shares of restricted common stock to certain executive
officers. These restricted shares were granted at fair market value at the date of grant and the
restrictions on these awards expire three years from the grant date. Deferred compensation expense
of $675 was recorded in connection with these awards and was determined based on the number of
granted restricted shares and the fair market value on the grant date. This amount was recorded as
a component of stockholders equity and will be amortized as a charge to operations over the
vesting period of the awards. 63




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On November 6, 2002, the Company granted 75 shares of restricted common stock to its chief
executive officer. These restricted shares were granted at fair market value at the date of grant
and the restrictions on the award expire three years from the grant date. Deferred compensation
expense of $807 was recorded in connection with the award and was determined based on the number of
granted restricted shares and the fair market value on the grant date. This amount was recorded as
a component of stockholders equity and will be amortized as a charge to operations over the
vesting period of the award. Conversion to Restricted Stock Units During the fourth quarter of 2003, the Company allowed certain executive officers to convert
92 previously issued restricted shares of common stock to restricted stock units. As a result, the
restricted common stock was canceled and new restricted stock units were granted with vesting
beginning as of the grant date of the previously issued restricted common stock. The conversion
had no impact on the deferred compensation expense recognized. Deferred Stock-Based Compensation In connection with the grant of 881 stock options to employees between January 1, 2000 and
July 27, 2000, the Company recorded deferred compensation expense of $7,112. Deferred compensation
for options granted to employees is determined based on the difference between the grant price and
the fair value of our common stock on the date we granted the options. This amount was recorded as
a component of stockholders equity and amortized as a charge to operations over the vesting period
of the options. In connection with the grant of stock options to employees during 2000, amortization of
deferred compensation expense for the year ended December 31, 2003 was $403. For the year ended
December 31, 2002, the options resulted in an expense of $3,243, which included the acceleration of
deferred compensation expenses related to the elimination of all stock-related loans resulting from
the surrender to us of 1,430 restricted shares by certain executive officers. In total, including the restricted stock awards, amortization of deferred stock-based
compensation expense for 2004, 2003 and 2002 was $723, $803, and $3,746 respectively, and was
reported in our Consolidated Statements of Operations as follows: 2004
    
    
    2003
    
    
    2002Cost of products sold
    
    $
    33
    
    
    $
    30
    
    
    $
    382Research and development
    
    
    40
    
    
    
    267
    
    
    
    745Sales, marketing and business development
    
    
    40
    
    
    
    66
    
    
    
    1,271General and administrative
    
    
    610
    
    
    
    440
    
    
    
    1,348Total amortization of deferred stock-based compensation
    
    $
    723
    
    
    $
    803
    
    
    $
    3,746
 Employee Stock Purchase Plan On March 13, 2001, the Company adopted the Genencor International, Inc. Employee Stock
Purchase Plan (the ESPP) and made a total of 2,000 shares of common stock available for issuance
under the plan. Under the ESPP, eligible employees may purchase stock at 85% of the lower of the
closing prices for the stock as of the beginning or the end of each six-month offering period. The
offering periods generally begin in January and July. The first offering period began July 1,
2001. Purchases are limited to 15% of the employees compensation and may not exceed 1 shares per
offering period. At December 31, 2004 and 2003, 126 and 146 shares, respectively, had been issued. Defined Contribution Pension Plans The Company maintains employee benefit plans in the United States which allow its eligible
employees to make contributions, up to a certain limit, on a tax deferred basis under Section
401(k) of the Internal Revenue Code. The Company also contributes to the plans. Total employer contributions to the plans for 2004,
2003 and 2002 amounted to $3,445, $3,153 and $2,869, respectively. Deferred Compensation Plan On September 10, 2003, the Company adopted the Genencor International, Inc. Nonqualified
Deferred Compensation Plan (the NQDC Plan). The NQDC Plan became effective on September 15, 2003
with deferrals of compensation beginning with compensation 64




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##### Table of Contents



payable on or after January 1, 2004.
The NQDC Plan allows eligible employees and directors the opportunity to defer the receipt of a
portion of their salary, bonus, restricted stock units, and gains from the exercise of stock
options to specified future dates, retirement or death. Deferred compensation is held in trust and
invested based on participant direction as allowed by the plan. Included in Investments and other
assets and Other long term liabilities is $1,048 related to the NQDC plan. The recorded cost of
these investments approximated fair value. No deferred compensation was recorded as of December
31, 2003. However, certain executive officers elected to defer restricted stock units as allowed
under the NQDC Plan during 2003. Defined Benefit Pension and Other Postretirement Benefits The Company has defined benefit pension plans covering employees in the U.S., the Netherlands,
Belgium and Finland and postretirement benefit plans covering employees in the U.S. Using a
measurement date of December 31 for each of the Companys plans, the following provides a
reconciliation of benefit obligations, plan assets, and funded status of all plans of the Company: Pension Benefits
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    69,937
    
    
    $
    57,071
    
    
    $
    2,820
    
    
    $
    2,031Service cost
    
    
    4,741
    
    
    
    4,208
    
    
    
    216
    
    
    
    200Interest cost
    
    
    3,661
    
    
    
    3,339
    
    
    
    149
    
    
    
    153Plan participants contributions
    
    
    431
    
    
    
    280
    
    
    
    
    
    
    
    Amendments
    
    
    (2,202
    )
    
    
    235
    
    
    
    
    
    
    
    Actuarial (gain)/loss
    
    
    7,486
    
    
    
    (1,683
    )
    
    
    (290
    )
    
    
    529Curtailment
    
    
    (412
    )
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (4,792
    )
    
    
    (2,880
    )
    
    
    (114
    )
    
    
    (93
    )Translation
    
    
    5,076
    
    
    
    9,367
    
    
    
    
    
    
    
    Benefit obligation at end of year
    
    $
    83,926
    
    
    $
    69,937
    
    
    $
    2,781
    
    
    $
    2,820Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    87,529
    
    
    $
    66,345
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    3,954
    
    
    
    6,489
    
    
    
    
    
    
    
    Employer contributions
    
    
    3,774
    
    
    
    5,437
    
    
    
    
    
    
    
    Plan participants contributions
    
    
    431
    
    
    
    280
    
    
    
    
    
    
    
    Benefits paid
    
    
    (4,792
    )
    
    
    (2,880
    )
    
    
    
    
    
    
    Translation
    
    
    5,909
    
    
    
    11,858
    
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    $
    96,805
    
    
    $
    87,529
    
    
    $
    
    
    
    $
    Funded Status
    
    $
    12,881
    
    
    $
    17,592
    
    
    $
    (2,781
    )
    
    $
    (2,820
    )Unrecognized net actuarial (gain)/loss
    
    
    24,936
    
    
    
    14,911
    
    
    
    572
    
    
    
    890Unrecognized net (asset)/obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrecognized prior service cost
    
    
    (2,253
    )
    
    
    (114
    )
    
    
    55
    
    
    
    109Prepaid cost (accrued benefit)
    
    $
    35,564
    
    
    $
    32,389
    
    
    $
    (2,154
    )
    
    $
    (1,821
    )Amounts recognized in the
Consolidated Balance Sheets consist of:Prepaid benefit cost
    
    $
    35,564
    
    
    $
    33,353
    
    
    $
    
    
    
    $
    Accrued benefit cost
    
    
    
    
    
    
    (964
    )
    
    
    (2,154
    )
    
    
    (1,821
    )Net amount recognized
    
    $
    35,564
    
    
    $
    32,389
    
    
    $
    (2,154
    )
    
    $
    (1,821
    )
 Weighted-average assumptions as of December 31:
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net periodic benefit cost:Discount rate
    
    
    5.00%  6.00
    %
    
    
    5.25%  6.50
    %
    
    
    6.00
    %
    
    
    6.00
    %Expected return on plan assets
    
    
    5.00%  8.00
    %
    
    
    5.25%  8.00
    %
    
    
    N/A
    
    
    
    N/ARate of compensation increase
    
    
    3.00%  6.50
    %
    
    
    3.00%  6.50
    %
    
    
    N/A
    
    
    
    N/ABenefit obligations:Discount rate
    
    
    4.50%  6.00
    %
    
    
    5.50%  6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    2.50%  5.50
    %
    
    
    3.00%  6.50
    %
    
    
    N/A
    
    
    
    N/A
 65




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##### Table of Contents



Pension Benefits
    
    
    Other Benefit2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Components of net periodic cost:Service cost
    

    $
    4,740
    
    
    $
    4,208
    
    
    $
    3,359
    
    
    $
    216
    
    
    $
    200
    
    
    $
    213Interest cost
    
    
    3,661
    
    
    
    3,339
    
    
    
    2,675
    
    
    
    149
    
    
    
    153
    
    
    
    136Expected return on plan assets
    
    
    (5,942
    )
    
    
    (4,911
    )
    
    
    (4,519
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of net (asset)/obligation
    
    
    
    
    
    
    26
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    (259
    )
    
    
    (64
    )
    
    
    (46
    )
    
    
    55
    
    
    
    55
    
    
    
    55Recognized net actuarial (gain)/loss
    
    
    1,367
    
    
    
    694
    
    
    
    60
    
    
    
    27
    
    
    
    42
    
    
    
    26Net periodic cost
    
    
    3,567
    
    
    
    3,292
    
    
    
    1,551
    
    
    
    447
    
    
    
    450
    
    
    
    430Curtailment
    
    
    (574
    )
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    (327
    )Total net periodic cost
    
    $
    2,993
    
    
    $
    3,292
    
    
    $
    1,609
    
    
    $
    447
    
    
    $
    450
    
    
    $
    103
 In 2004 the Finnish pension regulations changed and as a result the Companys liability for
its plan was significantly reduced. A curtailment gain is reflected in the net periodic pension
cost for the 2004 period. As a result of the reduction in the number of employees covered by the restructuring plan at
the Companys Elkhart, Indiana facility, a curtailment loss is reflected in the net periodic
pension cost for the 2002 period. No such loss was recorded in 2003. As part of the restructuring
plan, the defined benefit plan was frozen and all the participants of the plan either no longer
work for the Company or are covered under another plan. For the year ended December 31, 2003, the
plan had no service cost. As of December 31, 2004 all of the plan benefits had been paid and the
fair market value of the plan assets was $0. As a result $447 was charged to the remaining
restructuring liability from the 2002 restructuring with the remaining balance recorded as pension
expense. At December 31, 2003 and 2002 the fair market value of the assets in the plan was $622
and $519, respectively, all of which were in fixed income investments and money market funds. The fair market values of the active plans assets are as follows at December 31: 2004
    
    
    2003Percentage of Total
    
    
    
    
    
    
    Percentage of TotalAsset Category
    
    Fair Market Value
    
    
    Fair Value
    
    
    Fair Market Value
    
    
    Fair ValueFixed Income
    
    $
    42,856
    
    
    
    45%
    
    
    $
    39,542
    
    
    
    45%Money Market Funds
    
    
    2,329
    
    
    
    2%
    
    
    
    3,927
    
    
    
    5%Equity Securities:Large Cap Growth
    
    
    7,074
    
    
    
    7%
    
    
    
    5,921
    
    
    
    7%Large Cap Value
    
    
    4,081
    
    
    
    4%
    
    
    
    3,284
    
    
    
    4%Large Cap Blended
    
    
    40,466
    
    
    
    42%
    
    
    
    34,233
    
    
    
    39%
 The assets of each plan are intended to provide sufficient liquidity to meet the current and
expected demands for benefit payments. Each plans investment policies provide the guidelines for
the asset allocations of the portfolio. The asset allocation provides the basis to achieve a risk
adjusted return to meet the current and future benefit payments. Each investment category is
matched with a market index and is compared to the funds performance on a quarterly or semi-annual
basis. For the U.S. plan the asset allocation policy is 60% large cap equities, 10% mid cap
equities and 30% fixed income. For the Belgium plan the asset allocation policy is 50% large cap
equities, 45% fixed income and 5% money market funds. For the Netherlands plan the asset
allocation policy is 30% large cap equities and 70% fixed income. For all plans a +10 percentage
points or 10 percentage points deviation in any asset category is permitted. The plans asset
allocation policy represents a long-term view. Each plans investment policy allows for the asset
mix to occasionally fall outside the policy range for a reasonable time, not to exceed three
months. The investment policy for the U.S. plan allows for the purchase of common and preferred stock,
fixed income investments such as certificates of deposit, commercial paper, U.S. Government
Treasurys, agency securities, corporate bonds and mortgage backed securities. The Belgium
investment policy allows for the purchase of equity investments in Europe as well as outside Europe
and a combination of corporate and government bonds. The Netherlands plan investment policy allows
for the purchase of Euro national
government or municipality bonds and corporate bonds and equity investments with global
diversification and markets. The investment policies prohibit the purchase of commodities, futures
and options, unrestricted letterstock, private placements, venture capital, interest and principal
only mortgage backed securities, securities on margin, selling short or the Companys stock. The
investment policies also prohibit the purchase of stock from either of the Companys major
stockholders, Eastman or Danisco. 66




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The U.S. plans long-term expected rate of return on assets is 8.00%. The Company determined
the long-term expected rate of return on assets based on benchmark indices blended using the plans
asset allocation. The asset allocation was 70% equity/30% fixed income. The portfolio return for
2004 was 6.50%. The benchmark indices of 60% S&P 500, 30% Lehman Brothers Government Credit and
10% Russell Mid Cap had a blended return of 11.03% for 10 years, 10.20% for 15 years and 12.03% for
20 years. The Belgian plans long-term expected rate of return on assets is 7.00%. The Company
determined the long-term expected rate of return on assets based on benchmark indices blended using
the asset allocation of 50% equity/50% fixed income. The portfolio return for 2004 was 6.51%. The
benchmark indices had a blended return of 5.40% for 10 years and 8.50% for 23 years. The
Netherlands plans long-term expected rate of return on assets is 6.00%. The Company determined
the long-term expected rate of return on assets based on benchmark indices blended using the plans
asset allocation. The asset allocation was 70% fixed income/30% equity. The portfolio return for
2004 was 6.80%. The benchmark indices had a blended return of 3.00% for 5 years and 6.26% for 8
years. The accumulated benefit obligation of all defined benefit pension plans at December 31, 2004
and 2003 is $73,150 and $57,751, respectively. Estimated future benefit payments for all plans is as follows: 2005
    
