GEN PROBE INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Commission File Number 0-21872

GEN-PROBE INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		33-0044608 (I.R.S. Employer Identification Number)

10210 Genetic Center Drive
San Diego, CA 92121

(Address of principal executive offices)

(858) 410-8000
(Registrant’s Telephone No.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

As of November 12, 2002, there were 23,799,945 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

TABLE OF CONTENTS


	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
		Notes to the Consolidated Financial Statements (unaudited)
	Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls And Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Items
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT 4.3

GEN-PROBE INCORPORATED

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated balance sheets at December 31, 2001 and September 30, 2002 (unaudited)			3
Consolidated statements of income for the three months ended September 30, 2001 and 2002 (unaudited) and the nine months ended September 30, 2001 and 2002 (unaudited)			4
Consolidated statements of cash flows for the nine months ended September 30, 2001 and 2002 (unaudited)			5
Notes to the consolidated financial statements (unaudited)			6
Item 2 - Management Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk			21
Item 4 - Controls and Procedures			21
PART II — OTHER INFORMATION			22
Item 1 - Legal Proceedings			22
Item 4 - Submission of Matters to a Vote of Security Holders			22
Item 5 - Other Items			23
Item 6 - Exhibits and Reports on Form 8-K			35
SIGNATURES			36
CERTIFICATIONS			36

Item 1. Financial Statements

Gen-Probe Incorporated
Consolidated Balance Sheets
(in thousands,
except share and per share data)


		December 31,		September 30,
		2001		2002

				(unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	17,750	$	91,852
	Trade accounts receivable, net of allowance for doubtful accounts of $824 as of December 31, 2001 and $876 as of September 30, 2002		11,101		13,648
	Accounts receivable — other		5,129		979
	Accounts receivable from related parties		409		—
	Income taxes receivable		2,457		—
	Inventories		11,004		13,016
	Deferred income taxes		3,231		4,827
	Prepaid expenses and other current assets		5,754		5,029

Total current assets			56,835		129,351
Property, plant and equipment, net			60,094		66,881
Capitalized software			19,791		22,066
Other assets			3,753		2,913
Purchased intangibles, net			2,650		2,398
Goodwill, net of accumulated amortization of $7,677			17,224		18,621

Total assets		$	160,347	$	242,230

Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable	$	8,090	$	7,652
	Accounts payable to related parties		—		7
	Accrued salaries and employee benefits		7,041		7,350
	Other accrued expenses		4,727		6,622
	Deferred revenue		5,212		2,783
	Current portion of long-term debt		2,000		—

Total current liabilities			27,070		24,414
Long-term debt			10,000		—
Deferred income taxes			173		648
Deferred revenue			7,000		6,500
Deferred rent			297		311
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $.0001 par value per share, 20,000,000 shares authorized, none issued and outstanding		—		—
	Common stock, $.0001 par value per share; 100,000,000 shares authorized, 23,799,945 shares issued and outstanding		2		2
	Additional paid-in capital		106,103		192,627
	Accumulated other comprehensive income		60		29
	Retained earnings		9,642		17,699

Total stockholders’ equity			115,807		210,357

Total liabilities and stockholders’ equity		$	160,347	$	242,230

See accompanying notes.

Gen-Probe Incorporated
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2001			2002			2001			2002

Revenues:
	Product sales		$	24,968		$	40,919		$	77,489		$	97,586
	Collaborative research revenue			6,680			799			14,758			10,876
	Royalty and license revenue			2,894			1,079			4,398			2,969

Total revenues				34,542			42,797			96,645			111,431
Operating expenses:
	Cost of product sales			9,588			14,589			28,428			38,475
	Research and development			12,158			9,904			40,549			33,134
	Marketing and sales			4,197			4,298			12,154			12,685
	General and administrative			4,170			5,870			12,433			17,937
	Amortization of intangible assets			237			84			711			252

Total operating expenses				30,350			34,745			94,275			102,483

Income from operations				4,192			8,052			2,370			8,948
Other income (expenses)
	Interest income			52			285			351			478
	Interest expense			(240	)		(158	)		(776	)		(614	)
	Other income (expense), net			9			(402	)		17			3,227

Total other income (expenses), net				(179	)		(275	)		(408	)		3,091

Income before income taxes				4,013			7,777			1,962			12,039
Income tax expense (benefit)				(98	)		2,613			(1,183	)		3,241

Income before extraordinary loss				4,111			5,164			3,145			8,798

Extraordinary loss, net of tax				—			741			—			741

Net income			$	4,111		$	4,423		$	3,145		$	8,057

Basic and diluted earnings per share:
		Income before extraordinary loss	$	0.17		$	0.22		$	0.13		$	0.37
		Extraordinary loss, net of tax		—			0.03			—			0.03

		Net income	$	0.17		$	0.19		$	0.13		$	0.34

Weighted average shares outstanding:
	Basic			23,800			23,800			23,800			23,800

	Diluted			23,801			23,801			23,801			23,801

See accompanying notes.

Gen-Probe Incorporated
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)


				Nine Months Ended
				September 30,

				2001			2002

Operating activities
Net income				$	3,145		$	8,057
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			12,252			13,153
		Loss on disposal of property and equipment			113			290
		Deferred rent payable			222			14
		Deferred revenue			(2,025	)		(2,929	)
		Deferred income taxes			(2,232	)		(1,007	)
		Changes in assets and liabilities:
			Accounts receivable		(4,848	)		4,513
			Inventories		992			(2,012	)
			Prepaid expenses and other current assets		(2,963	)		725
			Accounts payable		(863	)		(438	)
			Accrued salaries and employee benefits		1,515			309
			Other accrued expenses		4,465			1,892

Net cash provided by operating activities					9,773			22,567
Investing activities
Proceeds from sales and maturities of short-term investments					6,353			—
Purchase