    
    2,1292006
    
    
    5,1162007
    
    
    4,1782008
    
    
    8,1702009
    
    
    5,0982010-2014
    
    
    29,316
 The estimated total contribution for all plans in 2005 is $2,672. In accordance with SFAS No. 87, Employers Accounting for Pensions, the Company recorded an
additional minimum pension liability of $2,231 at December 31, 2004, for its plan in the
Netherlands. This liability represented the excess of unfunded accumulated benefit obligation over
the previously recorded pension cost liabilities. A corresponding amount was recognized as an
intangible asset except to the extent these additional liabilities exceed related unrecognized
prior service costs and transition obligations, in which case the increase in liabilities is
charged directly to other comprehensive income. As of December 31, 2004, an after-tax charge of
$1,450 was recorded to other comprehensive income. In addition, as of December 31, 2002 the
Company recorded an additional minimum pension liability of $2,573 and an after-tax charge of
$2,123 to other comprehensive income also for its plan in the Netherlands. As of December 31,
2003, the fair value of the plans assets had increased significantly from the December 31, 2002
balance and exceeded the accumulated benefit obligation. In accordance with SFAS No. 87 the
additional minimum pension liability recorded in 2002 was eliminated in 2003. SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits
(revised 2003), requires that the Company disclose the aggregate benefit obligation (BO) and plan
assets of all plans in which the BO exceeds plan assets. Similar disclosure is required for all
plans in which the accumulated benefit obligation (ABO) exceeds plan assets. BO reflects the
present value of the pension obligation assuming salary increases. The ABO reflects this
obligation based on the current salary levels (i.e. no salary increases). Accordingly, the ABO is
a subset of the BO and the plans listed under the Plans with an ABO in excess of plan assets are
also included in the amounts for Plans with BO in excess of plan assets. The aggregate BO and the
plan assets are also disclosed for plans in which the plan assets exceed the BO. The amounts at December 31 for all of the Companys plans are as follows: 2004
    
    
    2003Benefit
    
    
    
    
    
    
    BenefitObligation
    
    
    Plan Assets
    
    
    Obligation
    
    
    Plan AssetsPlans with BO in excess of plan assets
    
    $
    22,287
    
    
    $
    19,129
    
    
    $
    20,219
    
    
    $
    16,682Plans with ABO in excess of plan assets
    
    
    22,287
    
    
    
    19,129
    
    
    
    466
    
    
    
    Plans with Assets in excess of plan BO
    
    
    61,639
    
    
    
    77,677
    
    
    
    49,718
    
    
    
    70,848
 Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. The trend rates assumed for pre-65 claims graded to 5.0% in 2009 and were 9.0%
in 2004, 9.0% in 2003 and 10.0% in 2002. The trend rates assumed for post-65 claims graded to 5.0%
in 2011 and were 11.0% in 2004, 11.0% in 2003, and 12.0% in 2002. For both pre and post-65 claims,
the trend rate was assumed to remain at 5.0% after 2009 and 2011, respectively. A one percentage
point increase in assumed health care cost trend rates would increase total service and interest
cost by $7 and increase the postretirement benefit obligation by 67




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##### Table of Contents



$118. A one percentage point
decrease in assumed health care cost trend rates would decrease total service and interest cost by
$6 and decrease the postretirement benefit obligation by $98. 14  Income Taxes The provision for/(benefit from) income taxes consisted of the following for the years ended
December 31: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    (978
    )
    
    $
    
    
    
    $
    (7,265
    )State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    3,428
    
    
    
    4,414
    
    
    
    8,5822,450
    
    
    
    4,414
    
    
    
    1,317Deferred:Federal and State
    
    
    823
    
    
    
    (4,202
    )
    
    
    (5,623
    )Foreign
    
    
    639
    
    
    
    1,817
    
    
    
    (718
    )1,462
    
    
    
    (2,385
    )
    
    
    (6,341
    )Increase in valuation allowances
    
    
    1,834
    
    
    
    3,688
    
    
    
    1,609$
    5,746
    
    
    $
    5,717
    
    
    $
    (3,415
    )
 The components of deferred tax assets and liabilities consisted of the following at December
31: 2004
    
    
    2003Current assets and liabilities:Unrealized depreciation on marketable equity securities
    
    $
    807
    
    
    $
    490Deferred revenues
    
    
    1,798
    
    
    
    1,201Inventories
    
    
    77
    
    
    
    (244
    )Accrued expenses
    
    
    464
    
    
    
    1,251Foreign currency exchange
    
    
    2,646
    
    
    
    204Other items, net
    
    
    338
    
    
    
    3786,130
    
    
    
    3,280Non-current assets and liabilities:Net operating loss and tax credit carryforwards
    
    
    31,454
    
    
    
    32,048Employee costs
    
    
    (10,685
    )
    
    
    (10,476
    )Depreciation and amortization
    
    
    (22,652
    )
    
    
    (19,414
    )Other items, net
    
    
    1,425
    
    
    
    (860
    )(458
    )
    
    
    1,298Valuation allowances
    
    
    (8,451
    )
    
    
    (6,617
    )Net deferred tax liability
    
    $
    (2,779
    )
    
    $
    (2,039
    )
 The Companys practice is to reinvest the earnings of its foreign subsidiaries in these
operations. However the American Jobs Creation Act of 2004 (the Jobs Act), which became law on
October 22, 2004, provides for a temporary 85% dividends received deduction on certain foreign
earnings repatriated during a one-year period. The deduction would result in an approximate 5.25%
U.S. federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must
be reinvested in the United States pursuant to a domestic reinvestment plan established by the
companys chief executive officer and approved by the companys board of directors. Certain other
criteria in the Jobs Act must be satisfied as well. The Company is in the process of evaluating
whether it will repatriate foreign earnings under the repatriation provisions of the Jobs Act, and
if so, the amount that will be repatriated. Accordingly, the Companys results of operations for
the year ended December 31, 2004 do not reflect any deferred income taxes on its undistributed
foreign earnings, as the Company has not committed to any repatriation under the provisions of the
Jobs Act or otherwise that would require the payment of related U.S. income taxes. Furthermore, it
is not practicable to estimate the amount of additional tax that might be payable on these
undistributed foreign earnings. The Company has net operating loss carryforwards of $19,480 for U.S. tax purposes, which
expire in 2022 through 2023. The Company also has net operating loss carryforwards of $5,145 for
Chinese tax purposes, which expire in 2005 through 2007. Additionally, the Company has net
operating loss carryforwards of $1,364 for Singapore tax purposes, which do not expire. The
Company also has net operating loss carryforwards of $6,305 for Argentine tax purposes, which
expire in 2006 through 2009. 68




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The Company also has research and experimentation tax credit carryforwards of $11,843 for U.S.
federal income tax purposes, which expire in 2005 through 2024. Additionally, the Company has
alternative minimum tax credit carryforwards of $3,507, which may be used indefinitely to reduce
U.S. federal income taxes. Statutory expiration or legislative rescission of certain tax credits
currently benefiting the Company could have an adverse impact on the Companys effective income tax
rate. A valuation allowance is provided for deferred tax assets if management believes that it is
more likely than not that these items will either expire before the Company is able to realize
their benefit or that future deductibility is uncertain. Although realization is not assured,
management believes it is more likely than not that the recorded deferred tax assets, net of
valuation allowance provided, will be realized. The Companys valuation allowances are $8,451 and
$6,617 at December 31, 2004 and 2003, respectively. The reconciliation of income tax from continuing operations computed at the U.S. federal
statutory tax rate to the Companys effective income tax rate is as follows for the years ending
December 31: 2004
    
    
    2003
    
    
    2002U.S. federal statutory income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of federal income tax benefit
    
    
    0.4
    %
    
    
    (0.4
    %)
    
    
    (39.0
    %)Amortization of non-deductible intangible assets
    
    
    2.3
    %
    
    
    0.9
    %
    
    
    55.4
    %Foreign and U.S. tax effects attributable to foreign operations
    
    
    (18.6
    %)
    
    
    (21.7
    %)
    
    
    (181.0
    %)Change in valuation allowances
    
    
    5.7
    %
    
    
    12.9
    %
    
    
    67.6
    %Tax credits
    
    
    (5.8
    %)
    
    
    (6.2
    %)
    
    
    (68.4
    %)Other, net
    
    
    (1.0
    %)
    
    
    (0.5
    %)
    
    
    (13.0
    %)18.0
    %
    
    
    20.0
    %
    
    
    (143.4
    %)
 Effective January 1, 2003, a change in the Belgian tax law reduced the Belgian tax rate from
40.17% to 33.99%. Effective January 1, 2005 a change in the Finnish tax law will reduce the
Finnish tax rate from 29% to 26% and a change in Dutch tax law will reduce the Dutch tax rate from
34.5% to 31.5%. 15  Segment and Product Data In accordance with 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. 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 2003, the Company modified
its managerial financial reporting to reflect two operating segments: Bioproducts and Health Care.
Accordingly, the Company is providing segment financial data for the years ended December 31, 2004,
2003 and 2002. Segment Information 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 primarily engaged in the performance of research and development,
securing intellectual property and the establishment of strategic investments and collaborations in
support of the Companys product objectives in the health care market. 69




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##### Table of Contents



The following table provides information by business segment; information for 2002 has been
restated to reflect the reorganized business segments: For the year ended December 31, 2004CorporateBioproducts
    
    
    Health Care
    
    
    Segment Subtotal
    
    
    and Other
    
    
    Consolidated TotalsProduct revenue
    
    $
    389,827
    
    
    $
    
    
    
    $
    389,827
    
    
    $
    
    
    
    $
    389,827Fees and royalty revenues
    
    
    10,215
    
    
    
    10,375
    
    
    
    20,590
    
    
    
    
    
    
    
    20,590Total revenues
    
    
    400,042
    
    
    
    10,375
    
    
    
    410,417
    
    
    
    
    
    
    
    410,417Research and development
    
    
    48,399
    
    
    
    27,410
    
    
    
    75,809
    
    
    
    
    
    
    
    75,809Operating income/(loss)
    
    
    56,215
    
    
    
    (23,317
    )
    
    
    32,898
    
    
    
    241
    
    
    
    33,139Total assets
    
    
    525,718
    
    
    
    20,940
    
    
    
    546,658
    
    
    
    205,455
    
    
    
    752,113Depreciation and amortization
    
    
    36,466
    
    
    
    424
    
    
    
    36,890
    
    
    
    
    
    
    
    36,890Capital additions
    
    
    20,870
    
    
    
    1,788
    
    
    
    22,658
    
    
    
    2,640
    
    
    
    25,298
 For the year ended December 31, 2003CorporateBioproducts
    
    
    Health Care
    
    
    Segment Subtotal
    
    
    and Other
    
    
    Consolidated TotalsProduct revenue
    
    $
    362,143
    
    
    $
    
    
    
    $
    362,143
    
    
    $
    
    
    
    $
    362,143Fees and royalty revenues
    
    
    20,594
    
    
    
    425
    
    
    
    21,019
    
    
    
    
    
    
    
    21,019Total revenues
    
    
    382,737
    
    
    
    425
    
    
    
    383,162
    
    
    
    
    
    
    
    383,162Research and development
    
    
    45,687
    
    
    
    26,847
    
    
    
    72,534
    
    
    
    
    
    
    
    72,534Operating income/(loss)
    
    
    65,372
    
    
    
    (33,648
    )
    
    
    31,724
    
    
    
    526
    
    
    
    32,250Total assets
    
    
    516,434
    
    
    
    18,416
    
    
    
    534,850
    
    
    
    177,572
    
    
    
    712,422Depreciation and amortization
    
    
    34,462
    
    
    
    1,200
    
    
    
    35,662
    
    
    
    
    
    
    
    35,662Capital additions
    
    
    24,884
    
    
    
    7,965
    
    
    
    32,849
    
    
    
    
    
    
    
    32,849
 For the year ended December 31, 2002CorporateBioproducts
    
    
    Health Care
    
    
    Segment Subtotal
    
    
    and Other
    
    
    Consolidated TotalsProduct revenue
    
    $
    329,337
    
    
    $
    
    
    
    $
    329,337
    
    
    $
    
    
    
    $
    329,337Fees and royalty revenues
    
    
    20,666
    
    
    
    75
    
    
    
    20,741
    
    
    
    
    
    
    
    20,741Total revenues
    
    
    350,003
    
    
    
    75
    
    
    
    350,078
    
    
    
    
    
    
    
    350,078Research and development
    
    
    40,844
    
    
    
    29,346
    
    
    
    70,190
    
    
    
    
    
    
    
    70,190Operating income/(loss)
    
    
    44,564
    
    
    
    (40,873
    )
    
    
    3,691
    
    
    
    3,571
    
    
    
    7,262Total assets
    
    
    467,782
    
    
    
    5,719
    
    
    
    473,501
    
    
    
    181,421
    
    
    
    654,922Depreciation and amortization
    
    
    31,127
    
    
    
    2,064
    
    
    
    33,191
    
    
    
    
    
    
    
    33,191Capital additions
    
    
    18,153
    
    
    
    1,397
    
    
    
    19,550
    
    
    
    
    
    
    
    19,550
 70




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The following table provides a reconciliation of segment information to total
consolidated information: 2004
    
    
    2003
    
    
    2002Net income:Operating income for reportable segments
    
    $
    32,898
    
    
    $
    31,724
    
    
    $
    3,691Other (income)
    
    
    (241
    )
    
    
    (526
    )
    
    
    (3,571
    )Investment expense
    
    
    
    
    
    
    1,018
    
    
    
    1,500Interest expense
    
    
    4,829
    
    
    
    6,667
    
    
    
    8,587Interest (income)
    
    
    (3,614
    )
    
    
    (3,960
    )
    
    
    (5,207
    )Provision for/(benefit from) income taxes
    
    
    5,746
    
    
    
    5,717
    
    
    
    (3,415
    )Consolidated net income
    
    $
    26,178
    
    
    $
    22,808
    
    
    $
    5,797Total assets:Total assets for reportable segments
    
    $
    546,658
    
    
    $
    534,850
    
    
    $
    473,501Cash, cash
equivalents and short-term investments not allocated to business
segments
    
    
    180,465
    
    
    
    158,167
    
    
    
    163,376Property plant and equipment
    
    
    5,190
    
    
    
    
    
    
    
    Deferred tax assets
    
    
    19,800
    
    
    
    19,405
    
    
    
    18,045Total consolidated assets
    
    $
    752,113
    
    
    $
    712,422
    
    
    $
    654,922
 Long-lived assets include property, plant, and equipment, goodwill, intangible assets, and
investments and other assets and are attributed to countries based on physical location. Included
in non-U.S. long-lived assets are approximately $67,000 in 2004, $63,000 in 2003, and $51,000 in
2002 in Belgium and approximately $49,000 in 2004, $45,000 in 2003, and $39,000 in 2002 in Finland.
Geographical information is as follows: U.S.
    
    
    Non-U.S.
    
    
    Consolidated2004Product revenue
    
    $
    165,602
    
    
    $
    224,225
    
    
    $
    389,827Long-lived assets
    
    $
    199,492
    
    
    $
    157,402
    
    
    $
    356,8942003Product revenue
    
    $
    147,969
    
    
    $
    214,174
    
    
    $
    362,143Long-lived assets
    
    $
    204,564
    
    
    $
    152,559
    
    
    $
    357,1232002Product revenue
    
    $
    149,954
    
    
    $
    179,383
    
    
    $
    329,337Long-lived assets
    
    $
    195,177
    
    
    $
    133,315
    
    
    $
    328,492
 Product revenue by similar product groupings is as follows: 2004
    
    
    2003
    
    
    2002Protein degrading enzyme products
    
    $
    181,215
    
    
    $
    173,983
    
    
    $
    171,213Starch degrading enzyme products
    
    
    126,358
    
    
    
    111,144
    
    
    
    102,443Cellulose degrading enzyme products
    
    
    56,198
    
    
    
    54,142
    
    
    
    40,623Other
    
    
    26,056
    
    
    
    22,874
    
    
    
    15,058Total
    
    $
    389,827
    
    
    $
    362,143
    
    
    $
    329,337
 16  Related Party Transactions Danisco and its affiliates purchased products from the Company for approximately $19,000,
$13,000 and $11,000 during the years ended December 31, 2004, 2003, and 2002, respectively. The
Company purchased products from and/or through these related parties for approximately $10,000,
$10,000, and $8,000 during the years ended December 31, 2004, 2003 and 2002, respectively. In
October 2000, the Company signed an exclusive agreement with Danisco for the development of
innovative bioingredients for the food industry. During the years ended December 31, 2004, 2003
and 2002, the Company received approximately $400, $1,500 and $1,100, respectively, in fees and
royalty revenues under this agreement. Also, the Company received approximately $70 in fees and
royalty revenues from a Danisco affiliate during both 2004 and 2003, and approximately $400 during
2002 under a collaboration agreement for the development and commercialization of enzymes for the
animal feed market. 71




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##### Table of Contents



At December 31, 2004 and 2003, the Company had amounts due from Danisco of $2,300 and $1,411,
respectively. At December 31, 2004 and 2003, the Company had amounts due to Danisco of $360 and
$505, respectively. The Company had outstanding relocation-related notes receivable with balances totaling $200
and $3,400 from officers of the Company at December 31, 2004 and 2003, respectively. The notes are
non-interest bearing and are due at the conclusion of five years from the date of issuance.
Accordingly, interest income is imputed at 3.97% per year on the notes, with an offset recorded as
compensation expense. The December 31, 2003 balance of $3,400 included relocation-related notes
receivable from certain of its officers, including a $1,200 note from Richard J. Ranieri, Senior
Vice President of Human Resources, and a $1,350 note from Raymond J. Land, Senior Vice President
and Chief Financial Officer. Both of these loans commenced in 2000, were non-interest bearing and
were due five years from their date of issuance. During the third quarter of 2004, the Company
purchased the residences of Mr. Land and Mr. Ranieri and paid part of the purchase price of these
properties by canceling the $1,350 that Mr. Land was indebted to the Company under a promissory note
dated April 2000 and the $1,200 that Mr. Ranieri was indebted to the Company under a promissory note
dated March 2000. The total purchase price for the Land residence was $2,825 and the total purchase
price for the Ranieri residence was $2,352. The Company also paid $13 in closing costs in connection
with these purchases. While third party appraisals were used to confirm that the purchase price for
each residence approximated the fair market value of the property, the transactions resulted in
deemed compensation of $125 to Mr. Land and $56 to Mr. Ranieri. Each of the two officers, together
with his spouse, then entered into a lease with the Company for his residence providing for a lease
term of up to 36 months. Mr. Ranieri and his spouse elected to terminate their residential lease
with the Company in December 2004. Prior to its termination, Mr. Ranieris lease resulted in deemed
compensation to him of $5. On June 6, 2003, the Company granted 47 shares of restricted common stock to certain executive
officers. These restricted shares were granted at fair market value at the date of grant and the
restrictions on these awards expire three years from the grant date. Deferred compensation expense
of $675 was recorded in connection with these awards and was determined based on the number of
granted restricted shares and the fair market value on the grant date. This amount was recorded as
a component of stockholders equity and will be amortized as a charge to operations over the
vesting period of the awards. During November 2002, the Company granted 75 shares of restricted common stock to its chief
executive officer. These restricted shares were granted at fair market value at the date of grant
and the restrictions on the award expire three years from the grant date. Deferred compensation
expense of $807 was recorded in connection with the award and was determined based on the number of
granted restricted shares and the fair market value on the grant date. This amount was recorded as
a component of stockholders equity and will be amortized as a charge to operations over the
vesting period of the award. The Company also had outstanding promissory notes of $14,647 at December 31, 2001. This
amount related to the exercise of stock options and purchase of restricted shares by executive
officers of the Company during April 2000. In November 2001, the Company allowed these executive
officers to surrender 350 vested, restricted shares to the Company at a value of $5,630, to pay
principal and interest due on these notes. On August 21, 2002, in order to eliminate all
stock-related loans, the Companys executive officers surrendered 1,430 restricted shares at a
value of $10.77 per share, to make full payment of the outstanding principal and accrued interest
on their obligations under these notes. The Company is holding the surrendered shares as treasury
stock. 17  Supplemental Cash Flow Information 2004
    
    
    2003
    
    
    2002Interest paid
    
    $
    5,306
    
    
    $
    7,145
    
    
    $
    9,065Taxes paid
    
    $
    1,003
    
    
    $
    5,803
    
    
    $
    6,244Schedule of non-cash investing and
financing activity:Acquisition of residential properties
    
    $
    2,550
    
    
    $
    
    
    
    $
    Capital lease obligation
    
    $
    1,044
    
    
    $
    
    
    
    $
    Acquisition of treasury stock in exchange for
notes and interest receivable
    
    $
    
    
    
    $
    
    
    
    $
    15,202Debt of acquired business
    
    $
    
    
    
    $
    
    
    
    $
    974Issuance of restricted stock
    
    $
    
    
    
    $
    675
    
    
    $
    807Intangible assets acquired in non-cash
settlement
    
    $
    
    
    
    $
    2,850
    
    
    $
    
 72




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18  Commitments and Contingencies The Company, from time to time, is involved in legal proceedings involving claims against the
Company, which are handled and defended in the ordinary course of business. While the resolution of
such litigation could have a material effect on earnings and cash flows in the year of resolution,
none is currently expected to have a material adverse effect on the financial condition of the
Company as of December 31, 2004. 19  Selected Quarterly Data (unaudited) First
    
    
    Second
    
    
    Third
    
    
    Fourth2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterProduct revenue
    
    $
    91,539
    
    
    $
    96,173
    
    
    $
    99,469
    
    
    $
    102,646Gross profit
    
    
    41,074
    
    
    
    41,142
    
    
    
    41,103
    
    
    
    40,759Net income/(loss)
    
    
    13,009
    
    
    
    13,883
    
    
    
    3,013
    
    
    
    (3,727
    )Net income available/(loss applicable) to holders of
common stock
    
    
    11,190
    
    
    
    12,064
    
    
    
    1,195
    
    
    
    (5,546
    )Basic earnings/(loss) per common share
    
    $
    0.19
    
    
    $
    0.20
    
    
    $
    0.02
    
    
    $
    (0.09
    )Diluted earnings/(loss) per common share
    
    $
    0.18
    
    
    $
    0.20
    
    
    $
    0.02
    
    
    $
    (0.09
    )
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2003
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterProduct revenue
    
    $
    90,038
    
    
    $
    89,744
    
    
    $
    89,795
    
    
    $
    92,566Gross profit
    
    
    39,197
    
    
    
    37,958
    
    
    
    37,699
    
    
    
    39,806Net income
    
    
    6,520
    
    
    
    7,619
    
    
    
    4,099
    
    
    
    4,570Net income available to holders
of common stock
    
    
    4,701
    
    
    
    5,800
    
    
    
    2,281
    
    
    
    2,751Basic earnings per common share
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.04
    
    
    $
    0.05Diluted earnings per common share
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.04
    
    
    $
    0.04
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2002
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterProduct revenue
    
    $
    75,548
    
    
    $
    85,470
    
    
    $
    85,931
    
    
    $
    82,388Gross profit
    
    
    33,430
    
    
    
    39,374
    
    
    
    35,661
    
    
    
    34,489Net (loss)/income
    
    
    (1,059
    )
    
    
    4,783
    
    
    
    2,952
    
    
    
    (879
    )Net (loss applicable)/income available
to holders of common stock
    
    
    (2,878
    )
    
    
    2,964
    
    
    
    1,134
    
    
    
    (2,698
    )Basic (loss)/earnings per common share
    
    $
    (0.05
    )
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.05
    )Diluted (loss)/earnings per common share
    
    $
    (0.05
    )
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.05
    )
 20  Collaborative Agreements During December 2004 the Company announced that it had signed an exclusive worldwide patent
license agreement giving it the right to develop and commercialize two therapeutic product
candidates for cancer from the Public Health Service and the National Cancer Institute. The two
proteins, GCR-3888 and GCR-8015, are recombinant immunotoxins that specifically target cancers
derived from B-cells that express the CD22 antigen. GCR-3888 is currently in Phase II clinical
studies for the treatment of hairy cell leukemia (HCL). Phase I clinical testing in subsets of
treatment-refractory pediatric acute lymphoblastic leukemia (pALL), chronic lymphocytic leukemia
(CLL) and non-Hodgkins lymphoma (NHL) is also underway. GCR-8015 is an improved second-generation
candidate in the investigational new drug application (IND) enabling stage of development for
expanded subsets of patients with these hematologic malignancies. During April 2003, the Company announced that it had exceeded the project goal of its contract
with NREL to further the development of an economically-viable enzymatic process for converting
biomass to ethanol. Expanding on the Companys research in this area, the Company announced in
September 2003, that Cargill Dow LLC, now known as NatureWorks, LLC, had named the 73




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Company as its development partner to create advanced enzyme systems for a biomass project
supported by the U.S. Department of Energy. During 2003, the Company amended its strategic alliance with Seattle Genetics, Inc., which was
formed in January 2002 to jointly discover and develop a class of cancer therapeutics. Under the
modified terms of the alliance, the companies extended the term of the collaboration by two
additional years and the Company obtained a non-exclusive license to Seattle Geneticss proprietary
antibody-directed enzyme prodrug therapy (ADEPT) technology for use with multiple targets. The
companies have the option to either co-develop or independently develop products utilizing the
other partys technology, subject to the payment of fees, milestones and royalties on net sales of
independent products. In July 2003, the Company made a payment of $500 to Seattle Genetics in
accordance with this amended agreement. During 2002, the Company made an equity investment in
Seattle Genetics of $3,000 and made a $500 payment in accordance with the original agreement. During January 2002, the Company entered into a two-year extendable collaboration agreement
with The Johns Hopkins University for the research of therapeutic vaccines and other
immunotherapies targeting cancers and oncogenic viruses. Under the agreement, the Company received
worldwide licenses to certain proprietary technologies as well as exclusive commercialization
rights to any products developed through the agreement. This collaboration required the Company to
pay an upfront license fee as well as annual royalties. The agreement also requires certain
research and development funding and has potential for additional milestone payments and royalties
on future product sales. This collaboration ended in 2004. During October 2002, the Company and the University of Leicester announced that they would
participate in a collaboration for microbial biotechnology between the European Union (EU) and the
Peoples Republic of China. The three-year project funded by the European Commission Fifth
Framework Program strives to identify metabolic and genetic diversity as a source of new and
valuable products. 21  Subsequent Events On January 27, 2005, the Company entered into an Acquisition Agreement (the Acquisition
Agreement) with Danisco A/S (Danisco) and DH Subsidiary Inc., an indirect wholly-owned subsidiary
of Danisco (Acquisition Sub), providing for a cash tender offer (the Offer) to acquire all of the
outstanding shares of common stock of the Company not otherwise owned by Danisco or its
subsidiaries for $19.25 per share, net to the seller in cash, to be followed by a merger (the
Merger) of Acquisition Sub with and into the Company, with the Company to continue as the surviving
corporation. A Special Committee comprised solely of the Companys independent directors, and the
Companys Board of Directors, each has determined that the Offer and the Merger are fair to, and in
the best interests of, the Companys stockholders (other than Danisco, Eastman and their respective
affiliates). In connection with the Acquisition Agreement, Danisco has entered into a definitive stock
purchase agreement with Eastman Chemical Company (Eastman), the holder of approximately 25 million
shares of the Companys common stock and 485 shares of the Companys series A preferred stock,
under which Danisco will acquire all of the outstanding shares of the Companys common stock held
by Eastman for $15 per share in cash and all of the outstanding shares of the Companys series A
preferred stock held by Eastman for $44 million in cash. In the stock purchase agreement with
Danisco, Eastman has agreed not to tender in the tender offer the shares of the Companys common
stock held by Eastman. The Acquisition Agreement is subject to certain conditions, including the tender of a majority
of the outstanding shares of the Companys common stock other than those held by Danisco, Eastman,
the officers and directors of the Company and its subsidiaries and the respective affiliates of
each of the foregoing, receipt of regulatory approvals and other conditions set forth in the
Acquisition Agreement. Subject to those conditions, the Company currently expects the acquisition
to be completed by May 31, 2005. If consummated, at the effective time of the Merger, all outstanding stock options, stock
appreciation rights, shares of restricted stock and restricted stock units outstanding under the
Companys 2002 Omnibus Incentive Plan and its predecessor plan, whether or not such awards have
otherwise become vested or exercisable, will be cashed out in a lump sum payment based upon the
price of $19.25 or such higher price as may be paid pursuant to the Offer. In certain instances, a
change in control price may be payable under the applicable plan if that price is higher than the
price paid in the Offer. During the pendency of
the Offer, we have suspended the right to exercise stock options. 74




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Financial Statement Schedules Schedule II  Valuation and Qualifying Accounts SCHEDULE II GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF VALUATION AND QUALIFYING ACCOUNTS Balance at
    
    
    Additions
    
    
    Deductions/
    
    
    Balance atBeginning
    
    
    Charged to
    
    
    Amounts
    
    
    Endof Period
    
    
    Earnings
    
    
    Written Off
    
    
    of Period(Amounts in thousands)Year Ended December 31, 2004Deducted in the Consolidated Balance Sheet:From current assets:Trade accounts receivable, allowance
for doubtful accounts
    
    $
    (2,034
    )
    
    $
    (166
    )
    
    $
    (43
    )
    
    $
    (2,243
    )Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments
    
    
    (2,764
    )
    
    
    (3,076
    )
    
    
    3,074
    
    
    
    (2,766
    )Total
    
    
    (4,798
    )
    
    
    (3,242
    )
    
    
    3,031
    
    
    
    (5,009
    )Deferred tax valuation allowance
    
    
    (6,617
    )
    
    
    (2,067
    )
    
    
    233
    
    
    
    (8,451
    )From current liabilities:Restructuring reserves
    
    
    (447
    )
    
    
    
    
    
    
    (447
    )
    
    
    Year Ended December 31, 2003Deducted in the Consolidated Balance Sheet:From current assets:Trade accounts receivable, allowance
for doubtful accounts
    
    $
    (2,770
    )
    
    $
    (838
    )
    
    $
    1,574
    
    
    $
    (2,034
    )Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments
    
    
    (2,679
    )
    
    
    (3,084
    )
    
    
    2,999
    
    
    
    (2,764
    )Total
    
    
    (5,449
    )
    
    
    (3,922
    )
    
    
    4,573
    
    
    
    (4,798
    )Deferred tax valuation allowance
    
    
    (2,929
    )
    
    
    (3,711
    )
    
    
    23
    
    
    
    (6,617
    )From current liabilities:Restructuring reserves
    
    
    (805
    )
    
    
    
    
    
    
    358
    
    
    
    (447
    )Year Ended December 31, 2002Deducted in the Consolidated Balance Sheet:From current assets:Trade accounts receivable, allowance
for doubtful accounts
    
    $
    (2,628
    )
    
    $
    (557
    )
    
    $
    415
    
    
    $
    (2,770
    )Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments
    
    
    (1,789
    )
    
    
    (1,205
    )
    
    
    315
    
    
    
    (2,679
    )Total
    
    
    (4,417
    )
    
    
    (1,762
    )
    
    
    730
    
    
    
    (5,449
    )Deferred tax valuation allowance
    
    
    (1,320
    )
    
    
    (1,609
    )
    
    
    
    
    
    
    (2,929
    )From current liabilities:Restructuring reserves
    
    
    (234
    )
    
    
    (16,427
    )
    
    
    15,856
    
    
    
    (805
    )
 75




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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. 
 Item 9A. Controls and Procedures Disclosure Controls and Procedures and Internal Control Over Financial Reporting Disclosure controls and procedures are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 (Exchange Act), such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms. Disclosure controls and procedures are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Internal control over financial reporting consists of 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. Accordingly, 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. Because
of the inherent limitations in any control system, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies and procedures may deteriorate. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Report, we carried out an evaluation, under the
supervision and with the participation of our management, including our principal executive officer
and our principal financial officer, of the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our
principal executive officer and our principal financial officer concluded that the Companys
disclosure controls and procedures were effective as of December 31, 2004. Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under
the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal Control  Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2004. Our managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included herein. Changes in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting that occurred during
the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 
 Item 9B. Other Information Not applicable. 76




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PART III. 
 Item 10. Directors and Executive Officers of the Registrant Board of Directors Jean-Jacques Bienaimé Jean-Jacques Bienaimé, age 51, is Genencors Chairman, Chief Executive Officer and President.
Mr. Bienaimé was appointed Genencors Chief Executive Officer and President in November 2002 and
Genencors Chairman in April 2003. Prior to joining Genencor, Mr. Bienaimé was Chairman, President
and Chief Executive Officer of SangStat Medical Corporation. He became President of SangStat
Medical Corporation in 1998 and Chief Executive Officer in 1999. Prior to joining SangStat Medical
Corporation, Mr. Bienaimé held various management positions from 1992 to 1998, including Senior
Vice President of Corporate Marketing and Business Development, and Vice President and General
Manager of the advanced therapeutic and oncology division, with Rhône-Poulenc Rorer Pharmaceuticals
(now known as Aventis). Mr. Bienaimé currently serves on the boards of directors of Aerogen, Inc.,
NeurogesX, Inc., Saegis Pharmaceuticals, Inc. and the Biotechnology Industry Organization. Mr.
Bienaimé has been a director of our company since 2002 and his current term expires in 2006. Soren Bjerre-Nielsen Soren Bjerre-Nielsen, age 52, is currently Executive Vice President and Chief Financial
Officer of Danisco, a position he has held since 1995, and has been a member of the Danisco
Executive Board since 1995. Prior to joining Danisco, Mr. Bjerre-Nielsen was a partner at Deloitte
& Touche. Mr. Bjerre-Nielsen serves on the boards of directors of Carlsberg Breweries A/S, VKR
Holding A/S, VELUX A/S and the Central Bank of Denmark. Mr. Bjerre-Nielsen has been a director of
our company since 1999 and his current term expires in 2005. Bruce C. Cozadd Bruce C. Cozadd, age 41, is Executive Chairman of Jazz Pharmaceuticals, Inc., a company he
co-founded in 2003. Prior to this, Mr. Cozadd was with ALZA Corporation from 1991 through 2001,
during which time he held various management positions, including Executive Vice President and
Chief Operating Officer and Senior Vice President and Chief Financial Officer. Mr. Cozadd also
serves on the board of directors of Cerus Corporation. Mr. Cozadd has been a director of our
company since 2000 and his current term expires in 2006. Theresa K. Lee Theresa K. Lee, age 52, is Senior Vice President, Chief Legal Officer and Corporate Secretary
of Eastman, a position she has held since 2002. Ms. Lee has held various positions since joining
Eastman in 1987, including Senior Vice President, General Counsel and Secretary from 2000 to 2002,
Vice President, Secretary and Associate General Counsel of Eastman from 1997 to 2000, and Assistant
Secretary and Assistant General Counsel, Legal Department  Corporate Group from 1995 to 1997. Ms.
Lee has been a director of our company since 2002 and her current term expires in 2007. Robert H. Mayer Robert H. Mayer, age 61, is currently Executive Vice President of Danisco, a position he has
held since 1999. Dr. Mayer joined Danisco in 1981 and has been a member of its Executive Board
since 1999. Dr. Mayer was the President of Danisco USA from 1981 until 1999. Dr. Mayer has been a
director of our company since 1999 and his current term expires in 2007. Joseph A. Mollica Joseph A. Mollica, age 64, serves as chairman of the board of directors of Pharmacopeia Drug
Discovery, Inc. Dr. Mollica served as Chairman and Chief Executive Officer of Pharmacopeia, Inc.
from 1994 to 2004 and was President of Pharmacopeia, Inc. from 1996 to 2004. From 1987 to 1993, Dr.
Mollica was employed by the DuPont Merck Pharmaceutical Company where, from 1991 to 1993, he served
as President and CEO, and previously as Vice President, Medical Products for DuPont. At Ciba-Geigy,
where he was employed from 1966 to 1986, he served in a variety of positions of increasing
responsibility rising to Senior Vice President of Ciba-Geigys Pharmaceutical Division. Dr. Mollica
also serves as chairman of the board of directors of Neurocrine Biosciences, Inc., and also serves 77




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on the board of directors of Linguagen Corp. Dr. Mollica has been a director of our company
since 2000 and his current term expires in 2005. Gregory O. Nelson Gregory O. Nelson, age 53, is currently Senior Vice President and Chief Technology Officer of
Eastman, a position he has held since 2003. Dr. Nelson is responsible for worldwide research,
development and technical service for Eastmans businesses. Dr. Nelson has held various research
and management positions since joining Eastman in 1982, including Vice President and Chief
Technology Officer from 2001 to 2003, Vice President of Polymers Technology from 1997 to 2001,
Director of Polymers Research Division from 1995 to 1997, Director of the Physical and Analytical
Chemistry Research Division from 1994 to 1995, Technology Manager for Polymer Modifiers Business
from 1993 to 1994, and Manager, Technology Core Competence from 1992 to 1993. Dr. Nelson also
serves on the board of directors of Eastman Credit Union. Dr. Nelson has been a director of our
company since 2002 and his current term expires in 2005. Norbert G. Riedel Norbert G. Riedel, age 47, is Senior Vice President and Chief Scientific Officer of Baxter
International Inc. Prior to this appointment, he was President of the Recombinant Strategic
Business Unit of Baxter Hyland Immuno, a division of Baxter Healthcare Corporation, a position he
had held since 1998. Prior to joining Baxter, Dr. Riedel served as the Head of Global Biotechnology

and Global Core Research Functions at Hoechst Marion Roussel, Inc. (now Aventis). Dr. Riedel
currently serves on the boards of directors of Oscient Pharmaceuticals Corporation and Medigene AG.
Dr. Riedel has been a director of our company since 2000 and his current term expires in 2006. James P. Rogers James P. Rogers, age 53, is currently Executive Vice President of Eastman, which he joined in
1999. Mr. Rogers previously served as Senior Vice President and Chief Financial Officer of Eastman.
Mr. Rogers also currently serves as President of Eastman Division, of which he previously served as
Chief Operations Officer. From 1992 until 1999, Mr. Rogers held various positions at GAF
Corporation and International Specialty Products, Inc., including, from 1993 to 1999, Executive
Vice President and Chief Financial Officer of GAF Corporation and of certain affiliated and
successor entities of GAF, including G-I Holdings, Inc . (1) Mr. Rogers
also serves on the board of directors of Lord Corporation. Mr. Rogers has been a director of our
company since 1999 and his current term expires in 2005. Jorgen Rosenlund Jorgen Rosenlund, age 49, is Vice President, Group General Counsel of Danisco, a position he
has held since January 2003. Since joining Danisco A/S in 1992, Mr. Rosenlund has held a variety
of positions, including Vice President and Deputy Group General Counsel from 1999 to 2003, Vice
President (Head of Legal Department) from 1996 to 1999, and Vice President, Danisco Sugar A/S from
1994 to 1996. Mr. Rosenlund has been a director of our company since 2003 and his current term
expires in 2007.   (1)
    
    On January 5, 2001, G-I Holdings, Inc. announced that it had filed a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court
for the District of New Jersey to resolve asbestos liability claims. This information is
included pursuant to the SECs rules, which require the description of the filing of a
petition in bankruptcy during the past five years by any corporation of which a director of
Genencor was an executive officer within two years before the time of such filing. Executive Officers Jean-Jacques Bienaimé Jean-Jacques Bienaimé, age 51, has been Genencors Chief Executive Officer and President since
November 2002 and Genencors Chairman since April 2003. Further information about Mr. Bienaimé is
set forth above under Board of Directors. Michael V. Arbige Michael V. Arbige, age 50, is Genencors Senior Vice President, Technology, a position he has
held since 1999. Since joining Genencor in 1990, he has served variously as Vice President of
Research, Vice President of Development, Senior Scientist and Director of Fermentation and
Recovery. 78




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Carole Beth Cobb Carole Beth Cobb, age 47, is Genencors Senior Vice President, Global Supply, a position she
has held since 1999. Ms. Cobb joined Genencor in 1990 and has served in various capacities,
including Vice President of Global Manufacturing from 1997 until 1999, Plant Manager of Genencors
Cedar Rapids, Iowa facility from 1995 until 1997, and Director, Business Development from 1990
until 1995. Before joining us, Ms. Cobb spent more than nine years at Eastman Kodak Company, where
she was a research engineer and product manager in the biotechnology area. Mark A. Goldsmith Mark A. Goldsmith, age 42, is Genencors Senior Vice President, Health Care, a position he has
held since June 2003. Since joining Genencor in 2001, Dr. Goldsmith served as Vice President of
Health Care and Vice President of Molecular Medicine Strategy. Dr. Goldsmith was previously on the
faculty of the University of California at San Francisco from 1993 to 2003 (without compensation)
and the Gladstone Institute of Virology and Immunology from 1993 until 2001 on a full-time basis
and from 2001 to 2003 as a visiting scientist. Margaret A. Horn Margaret A. Horn, age 42, is Genencors Senior Vice President, General Counsel and Secretary,
a position she has held since June 2004. Ms. Horn joined Genencor in 1991 and has served in various
capacities, including Vice President, Assistant General Counsel from 1996 until 2004 and General
Patent Counsel from 1992 until 1996. Raymond J. Land Raymond J. Land, age 60, is Genencors Senior Vice President and Chief Financial Officer, a
position he has held since joining Genencor in 1997. Mr. Land, a certified public accountant, has
more than 31 years of experience in financial and general management positions, including nine
years with Coopers & Lybrand. From 1991 until 1996, he was Senior Vice President and Chief
Financial Officer of The West Pharmaceutical Services Company. Prior to that, he was General
Manager of a food division and held various financial positions at Campbell Soup Company. Thomas J. Pekich Thomas J. Pekich, age 56, is Genencors Group Vice President, Bioproducts, a position he has
held since 1999. Mr. Pekich served as Genencors Vice President of Grain Processing and Specialties
from 1995 until 1999, and Genencors Vice President for North American Manufacturing and Plant
Manager of Genencors Cedar Rapids, Iowa facility from 1992 until 1995. Before joining Genencor in
1990, Mr. Pekich spent more than 15 years at Eastman Kodak Company in a variety of assignments and
played a major role in establishing Kodaks bioproducts site in Cedar Rapids, which opened in 1991
as a Genencor facility. Richard J. Ranieri Richard J. Ranieri, age 53, is Genencors Senior Vice President, Human Resources, a position
he has held since 1993. Prior to joining us, Mr. Ranieri spent more than 15 years with
GlaxoSmithKline, a worldwide health care company, in various human resource positions at the
corporate and divisional levels. Audit Committee The current members of the audit committee are Mr. Cozadd (Chair), Dr. Mollica and Dr. Riedel,
each of whom the Genencor Board of Directors (the Genencor Board) has determined is independent
pursuant to the National Association of Securities Dealers listing standards for the Nasdaq Stock
Market and applicable SEC rules. The Genencor Board has determined that each audit committee member
has sufficient knowledge in financial and auditing matters to serve on the audit committee. The
Genencor Board has designated Mr. Cozadd, the audit committees chairman, as an audit committee
financial expert as defined under applicable SEC rules. The audit committee serves as an
independent and objective party to monitor Genencors financial reporting process and internal
control system; retains, pre-approves audit and non-audit services to be performed by, and directly
consults with Genencors independent registered public accountants; reviews and appraises the
efforts of Genencors independent registered public accountants; and provides an open avenue of
communication among Genencors independent registered public accountants, financial and senior
management and the Genencor Board. The audit committee acts pursuant to a written charter, which
was amended by the Genencor Board in 2004 to comply with the Sarbanes-Oxley Act of 2002, as well as
the rules and regulations of the SEC and the National 79




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Association of Securities Dealers. A copy of the audit committee charter, which more
specifically sets forth the duties and responsibilities of the audit committee, was attached as
Appendix A to Genencors 2004 proxy statement, filed with the SEC on April 16, 2004. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires Genencors directors, officers and greater-than-10%
stockholders to file with the SEC reports of ownership and changes in ownership regarding their
holdings in us. For purposes of Section 16(a), Genencors officers currently consist of the
executive officers listed above and Darryl L. Canfield, Genencors Vice President and Corporate
Controller. During 2004, all of Genencors directors, officers and greater-than-10% stockholders
complied in a timely manner with the filing requirements of Section 16(a) of the Exchange Act,
except that in February 2005 Dr. Riedel filed a Form 5 to report (i) his beneficial ownership of
certain shares that were inadvertently omitted from his initial report on Form 3 and (ii) one
transaction that was inadvertently not reported on a Form 4. In making these statements, Genencor
has relied on the written representations of Genencors directors, officers and greater-than-10%
stockholders and copies of the reports that they have filed with the SEC. Code of Ethics Genencor has adopted a code of conduct that applies to its directors, officers and employees,
which is attached to this Report as Exhibit 14.1. 
 Item 11. Executive Compensation The named executives shown on the following table were Genencors Chief Executive Officer
during 2004, a former executive officer, and Genencors four other highest paid executive officers
during 2004 (the Named Executive Officers and each a Named Executive Officer). Summary Compensation
Table Long Term CompensationAnnual Compensation
    
    
    Awards
    
    
    PayoutsOther
    
    
    
    
    
    
    SecuritiesAnnual
    
    
    Restricted
    
    
    Underlying
    
    
    LTIP
    
    
    All OtherCompen-
    
    
    Stock
    
    
    Options/SARs
    
    
    Payouts
    
    
    CompensationName and Principal Position
    
    Year
    
    
    Salary ($)
    
    
    Bonus ($)
    
    
    sation($)(1)
    
    
    Awards($)(2)
    
    
    (#)
    
    
    ($)
    
    
    ($)(3)Jean-Jacques Bienaimé
    
    
    2004
    
    
    $
    540,346
    
    
    $
    370,900
    
    
    $
    24,073
    
    
    $
    0
    
    
    
    120,000
    
    
    $
    0
    
    
    $
    30,622Chairman, Chief Executive
    
    
    2003
    
    
    
    525,000
    
    
    
    425,000
    
    
    
    16,911
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    23,914Officer and President
    
    
    2002
    
    
    
    76,731
    
    
    
    175,000
    
    
    
    0
    
    
    
    807,000
    
    
    
    550,000
    
    
    
    0
    
    
    
    0Stuart L. Melton
    
    
    2004
    
    
    
    337,888
    
    
    
    172,800
    
    
    
    263,803
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    113,105Senior Vice President,
    
    
    2003
    
    
    
    324,593
    
    
    
    86,468
    
    
    
    104,700
    
    
    
    113,256
    
    
    
    50,000
    
    
    
    0
    
    
    
    28,596General Counsel and
    
    
    2002
    
    
    
    315,000
    
    
    
    102,159
    
    
    
    105,028
    
    
    
    0
    
    
    
    214,249
    
    
    
    0
    
    
    
    19,977Secretary(4)Michael V. Arbige
    
    
    2004
    
    
    
    318,134
    
    
    
    162,100
    
    
    
    10,594
    
    
    
    0
    
    
    
    50,000
    
    
    
    0
    
    
    
    20,138Senior Vice President,
    
    
    2003
    
    
    
    304,500
    
    
    
    78,233
    
    
    
    15,609
    
    
    
    123,420
    
    
    
    55,000
    
    
    
    0
    
    
    
    18,792Technology
    
    
    2002
    
    
    
    285,000
    
    
    
    89,178
    
    
    
    9,172
    
    
    
    0
    
    
    
    195,934
    
    
    
    0
    
    
    
    19,775Raymond J. Land
    
    
    2004
    
    
    
    313,953
    
    
    
    160,000
    
    
    
    252,487
    
    
    
    0
    
    
    
    60,000
    
    
    
    0
    
    
    
    158,944Senior Vice President
    
    
    2003
    
    
    
    300,501
    
    
    
    79,536
    
    
    
    225,448
    
    
    
    117,612
    
    
    
    52,000
    
    
    
    0
    
    
    
    27,209and Chief Financial
    
    
    2002
    
    
    
    289,750
    
    
    
    94,630
    
    
    
    216,200
    
    
    
    0
    
    
    
    214,249
    
    
    
    0
    
    
    
    19,482OfficerThomas J. Pekich
    
    
    2004
    
    
    
    265,174
    
    
    
    160,100
    
    
    
    15,263
    
    
    
    0
    
    
    
    60,000
    
    
    
    0
    
    
    
    25,138Group Vice President,
    
    
    2003
    
    
    
    253,750
    
    
    
    92,143
    
    
    
    11,485
    
    
    
    117,612
    
    
    
    52,000
    
    
    
    0
    
    
    
    24,184Bioproducts
    
    
    2002
    
    
    
    244,600
    
    
    
    105,013
    
    
    
    7,372
    
    
    
    0
    
    
    
    206,817
    
    
    
    0
    
    
    
    28,856Richard J. Ranieri
    
    
    2004
    
    
    
    268,673
    
    
    
    136,800
    
    
    
    191,722
    
    
    
    0
    
    
    
    45,000
    
    
    
    0
    
    
    
    76,059Senior Vice President,
    
    
    2003
    
    
    
    257,000
    
    
    
    67,870
    
    
    
    205,143
    
    
    
    101,640
    
    
    
    45,000
    
    
    
    0
    
    
    
    18,918Human Resources
    
    
    2002
    
    
    
    247,250
    
    
    
    105,611
    
    
    
    193,562
    
    
    
    0
    
    
    
    214,249
    
    
    
    0
    
    
    
    17,043
    80




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$32,400, Mr. Melton  $15,231, and Mr. Ranieri  $27,600), tax preparation fees, executive
physicals, club and conference center dues and spousal travel as well as tax reimbursement payments
(2004 amounts: Mr. Bienaimé  $16,073, Mr. Melton  $94,097, Dr. Arbige  $7,594, Mr. Land -
$160,202, Mr. Pekich  $11,980, and Mr. Ranieri  $99,832), imputed interest on interest-free loans
(2004 amounts: Mr. Melton  $15,306, Mr. Land  $57,668, and Mr. Ranieri  $51,948) and payments of
earnings with respect to long-term incentive plans (2004 amounts: Mr. Melton  $127,920 for the
early vesting on December 31, 2004 of 7,800 shares of restricted stock pursuant to the terms of his
Severance Agreement). (2) The amount shown reflects shares of restricted stock issued to Mr. Bienaimé under his
employment agreement, and the dollar value shown represents the aggregate fair market value of the
shares on the date of the award. The aggregate fair market value of the shares of restricted stock
held as of December 31, 2004 (based on closing market price on such date of $16.40 per share) was
$1,230,000. Mr. Melton, Dr. Arbige, Mr. Land, Mr. Pekich and Mr. Ranieri each received a restricted
stock grant in 2003, and the dollar value shown represents the aggregate fair market value of the
shares on the date of the award. The aggregate fair market value of the shares of restricted stock
held as of December 31, 2004 (based on closing market price on such date of $16.40 per share) was
$127,920 for Mr. Melton, $139,400 for Dr. Arbige, $132,840 for Mr. Land, $132,840 for Mr. Pekich
and $114,800 for Mr. Ranieri. All of these shares of restricted stock will vest three years from
date of grant. Mr. Bienaimé, Dr. Arbige and Mr. Pekich have converted their stock awards to
restricted stock units. (3) In 2004, includes (a) life insurance premiums paid to Mr. Bienaimé  $12,577, Mr. Melton -
$76,371, Dr. Arbige  $6,723, Mr. Land  $20,846, Mr. Pekich  $12,838 and Mr. Ranieri  $6,718;
(b) long term disability premiums (Mr. Bienaimé  $5,745, Mr. Melton  $1,866, Dr. Arbige  $1,115,
Mr. Land  $798 and Mr. Ranieri  $241); (c) year-end defined contributions under Genencors 401(k)
plan ($6,150 for each Named Executive Officer); (d) employer match contributions under Genencors
401(k) plan ($6,150 for each Named Executive Officer); (e) transition costs for Mr. Meltons
retirement totaling $22,569 for passport renewal fees, transition counseling, closing cost of
California home and home office equipment; and (f) deemed compensation to Mr. Land of $125,000 on
the purchase of his residence by Genencor in 2004 and deemed compensation to Mr. Ranieri of $56,800
on the purchase of his residence by Genencor and his subsequent lease of that property from
Genencor in 2004. (4) Mr. Melton resigned his position as Genencors General Counsel and Secretary effective
June 15, 2004 and retired effective December 31, 2004. Stock Options Shown below is information on grants of stock options to the Named Executive Officers during
2004. Genencor granted no stock appreciation rights (SARs) to the Named Executive Officers during
2004. Option/SAR Grants in 2004 Individual Grants
    
    
    Grant DateValuePercent ofNumber of

    
    TotalSecurities
    
    Options/SARs
    
    Exercise
    
    
    
    
    
    
    Grant DateUnderlying
    
    Granted to
    
    or Base
    
    
    
    
    
    
    PresentOptions/SARS

    
    Employees in
    
    Price
    
    
    Expiration
    
    
    ValueName
    
    Granted(#)
    
    Fiscal year
    
    ($/Sh)
    
    
    Date
    
    
    ($)(1)Jean-Jacques Bienaimé
    
    
    120,000
    
    
    
    7.71
    %
    
    $
    16.23
    
    
    
    12/9/2014
    
    
    $
    588,000Stuart L. Melton
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Raymond J. Land
    
    
    60,000
    
    
    
    3.86
    %
    
    $
    16.23
    
    
    
    12/9/2014
    
    
    $
    294,000Michael V. Arbige
    
    
    50,000
    
    
    
    3.21
    %
    
    $
    16.23
    
    
    
    12/9/2014
    
    
    $
    245,000Thomas J. Pekich
    
    
    60,000
    
    
    
    3.86
    %
    
    $
    16.23
    
    
    
    12/9/2014
    
    
    $
    294,000Richard J. Ranieri
    
    
    45,000
    
    
    
    2.89
    %
    
    $
    16.23
    
    
    
    12/9/2014
    
    
    $
    220,000
 (1) The hypothetical grant date present value for the options granted during 2004 is presented
pursuant to the rules of the SEC and is calculated under the modified Black-Scholes Model for
pricing options, a mathematical formula used to value options traded on the stock exchange. This
formula considers a number of factors in forecasting an options present value. Factors used to
value the options shown on the table include the expected volatility rate of the shares underlying
the options (31.5%), risk free rate of return (3.55%), projected time of exercise (four years) and
projected risk of forfeiture rate for vesting period (0% per annum). The actual before-tax amount,
if any, realized upon the exercise of stock options will depend upon the excess, if any, of the
market price of the common stock over the exercise price per share of the common stock at the time
an option is exercised. The hypothetical grant date present value of the options reflected on this
table may not be realized. 81




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Stock Option/SAR Exercises and Fiscal Year-End Value Table Shown below is information with respect to option and SAR exercises by the Named Executive
Officers during 2004 and unexercised options and SARs held by them at the end of 2004. Aggregated Option/SAR Exercises in 2004
and Fiscal Year-End Option/SAR Values Shares
    
    
    
    
    
    Number of SecuritiesAcquired
    
    Value
    
    
    Underlying Unexercised
    
    Value of Unexercised in-the-on Exercise
    
    Realized
    
    
    Options/SARs at Fiscal
    
    Money Options/SARs at FiscalName
    
    (#)
    
    ($)
    
    
    Year-End (#)
    
    Year-End ($)Exercisable
    
    
    Unexercisable
    
    Exercisable
    
    
    UnexercisableJean-Jacques Bienaimé
    
    
    0
    
    
    $
    0
    
    
    
    366,666
    
    
    
    303,334
    
    
    $
    2,067,996
    
    
    $
    1,054,404Stuart L. Melton
    
    
    0
    
    
    $
    0
    
    
    
    210,915
    
    
    
    33,334
    
    
    $
    1,124,954
    
    
    $
    62,668Raymond J. Land
    
    
    0
    
    
    $
    0
    
    
    
    161,042
    
    
    
    94,667
    
    
    $
    841,668
    
    
    $
    75,374Michael V. Arbige
    
    
    0
    
    
    $
    0
    
    
    
    214,267
    
    
    
    86,667
    
    
    $
    1,137,574
    
    
    $
    77,434Thomas J. Pekich
    
    
    0
    
    
    $
    0
    
    
    
    224,150
    
    
    
    94,667
    
    
    $
    1,196,966
    
    
    $
    75,374Richard J. Ranieri
    
    
    0
    
    
    $
    0
    
    
    
    229,249
    
    
    
    75,000
    
    
    $
    1,234,422
    
    
    $
    64,050
 Pension Plan Table The following table sets forth the estimated annual benefits payable on a single-life annuity
basis on retirement at age 65 pursuant to Genencors retirement plan to participating employees,
including officers, in specified compensation and years of service classifications. The credited
years of service for Messrs. Melton, Ranieri, Land, Pekich and Dr. Arbige are 7, and Mr. Bienaimé
is 2.166. Benefits are determined based upon average total salary for the five consecutive years of
highest compensation during the 10 years preceding retirement. Average
    
    Years of ServiceCompensation
    
    5
    
    10
    
    15
    
    20
    
    25
    
    30
    
    35$   100,000
    
    3,828
    
    7,465
    
    11,102
    
    14,451
    
    17,896
    
    20,959
    
    24,213125,000
    
    4,785
    
    9,331
    
    13,877
    
    18,064
    
    22,371
    
    26,199
    
    30,266150,000
    
    5,742
    
    11,197
    
    16,652
    
    21,677
    
    26,845
    
    31,438
    
    36,319175,000
    
    6,699
    
    13,063
    
    19,428
    
    25,290
    
    31,319
    
    36,678
    
    42,372>205,000
    
    7,848
    
    15,303
    
    22,758
    
    29,625
    
    36,688
    
    42,966
    
    49,636
 Under the terms of the plan, estimated annual benefits payable on a single-life annuity basis
on retirement at age 65 for Mr. Melton will be $33,176, Mr. Ranieri will be $35,470, Mr. Land will
be $27,725, Dr. Arbige will be $43,269, Mr. Pekich will be $31,716, and Mr. Bienaimé will be
$24,066. As noted above, benefits are computed on a single-life annuity basis, and the benefits are not
subject to deduction for Social Security or other offsets. Employment Contracts, Termination of Employment and Change-in-Control Arrangements On July 8, 2004, Genencor amended its employment agreement with Jean-Jacques Bienaimé,
Genencors Chairman, Chief Executive Officer and President. The employment agreement provides for
an annual salary of $546,000 and provides that Mr. Bienaimés salary may be increased from time to
time by action of the Genencor Board or by the Management Development and Compensation Committee
(MDCC) and that these increases constitute amendments to Mr. Bienaimés employment agreement. Mr.
Bienaimé is entitled to participate in all of Genencors insurance, pension, retirement, deferred
compensation, stock and stock option, stock purchase or similar compensation and benefit plans and
programs. Mr. Bienaimé is also entitled to cash payments to cover the costs of an annual physical
not covered by health insurance benefits and the costs of financial planning and income tax
preparation services. In addition, Genencor has agreed to maintain for his benefit a fully-paid
whole life insurance policy with a stated death benefit of $500,000. In the event that Genencor
terminates Mr. Bienaimés employment without cause or in the event that Mr. Bienaimé resigns due to
a constructive removal, a forced relocation, a decrease in salary or benefits or Genencors breach
of the agreement, he will receive severance in the form of continued compensation for 24 months at
his then current annual salary rate, a cash bonus under Genencors variable pay plan, continuation
of company-paid benefits for 24 months, and customary executive outplacement services limited to
$18,000. 82




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Further, in the event Genencor terminates Mr. Bienaimés employment without cause following a
change in Genencors ownership or control in which more than 50 percent of Genencors outstanding
shares of common stock are acquired by an unaffiliated third party (an Unaffiliated
Change-in-Control), in lieu of the foregoing severance, he will receive an enhanced severance
(Enhanced Severance) in the form of continued cash compensation for 30 months equal to the sum of
his then current annual salary rate plus bonus at 100 percent of target, continuation of
company-paid benefits for 30 months, the monetary equivalent of the crediting of an additional five
years of service to the pension plan and immediate eligibility for retiree medical plan for
purposes of determining benefits payable under these plans, a cash payment of $18,000 for customary
executive outplacement services, a cash payment for the cost of annual physical examinations in the
year of termination and for two additional years thereafter which are not covered by health
insurance benefits, a fully-paid whole life insurance policy with a stated death benefit of
$500,000, a cash payment intended to cover the out of pocket expenses incurred by Mr. Bienaimé
annually for state and federal income tax return preparation for the year of termination and two
additional years, Genencors annual contribution to his 401(k) Plan account for the year in which
termination occurs, and a full years credit towards his benefits under Genencors pension plan. In
addition to the Enhanced Severance, Mr. Bienaimé would be eligible for a discretionary bonus, if
granted, in connection with an Unaffiliated Change-in-Control and would be entitled to receive an
additional payment to reimburse Mr. Bienaimé for any excise tax otherwise payable by him as a
result of the Enhanced Severance. Also, certain benefits included in the agreement are to be
supplemented by Genencor to compensate Mr. Bienaimé for taxes payable on such benefit. In either
severance event, Genencor would compensate Mr. Bienaimé for the applicable 24 or 30 month period,
respectively, if his employment is terminated due to a permanent disability. In July 2004, Genencor also entered into employment agreements with each of its executive
officers. These employment agreements each have a one year term with automatic one year renewals
unless otherwise agreed, with bonus compensation to be determined by the Genencor Board or MDCC.
Each executive officers salary may be increased from time to time by action of the MDCC, and these
increases constitute amendments to his or her employment agreement. Each executive officer is
entitled to participate in all of Genencors insurance, pension, retirement, deferred compensation,
stock and stock option, stock purchase or similar compensation and benefit plans and programs. In
the event that Genencor terminates an executive officers employment without cause, or in the event
that the executive officer resigns due to a constructive removal, a forced relocation, a decrease
in salary or benefits or Genencors breach of the agreement, he or she will receive severance in
the form of continued compensation for 18 months at his or her then current annual salary rate, a
cash bonus under the Genencors variable pay plan, continuation of company-paid benefits for 18
months, and outplacement services of $18,000. As with Mr. Bienaimé, each executive officer is also
eligible to receive the Enhanced Severance termination compensation for 30 months in lieu of the
foregoing severance, except that the whole life insurance policy stated death benefit shall be
$300,000. In addition to the Enhanced Severance, the executive officers would be eligible for a
discretionary bonus, if granted, in connection with an Unaffiliated Change-in-Control and would be
entitled to receive an additional payment to reimburse them for any excise tax otherwise payable by
them as a result of the Enhanced Severance. Genencor will continue to compensate each of these
individuals for the applicable 18 or 30-month-period, respectively, if that persons employment is
terminated due to a permanent disability. In addition, for the two executive officers currently
receiving declining housing supplements, at levels which were frozen in 2003, these officers would
continue to receive such payments for the applicable 18 or 30-month period described above. Genencor entered into an Employment and Separation Agreement with Mr. Melton on May 28, 2004
whereby Mr. Melton agreed to resign as Genencors General Counsel and Secretary effective on June
15, 2004 and to retire from active employment with Genencor effective as of December 31, 2004. Mr. Melton continued as a full time employee from the date of the agreement through his
retirement date with full salary and benefits, including participation in Genencors bonus plan,
the variable pay plan, for 2004. Pursuant to this Employment and Separation Agreement, Genencor
also agreed, among other things, that Genencor would (a) continue Mr. Meltons salary and benefits
for a period of 24 months after retirement, (b) accelerate the vesting of Mr. Meltons restricted
stock award of 7,800 shares originally granted on June 6, 2003 to coincide with his retirement
date, (c) provide Mr. Melton with a payment on January 1, 2005 equal to the value of five
additional years of credited service under Genencors pension plan, the income replacement plan,
(d) provide Mr. Melton with his fully-paid whole life insurance policy with a stated death benefit
of $300,000, (e) pay Mr. Melton specific sums for his tax preparation for 2004 and 2005,
transitional retirement and financial planning services, and annual executive check-ups for 2004
and 2005, and (f) reimburse Mr. Melton for the closing costs, excluding realtor commissions, on the
sale of his residence in Palo Alto, California. The Employment and Separation Agreement further
provides that Mr. Melton shall receive enhanced termination compensation benefits in the event
Genencor consummates a change in control transaction with an unaffiliated third party during 2004
or 2005, which transaction entitles Mr. Meltons successor to such enhanced termination
compensation under the terms of the successors then-current employment agreement. Report of Management Development and Compensation Committee Executive Compensation Philosophy The fundamental compensation philosophy of the Genencor Board is that there should be a
substantial and meaningful connection between executive compensation and stockholder value. Under
the supervision of the MDCC, which is comprised of independent 83




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directors and which also administers many of Genencors benefit plans, Genencor has developed
and implemented compensation policies, plans and programs designed to enhance Genencors
performance as well as increase stockholder value by aligning closely the financial interests of
Genencors executive officers with those of Genencors stockholders. In furtherance of these goals,
annual base salaries are intended to serve as only a portion of an executives total achievable
compensation. The Genencor Board believes that attracting and retaining executives of high quality
is essential to Genencors growth and success. The Genencor Board further believes that Genencors
long-term success is enhanced by a comprehensive compensation program that includes different types
of incentives for motivating executives and rewarding outstanding contributions, including awards
that link compensation to applicable measures of Genencors performance. Genencor relies to a large
degree on annual and long-term incentive compensation to attract and retain executives of
outstanding ability and to motivate them to perform to the full extent of their abilities. Both the
annual and long-term components of the incentive compensation policy are closely tied to Genencors
performance, profitability and stockholder value. In years of outstanding achievement, executive
officers will be substantially rewarded for their respective contributions to Genencors success
through a combination of base salary, variable pay and stock-based incentive awards. Executive Officer Compensation Genencors current total compensation program for executive officers consists of cash
compensation in the form of base salaries and bonuses as well as long-term incentives, all of which
are described below. Base Salaries Base salaries are fixed at levels that the MDCC believes to be generally competitive with
amounts paid to highly qualified senior executives at other similarly-sized companies engaged in
businesses similar to ours. Salaries are reviewed on an annual basis in the first quarter and may
be increased based on the individuals position relative to competitive market data, experience and
performance and the MDCCs consensus that the individuals contribution has increased stockholder
value. Variable Pay Plan In general, Genencor intends that its annual cash compensation incentives for Genencors
executive officers (including Genencors Chief Executive Officer, who receives a comparable bonus
pursuant to Genencors Omnibus Incentive Plan described below) reflect Genencors belief that
managements contribution to improving Genencors performance and stockholder return is related to
revenue and earnings. Under Genencors current incentive compensation program administered through
Genencors variable pay plan, bonuses are tied to financial measures and other performance
milestones established by the MDCC. The variable pay plan covers Genencors regular employees in
the United States and certain foreign locations. Under the current variable pay plan, early each
year, the Genencor Board, through the MDCC, assesses Genencors performance for the prior year
against goals set previously for that year and makes an award determination. The target awards for
plan participants, including the Named Executive Officers, range from 5% to 100% of eligible
earnings, depending on each participants individual salary band level. For any variable pay plan
participant, the actual amount of an award will be contingent upon the level of achievement by
Genencor relative to pre-established goals. The variable pay plan awards for executives are
currently set by the achievement of total revenue and EBITDA (i.e., earnings before interest,
taxes, depreciation and amortization) targets, as well as technology, transactional and business
development milestones, with the targets recommended annually by Genencors management and reviewed
and approved by the MDCC. Awards can vary from zero, if company goals are not met, to the amounts
in excess of target if company goals are exceeded. The maximum payout achievable under the plan for
exceeding total revenue and EBITDA targets for 2004 was 128%. 2002 Omnibus Incentive Plan (Omnibus Incentive Plan) The purpose of the Omnibus Incentive Plan is to provide motivation to selected employees,
directors and consultants to put forth maximum efforts toward Genencors continued growth,
profitability, and success. With the approval of stockholders at the 2002 Annual Meeting, the
Omnibus Incentive Plan replaced the 1999 Stock Option and Stock Appreciation Right Plan as
Genencors vehicle for providing long-term incentives. Under the Omnibus Incentive Plan, the MDCC has authority to grant incentive stock options to
Genencor employees and nonstatutory stock options and SARs to Genencor directors, employees,
consultants and advisors. The Omnibus Incentive Plan also authorizes the grant of restricted and
unrestricted stock awards, restricted stock units, performance shares (which are stock or
stock-based awards contingent upon attaining performance objectives during a performance period),
performance units (which are units valued by reference to criteria chosen by the MDCC), and other
awards established by the MDCC that are consistent with the Omnibus Incentive Plans purpose. The
MDCC also has the authority under the Omnibus Incentive Plan to apply negative discretion to reduce
the amount of an award earned or to modify the payment schedule for such award to the extent
reasonably feasible for federal income tax deductibility purposes pursuant to Section 162(m) of the
Internal Revenue Code. The MDCC administers the Omnibus Incentive Plan. Subject to the limitations set forth in the
plan, the MDCC has the authority to select the eligible persons to whom Genencor may grant awards;
determine the number of shares subject to options, SARs, or other 84




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awards; decide whether an option is an incentive stock option or a nonstatutory option;
determine the type of consideration to be paid by a participant when exercising an option; and
establish the vesting schedule of options, SARs, and other awards. In granting awards to Genencor
executive officers under the Omnibus Incentive Plan, the MDCC reviews and considers the respective
scope of accountability, strategic and operational goals, and anticipated performance requirements
and contributions of each employee. During 2004, the MDCC granted to Genencors Named Executive
Officers non-statutory options to purchase a total of 335,000 shares of Genencor common stock. See
Stock Options above in this Item 11. Employee Retirement Investment Plan Executive officers (and all other eligible employees) are also entitled to participate in
Genencors employee retirement investment plan, a 401(k) plan. Genencor contributes to the plan by
making a limited matching contribution to the accounts of those employees who are contributing to
the plan. On an annual basis Genencor also makes an additional employer contribution on behalf of
all employees who are eligible to participate. Employees do not have to contribute to the plan in
order to be eligible for the additional employer contribution each year. Nonqualified Deferred Compensation Plan In 2003, Genencor adopted a nonqualified deferred compensation plan permitting Genencors
directors, executive officers, and other eligible employees to defer salary, bonus, restricted
stock units and gains from the exercise of stock options. Several of Genencors executive officers,
directors and other eligible participants elected to participate in the plan during 2004. Employee Stock Purchase Plan Executive officers (and all other eligible employees) are eligible to participate in
Genencors employee stock purchase plan, which was adopted in 2001. Under the employee stock
purchase plan, employees are permitted to purchase shares of Genencor common stock that are offered
for sale by Genencor. The MDCC determines a date on which an offering of shares to eligible
employees will begin and a date on which the offering will end. Since the plans inception, the
MDCC has made offerings every six months. Eligible employees may participate during an offering by
enrolling in the employee stock purchase plan and authorizing specified payroll deductions of up to
15% of their base pay rate for the whole period of the offering. At the end of the offering period,
the employees use their payroll deductions to purchase shares of Genencor common stock at a
purchase price established under the employee stock purchase plan. During 2004, Mr. Bienaimé was
the only Named Executive Officer who participated in the plan, acquiring 794 shares from his 2004
contributions. Other Benefits Executive officers (and other eligible employees) are entitled to participate in a group life
insurance program, which provides employees with the opportunity to purchase up to four times base
salary in term life insurance (up to a maximum of $1.0 million) in addition to the two times base
salary in term life insurance provided by Genencor. Executive officers also participate in a
supplemental life insurance program whereby Genencor pays for the executive officer while actively
employed with Genencor the annual premiums designed to provide a paid-up whole life insurance
policy at age 60 in the amount of $500,000 for Genencors chief executive officer and $300,000 for
Genencors other executive officers. Also, Genencor maintains an insured group long-term disability plan for all eligible
employees. The intent of that plan is to provide a benefit equivalent of up to two-thirds of base
salary. Under the program, eligible annual compensation is capped at approximately $342,000.
Genencor has purchased additional long-term disability insurance for certain executive officers to
supplement the long-term disability benefit for the portion of that executive officers
compensation that is above the maximum level of the group plan. Genencors senior executive relocation policy provides that Genencor will pay or reimburse
executives for certain costs of relocation. Genencor has included in this policy provisions for
items such as travel and moving expenses, temporary living expenses, and tax consultation. In
addition, in connection with permanent relocation of certain senior executives to Genencors
headquarters in Palo Alto, California, Genencor previously provided certain executive officers with
home down payment assistance in the form of repayable loans, declining housing supplements and home
price guarantees. In 2003 and continuing through 2004, the declining housing supplements were
frozen for Messrs. Land, Melton and Ranieri. Further information on these repayable loans is
provided in Item 13 of this Report. Chief Executive Officer Compensation The key performance measure used to determine Mr. Bienaimés 2004 compensation package was the
Committees assessment of his ability and dedication to provide the leadership and vision necessary
to enhance Genencors long-term value. Pursuant to his revised employment agreement (see Employment Contracts, Termination of
Employment and Change-in-Control Arrangements in this Item 11), which was approved by the Genencor
Board in 2004, Mr. Bienaimés annual base salary was increased 85




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to $546,000. (In March 2005, the MDCC approved an increase in Mr. Bienaimés salary to
$568,000.) The MDCC believes that Mr. Bienaimés salary was set at a level that is competitive with
the amounts paid to other chief executive officers with comparable qualifications, experience and
responsibilities at other similarly-sized companies engaged in similar businesses. Consistent with Genencors executive compensation philosophy, Mr. Bienaimés total
compensation package depends largely on annual and long-term incentive compensation. The annual
incentive component for 2004 was made up of a cash bonus under the Omnibus Incentive Plan, paid
after the end of the year and based on Genencors financial performance and advancement of
Genencors strategic initiatives. The long-term component took the form of a grant of stock options
under the Omnibus Incentive Plan. Both the annual and long-term incentive components of Mr.
Bienaimés compensation were tied to corporate performance, thereby encouraging dedication to
improving Genencors profitability and building stockholder value. Mr. Bienaimés annual incentive compensation is based upon the same financial measures and
other performance milestones established by the MDCC for the variable pay plan. Mr. Bienaimés
target award is 100% of his eligible earnings and may vary year to year from zero if company goals
are not met or if performance is unsatisfactory, to an amount in excess of target if company goals
are exceeded. The grant of long-term awards under the Omnibus Incentive Plan are variable and are
based on both corporate and executive performance. Policy with Respect to Qualifying Compensation Paid to Executive Officers for Deductibility Under
Section 162(m) of the Internal Revenue Code The MDCC intends that, whenever reasonably possible, compensation paid to its managers,
including its executive officers, should be deductible for federal income tax purposes. The MDCC,
however, may vote to award compensation, especially to a chief executive officer, that is not fully
deductible, if the MDCC determines that such award is consistent with its philosophy and is in
Genencors best interests. Management Development and Compensation Committee:Norbert G. Riedel, ChairSoren Bjerre-NielsenJames P. Rogers
 86




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Stock Price Performance Graph Set forth below is a line graph comparing, (a) the cumulative stockholder return on the shares
of Genencor common stock for the period beginning with the last trade of Genencor common stock on
July 28, 2000 (the date of Genencors initial public offering) and ending on December 31, 2004, to
(b) the cumulative total return of companies on the Standard & Poors 500 Index over such period
and (c) the cumulative total return of companies on the Nasdaq Pharmaceutical Index over such
period. (PERFORMANCE GRAPH) Assumes $100 invested on July 28, 2000 in the shares, the companies comprising the Standard &
Poors 500 Index and the companies comprising the Nasdaq Pharmaceutical Index. Total return assumes
reinvestment of dividends. Genencors stock performance may not continue into the future with the trends similar to those
depicted in the graph above. Genencor neither makes nor endorses any predictions as to its future
stock performance. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth the beneficial ownership of the shares as of January 31, 2005 by:
  
    each person who is known to Genencor to own beneficially more than 5% of the shares;
    each of the officers named in the Summary Compensation Table in Item 11 of this Report;
    each of Genencors directors; and
    all of Genencors executive officers and directors as a group. Genencor has calculated beneficial ownership based on the requirements of the SEC. Unless
otherwise indicated below, to the best of Genencors knowledge, each stockholder named in the table
has sole voting and investment power with respect to all shares shown. 87




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The designated address of each individual listed in the table is c/o Genencor International, Inc.,
925 Page Mill Road, Palo Alto, California 94304. Common StockBeneficially OwnedNumber ofBeneficial Owner
    
    Shares
    
    
    PercentageEastman (1)
    
    
    25,000,000
    
    
    
    41.6
    %Danisco (2)
    
    
    25,000,000
    
    
    
    41.6
    %Jean-Jacques Bienaimé (3)
    
    
    369,946
    
    
    
    *Stuart L. Melton (4)
    
    
    220,803
    
    
    
    *Michael V. Arbige (5)
    
    
    238,583
    
    
    
    *Raymond J. Land (6)
    
    
    173,753
    
    
    
    *Thomas J. Pekich (7)
    
    
    238,133
    
    
    
    *Richard J. Ranieri (8)
    
    
    236,249
    
    
    
    *Soren Bjerre-Nielsen
    
    
    2,025
    
    
    
    *Bruce C. Cozadd (9)
    
    
    52,999
    
    
    
    *Theresa K. Lee
    
    
    1,000
    
    
    
    *Robert H. Mayer (10)
    
    
    1,400
    
    
    
    *Joseph A. Mollica (9)
    
    
    52,999
    
    
    
    *Gregory O. Nelson
    
    
    500
    
    
    
    *Norbert G. Riedel (11)
    
    
    53,299
    
    
    
    *James P. Rogers (12)
    
    
    17,500
    
    
    
    *Jorgen Rosenlund
    
    
    0
    
    
    
    *All executive officers and directors as a group (18 persons) (13)
    
    
    2,169,966
    
    
    
    3.5
    %
    (1) Eastmans address is 100 N. Eastman Road, Kingsport, Tennessee 37660. Eastman and its
designees, Ms. Lee, Dr. Nelson and Mr. Rogers, could be deemed to beneficially own the shares held
by each other. However, they disclaim such beneficial ownership, and it is not reflected on this
table. (2) An affiliate of Danisco, A/S PSE 38 nr. 2024, owns 25,000,000 shares. Its address is
Langebrogade 1 1411 Copenhagen K, Denmark. Danisco and its designees, Mr. Bjerre-Nielsen, Dr. Mayer
and Mr. Rosenlund, could be deemed to beneficially own the shares held by each other. However, they
disclaim such beneficial ownership, and it is not reflected on this table. In addition, its
indirect wholly-owned subsidiary, Acquisition Sub, has a right to acquire 25,000,000 shares
pursuant to the Stock Purchase Agreement between Danisco, Acquisition Sub, Eastman, and Eastman
Chemical Company Investments, Inc., and Danisco has a right to acquire an indeterminate number of
shares pursuant to an option provided for in the Acquisition Agreement between Danisco, Acquisition
Sub and Genencor. (3) The amount shown includes a presently exercisable option to purchase 366,666 shares and
excludes 75,000 restricted stock units. (4) The amount shown includes 1,540 shares held by members of Mr. Meltons family, as to which
he disclaims beneficial ownership, and presently exercisable options to purchase 210,915 shares.
Mr. Melton resigned his position as Genencors General Counsel and Secretary effective June 15,
2004 and retired effective December 31, 2004. (5) The amount shown includes 2,200 shares held by members of Dr. Arbiges family, as to which
he disclaims beneficial ownership, and presently exercisable options to purchase 214,267 shares.
The amount shown excludes 8,500 restricted stock units. (6) The amount shown includes 560 shares held by members of Mr. Lands family, as to which he
disclaims beneficial ownership, and presently exercisable options to purchase 161,042 shares. (7) The amount shown includes 3,300 shares held by members of Mr. Pekichs family, as to which
he disclaims beneficial ownership, and presently exercisable options to purchase 224,150 shares.
The amount shown excludes 8,100 restricted stock units. (8) The amount shown includes presently exercisable options to purchase 229,249 shares. (9) The amount shown consists of presently exercisable options to purchase shares. (10) These shares are held by a trust established for the benefit of Dr. Mayers spouse. (11) The amount shown includes 300 shares held jointly by Dr. Riedel and his spouse and
presently exercisable options to purchase 52,999 shares. 88




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(12) These shares are owned jointly by Mr. Rogers and his spouse. (13) See notes (3) through (12) above. (This includes the beneficial ownership of Stuart L.
Melton who resigned his position as Genencors General Counsel and Secretary effective June 15,
2004 and retired effective December 31, 2004.) Equity Compensation Plan Information Number of securities remainingNumber of securities to be
    
    
    
    
    
    available for future issuanceissued upon exercise of
    
    Weighted-average exercise
    
    
    under equity compensationoutstanding options, warrants
    
    price of outstanding options,
    
    
    plans (excluding securitiesand rights
    
    warrants and rights
    
    
    reflected in column (a))Plan category
    
    (a)
     
    (b)
    
    
    (c)Equity
compensation plans
approved by
security holders
    
    
    10,734,681
    
    
    $
    12.35
    
    
    
    1,867,618Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    N/A
    
    
    
    Total
    
    
    10,734,681
    
    
    $
    12.35
    
    
    
    1,867,618
 
 Item 13. Certain Relationships and Related Transactions Agreements with Executive Officers and Directors Genencor previously made interest-free loans to certain key employees to facilitate their
relocation to the Palo Alto, California area, and Genencor has an outstanding loan to Dr.
Goldsmith. Dr. Goldsmith is indebted to Genencor under a promissory note dated December 2001, with
an outstanding principal balance of $200,000 as of January 27, 2005, which is also the largest
amount outstanding on the loan at any time during 2004. In June 2004, Mr. Melton repaid in full the
$650,000 that he was indebted to Genencor under a similar promissory note dated October 1999. During the third quarter of 2004, Genencor purchased the residences of Mr. Land and Mr.
Ranieri and paid part of the purchase price of these properties by canceling the $1,350,000 that
Mr. Land was indebted to Genencor under a promissory note dated April 2000 and the $1,200,000 that
Mr. Ranieri was indebted to Genencor under a promissory note dated March 2000. The total purchase
price for the Land residence was $2,825,000 and the total purchase price for the Ranieri residence
was $2,352,000. Genencor also paid $13,000 in closing costs in connection with these purchases.
While third party appraisals were used to confirm that the purchase price for each residence
approximated the fair market value of the property, the transactions resulted in deemed
compensation of $125,000 to Mr. Land and $56,800 to Mr. Ranieri. Each of the two officers, together
with his spouse, then entered into a lease with Genencor for his residence providing for a lease
term of up to 36 months. Mr. Ranieri and his spouse elected to terminate their residential lease
with Genencor in December 2004. Prior to its termination, Mr. Ranieris lease resulted in deemed
compensation to him of $4,800. The transactions described in this paragraph were reviewed and
approved by the MDCC and Genencors audit committee. See Item 11 of this Report under the heading Employment Contracts, Termination of Employment
and Change-in-Control Arrangements for descriptions of other agreements Genencor has with its
executive officers. Commercial Relationships and Agreements with Major Stockholders Commercial Relationships Genencor has agreements with Danisco and its affiliates, including a joint development and
supply agreement. During 2004, Danisco and its affiliates purchased approximately $18.7 million of
products from us, and paid Genencor approximately $0.5 million in fees and royalties. In addition,
during 2004, Genencor purchased approximately $10.1 million in products, including products for
resale, from or through Danisco and its affiliates. 89




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Stockholder Agreement Pursuant to the stockholder agreement among Genencor, Danisco and Eastman, dated July 25,
2000, as amended on February 16, 2001, November 15, 2002, April 2, 2003 and January 27, 2005 (the
Stockholder Agreement), Danisco and Eastman each has the right to nominate three directors
(directors nominated by Danisco and Eastman being referred to respectively as the Danisco Nominees
and the Eastman Nominees). If Danisco or Eastman reduces its ownership interest to less than 20% of
Genencors outstanding shares of common stock, then such stockholders nomination rights will be
reduced to two directors and its nomination rights will terminate when it owns 10% or less of
Genencors outstanding shares of common stock. In addition, Danisco and Eastman each has agreed to
take such actions as are necessary to effectuate the nomination rights and to cause the Genencor
Board to be comprised of 10 members, including the Danisco Nominees, the Eastman Nominees,
Genencors chief executive officer and the remaining directors, all of whom must be persons who are
not affiliates of Genencor, Danisco or Eastman. Pursuant to the Fourth Amendment to the Stockholder Agreement entered into on January 27, 2005
in connection with the execution of the Acquisition Agreement (the Fourth Amendment), Genencor,
Danisco and Eastman agreed that the board nomination and board composition rights noted above will
terminate immediately after Genencor has received written notice from Danisco (and with respect to
clause (b) below only, an acknowledgement in writing from Eastman) that both of the following have
occurred: (a) the purchase of and payment for any shares of common stock pursuant to its tender
offer; and (b) the purchase by Danisco or its affiliates of, and payment for, shares of all the
capital stock of Genencor owned by Eastman and its affiliates. The Acquisition Agreement provides
that from and after the time that Danisco purchases shares of common stock pursuant to its tender
offer, Danisco shall be entitled to designate individuals to serve on the Genencor Board in
proportion to its holdings of shares of common stock. The material terms of the Stockholder Agreement are described or referred to below. Board Nomination Rights and Board Composition For a description of the provisions of the Stockholder Agreement relating to board nomination
rights and board composition, see Stockholder Agreement above in this Item 13. Registration Rights Each of Danisco and Eastman were granted certain demand and piggyback registration rights
that expire on August 2, 2010, unless terminated earlier in accordance with the terms of the
Stockholder Agreement. Related Party Transactions Genencor, Danisco and Eastman agreed that all commercial transactions and agreements between
Genencor and each of Danisco and Eastman would be negotiated and conducted on an arms length basis
and consummated upon commercially reasonable terms. Pursuant to the Fourth Amendment, Genencor,
Danisco and Eastman agreed that the Acquisition Agreement and the transactions contemplated thereby
satisfied these requirements. Public Statements by Danisco or Eastman Concerning Genencor Danisco and Eastman have each agreed that they will endeavor to provide advance copies of, or
in the case of oral statements, advance notice of, any public release or announcement concerning
Genencor to be issued, released or made by it or any of its affiliates, in each case, at least five
business days prior to such release or announcement. Assignment of Rights Danisco and Eastman cannot assign their rights, interests and obligations under the
Stockholder Agreement without the written consent of Genencor. 
 Item 14. Principal Accountant Fees and Services The firm of PricewaterhouseCoopers LLP served as our independent registered public accountants
for 2004. 90




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Audit Fees For professional services rendered by it for the audit of our annual financial statements, reviews
of the financial statements included in our Quarterly Reports on Form 10-Q and other services
provided in connection with statutory and regulatory filings, PricewaterhouseCoopers LLP billed us
fees in the aggregate amounts of $532,000 in 2003 and $1,520,000 in 2004. Substantially all of the
increase in Audit Fees in 2004 compared to 2003 is attributable to opinions on managements
assessment of and our effectiveness of internal control over financial reporting in connection with
our compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Audit-Related Fees For assurance and related services rendered by it that are reasonably related to the
performance of the audit or review of our financial statements, and which are not included under
the caption Audit Fees above, PricewaterhouseCoopers LLP billed us fees in the aggregate amounts
of $46,000 in 2003 and $39,000 in 2004. Audit-related services include fees for employee benefit
plan audits and accounting consultations. Tax Fees For tax compliance, tax advice and tax planning services rendered by it,
PricewaterhouseCoopers LLP billed us fees in the aggregate amounts of $364,000 in 2003 and $291,000
in 2004. Tax services include fees for expatriate administration and expatriate tax return
preparation, executive tax return preparation, domestic and international tax consultations, and
international tax return preparation. All Other Fees For professional services other than those described above rendered by it,
PricewaterhouseCoopers LLP billed us fees in the aggregate amounts of $2,000 in 2003 and $4,000 in
2004. These fees are for access to a web-based technical accounting research tool. The audit committee has considered whether the provision of services described above under
All Other Fees is compatible with maintaining the independence of PricewaterhouseCoopers LLP. Pre-Approval Policy Pursuant to its charter, the audit committee is responsible for the engagement of our
independent registered public accountants and for approving, in advance, all audit and non-audit
services provided by our independent registered public accountants which are not prohibited by law
which are deemed advisable by the audit committee and which are consistent with the need to
maintain the independence of our independent registered public accountants. The pre-approval
requirements are not applicable with respect to the provision of de-minimis non-audit services that
are approved in accordance with the Exchange Act and our audit committee charter. The audit
committee may delegate to one or more designated members of the audit committee the authority to
grant required pre-approval of auditing and non-audit services. The decision of any member to whom
authority is delegated shall be presented to the full audit committee at its next scheduled
meeting. For
fiscal year 2004, none of the services described in each of the
above were approved by the audit committee in reliance upon the
de minimus exception described in
Section 10A(i)(1)(B) of the Exchange Act and in
17 CFR 210.2-01(c)(7)(i)(C). 
 PART IV. 
 Item 15. Exhibits and Financial Statement Schedules Item 15(a)(1): Consolidated
Financial Statements:Report of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Changes in Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements
 91




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Item 15(a)(2): The following financial statement schedule is filed as part of this Report: Schedule II- Valuation and Qualifying Accounts Item 15(a)(3) and 15(b): See Index to Exhibits Item 15(c): All other schedules are omitted since the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements and notes thereto. 92




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Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized. Genencor International, Inc.Date: March 14, 2005
    
    By:
    
    /s/ Jean-Jacques BienaiméJean-Jacques BienaiméChairman, Chief Executive Officer and President
 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K
has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated. Signature
    
    Title
    
    Date/s/ Jean-Jacques Bienaimé

Jean-Jacques Bienaimé
    
    Director, Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
    
    March 14, 2005/s/Raymond J. Land

Raymond J. Land
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
    
    March 14, 2005/s/ Darryl L.Canfield

Darryl L. Canfield
    
    Vice President and Corporate Controller
(Principal Accounting Officer)
    
    March 14, 2005/s/Soren Bjerre-Nielsen

Soren Bjerre-Nielsen
    
    Director
    
    March 14, 2005/s/ Gregory O. Nelson

Gregory O. Nelson
    
    Director
    
    March 14, 2005/s/ Bruce C. Cozadd

Bruce C. Cozadd
    
    Director
    
    March 14, 2005/s/ Jorgen Rosenlund

Jorgen Rosenlund
    
    Director
    
    March 14, 2005/s/ Theresa K. Lee

Theresa K. Lee
    
    Director
    
    March 14, 2005/s/ Robert H. Mayer

Robert H. Mayer
    
    Director
    
    March 14, 2005/s/ Joseph A. Mollica

Joseph A. Mollica
    
    Director
    
    March 14, 2005/s/ Norbert G. Riedel

Norbert G. Riedel
    
    Director
    
    March 14, 2005/s/ James P. Rogers

James P. Rogers
    
    Director
    
    March 14, 2005
 93




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INDEX TO EXHIBITS (2)
    
    Plan of acquisition, reorganization, arrangement, liquidation or succession2.1
    
    
    Acquisition Agreement among Danisco A/S, DH
Subsidiary Inc. and the Company, dated as of
January 27, 2005, is incorporated by reference
to Exhibit 2.1 to the Companys Current Report
on Form 8-K filed on February 2, 2005.(3)
    
    Articles of Incorporation and By-laws3.1
    
    
    Form of Restated Certificate of Incorporation
is incorporated herein by reference to Exhibit
3.3 to Amendment No. 3 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on July 24,
2000.3.2
    
    
    Form of Amended and Restated Bylaws is
incorporated herein by reference to Exhibit
3.4 to Amendment No. 3 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on July 24,
2000.(4)
    
    Instruments defining the rights of securities holders, including indentures4.1
    
    
    Exhibit 3.1 to this Report is incorporated
herein by reference.4.2
    
    
    Exhibit 3.2 to this Report is incorporated
herein by reference.4.3
    
    
    Form of Specimen Common Stock Certificate is
incorporated herein by reference to Exhibit
4.1 to Amendment No. 3 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on July 24,
2000.4.4
    
    
    Note Agreement for the $140,000,000 6.82%
Senior Notes due 2006 between the Company and
the purchasers identified therein, dated March
28, 1996, is incorporated herein by reference
to Exhibit 4.2 to Amendment No. 1 to the
Companys Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000.4.5
    
    
    Amendment No. 1, dated as of September 25,
1996, to Note Agreement for the $140,000,000
6.82% Senior Notes due 2006 is incorporated
herein by reference to Exhibit 4.5 to the
Companys Annual Report on Form 10-K for the
year ended December 31, 2002.4.6
    
    
    Amendment No. 2, dated as of December 31,
1996, to Note Agreement for the $140,000,000
6.82% Senior Notes due 2006 is incorporated
herein by reference to Exhibit 4.6 to the
Companys Annual Report on Form 10-K for the
year ended December 31, 2002.4.7
    
    
    Amendment No. 3, dated as of May 5, 2000, to
Note Agreement for the $140,000,000 6.82%
Senior Notes due 2006 is incorporated herein
by reference to Exhibit 4.7 to the Companys
Annual Report on Form 10-K for the year ended
December 31, 2002.4.8
    
    
    Amendment No. 4, dated as of October 1, 2000,
to Note Agreement for the $140,000,000 6.82%
Senior Notes due 2006 is incorporated herein
by reference to Exhibit 4.8 to the Companys
Annual Report on Form 10-K for the year ended
December 31, 2002.4.9
    
    
    Amendment No. 5, dated as of April 17, 2002,
to Note Agreement for the $140,000,000 6.82%
Senior Notes due 2006 is incorporated herein
by reference to Exhibit 4.9 to the Companys
Annual Report on Form 10-K for the year ended
December 31, 2002.4.10
    
    
    $40,000,000 Three Year Credit Agreement, dated
as of December 23, 2003, by and among the
Company, the Lenders party thereto and ABN
AMRO BANK, N.V., as Administrative Agent, is
incorporated herein by reference to Exhibit
4.10 to the Companys Annual Report on Form
10-K for the year ended December 31, 2003.(9)
    
    Voting Trust AgreementNot applicable.
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(10)
    
    Material Contracts10.1
    
    
    Stockholder Agreement between the Company,
Eastman Chemical Company and Danisco A/S,
dated July 25, 2000, is incorporated herein by
reference to Exhibit 10.5 to Amendment No. 4
to the Companys Registration Statement on
Form S-1 (Registration No. 333-36452) filed on
July 26, 2000.10.2
    
    
    First Amendment to Stockholder Agreement,
dated February 16, 2001, between the Company,
Eastman Chemical Company and Danisco A/S is
incorporated herein by reference to Exhibit
10.2 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002.10.3
    
    
    Second Amendment to Stockholder Agreement,
dated November 15, 2002, between the Company,
Eastman Chemical Company and Danisco A/S is
incorporated herein by reference to Exhibit
10.3 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002.10.4
    
    
    Third Amendment to Stockholder Agreement,
dated as of April 2, 2003, by and among the
Company, Eastman Chemical Company and Danisco
A/S is incorporated herein by reference to
Exhibit 10.4 to the Companys Annual Report on
Form 10-K for the year ended December 31,
2003.10.5
    
    
    Fourth Amendment to Stockholder Agreement by
and among the Company, Eastman Chemical
Company and Danisco A/S, dated as of January
27, 2005, is incorporated by reference to
Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on February 2, 2005.#10.6
    
    
    Form of Indemnification Agreement between the
Company and its directors and executive
officers is incorporated herein by reference
to Exhibit 10.1 to Amendment No. 3 to the
Companys Registration Statement on Form S-1
(Registration No. 333-36452) filed on July 24,
2000.10.7
    
    
    Lease Agreement by and between the Company and
The Board of Trustees of the Leland Stanford
Junior University, dated May 22, 1995, is
incorporated herein by reference to Exhibit
10.6 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000. (Palo Alto)10.8
    
    
    Lease by and between the Company and the Board
of Trustees of the Leland Stanford Junior
University, dated January 30, 2003, is
incorporated herein by reference to Exhibit
10.1 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2003.
(Palo Alto supplemental lease)10.9
    
    
    Lease Agreement between the Company and
Meridian Centre Associates, L.P., dated August
16, 1999, as amended September 1, 1999, is
incorporated herein by reference to Exhibit
10.7 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000. (Rochester)10.10
    
    
    Lease between Genencor International B.V. and
ABN AMRO Onroerend Goed Lease en
Financieringen B.V., dated January 6, 1999, is
incorporated herein by reference to Exhibit
10.8 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000. (Leiden, the Netherlands)10.11
    
    
    Deed of Economic Transfer between Genencor
International B.V. and ABN AMRO Goed Lease en
Financieringen B.V., dated January 6, 1999, is
incorporated herein by reference to Exhibit
10.8.1 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000.10.12
    
    
    Lease agreement by and between the Company and
Eastman Kodak Company, dated August 28, 1991,
is incorporated herein by reference to Exhibit
10.9 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000. (Rochester)10.13
    
    
    First Amendment to Lease, dated November 30,
2001, by and between the Company and Eastman
Kodak Company is incorporated herein by
reference to Exhibit 10.10 to the Companys
Annual Report on Form 10-K for the year ended
December 31, 2002.10.14
    
    
    Second Amendment to Lease Agreement and
Landlord Consent, dated July 8, 2002, by and
between the Company and Eastman Kodak Company
is incorporated herein by reference to Exhibit
10.11 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002.
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##### Table of Contents



10.15
    
    
    Rental Agreement, originally dated April 29,
1966, between the City of Hanko and the
Companys ultimate predecessor-in-interest,
Suomen Sokeri Osakeyhtio is incorporated
herein by reference to Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004. (Hanko,
Finland)10.16
    
    
    Amended and Restated Equity Joint Venture
Contract between Genencor Mauritius Ltd. and
Wuxi Enzyme Factory, dated May 10, 1998, is
incorporated herein by reference to Exhibit
10.15 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000.10.17
    
    
    Agreement for the First Amendment to the
Amended and Restated Equity Joint Venture
Contract and First Amendment to the Amended
and Restated Articles of Association, dated as
of December 23, 2002, between Genencor
Mauritius Ltd. and Wuxi Enzymes Factory is
incorporated herein by reference to Exhibit
10.16 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002.*+10.18
    
    
    Agreement for Transfer of Equity Interest, dated
November 30, 2004, between Wuxi Enzyme
Factory, Genencor Mauritius Ltd. and
Genencor (Wuxi) Bio-Products Co., Ltd.*+10.19
    
    
    Contract Granting State-Owned Land Use Right,
dated January 5, 2004, between Wuxi Land
Resource Administration Bureau and Genencor
(Wuxi) Bio-Products Co., Ltd.#10.20
    
    
    Senior Executive Relocation Policy is
incorporated herein by reference to Exhibit
10.18 to Amendment No. 1 to the Companys
Registration Statement on Form S-1
(Registration No. 333-36452) filed on June 26,
2000.*#10.21
    
    
    Promissory Note, dated December 21, 2001, from
Mark Goldsmith and Anne Midler payable to the
order of the Company.#10.22
    
    
    Employment Agreement, dated July 8, 2004,
between the Company and Jean-Jacques Bienaimé
is incorporated herein by reference to Exhibit
10.3 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2004.#10.23
    
    
    Form of executive officer Employment Agreement
is incorporated herein by reference to Exhibit
10.4 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2004.#10.24
    
    
    Employment and Separation Agreement, dated May
1, 2004, between the Company and Stuart Melton
is incorporated by reference to Exhibit 10.2
to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.+10.25
    
    
    Enzyme Supply Agreement by and between the
Company and Cargill, Incorporated, dated as of
January 5, 2001, is incorporated herein by
reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001.+10.26
    
    
    Supply Agreement by and among The Procter &
Gamble Manufacturing Company, The Procter &
Gamble Company, Procter & Gamble International
Operations SA, and P&G Northeast Asia PTE,
Ltd., and the Company, executed October 17,
2001, is incorporated herein by reference to
Exhibit 10.26 to the Companys Annual Report
on Form 10-K for the year ended December 31,
2001.+10.27
    
    
    First Amendment to Supply Agreement by and
between the Company and The Procter and Gamble
Company, entered into as of January 1, 2003,
is incorporated here in by reference to
Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30,
2003.+10.28
    
    
    Amended and Restated Research Agreement, dated
June 14, 2004, between Dow Corning Corporation
and the Company is incorporated herein by
reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.+10.29
    
    
    Enzyme Supply Agreement between the Company
and Corn Products International, Inc., dated
February 5, 2002, is incorporated herein by
reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.#10.30
    
    
    Genencor International, Inc. Nonqualified
Deferred Compensation Plan effective as of
September 15, 2003 is incorporated herein by reference
to Exhibit 10.35 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
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##### Table of Contents



#10.31
    
    
    Genencor International, Inc. 2002 Omnibus
Incentive Plan effective May 30, 2002 is incorporated herein by reference to Appendix
A to the Companys 2002 Definitive Proxy Statement filed on April 19, 2002.#10.32
    
    
    Standard Form of Option Grant Agreement used
by the Company to issue stock options pursuant
to the Genencor International, Inc. 2002
Omnibus Incentive Plan is incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004.#10.33
    
    
    Residential Lease, dated August 20, 2004,
between Raymond J. Land and Kathleen A. Land
and the Company is incorporated by reference
to Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2004.*+10.34
    
    
    Patent License Agreement, fully executed
December 7, 2004, between agencies of the
United States Public Health Service within the
Department of Health of Human Services and the
Company.*+#10.35
    
    
    Genencor International, Inc. Variable Pay Plan
(For Base Periods starting on an after January
1, 2004).#10.36
    
    
    Compensation arrangement, as of December 7, 2004,
with the Special Committee of the Companys Board of Directors, is incorporated herein
by reference to Exhibit (e)(12) to the Companys Schedule 14D-9 filed on February 15, 2005.(11)
    
    Statement re computation of per share earningsNot included as a separate exhibit as
computation can be determined from Note 1 to
the financial statements included in this
Report under Item 8.(12)
    
    Statements re computation of ratiosNot applicable.(13)
    
    Annual report to security holders, Form 10-Q, or quarterly report to security holders(14)
    
    Code of Ethics*14.1
    
    
    Genencor International, Inc. Code
of Conduct.(16)
    
    Letter re change in certifying accountantNot applicable.(18)
    
    Letter re change in accounting principlesNot applicable.(21)
    
    Subsidiaries of the Registrant*21.1
    
    
    Subsidiaries of the Registrant.(22)
    
    Published report regarding matters submitted to a vote of security holdersNot applicable.(23)
    
    Consents of experts and counsel*23.1
    
    
    Consent of Independent Registered Public Accounting Firm.(24)
    
    Power of AttorneyNot applicable.(31)
    
    Rule 13a-14(a)/15d-14(a) Certifications*31.1
    
    
    (i)Rule 13a-14(a)/15(d)-14(a) Certification of
Chief Executive
Officer.*31.2
    
    
    Rule 13a-14(a)/15(d)-14(a) Certification of
Chief Financial Officer.(32)
    
    Section 1350 Certifications*32.1
    
    
    Section 1350 Certifications of each of the
Chief Executive Officer and the Chief
Financial Officer.(99)
    
    Additional ExhibitsNot applicable
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*
    
    
    Exhibits filed with this Report.+
    
    
    Confidential Treatment requested as to certain
information which has been separately filed
with the Securities and Exchange Commission
pursuant to an application for such treatment.#
    
    
    Management contract or compensatory plan.
 98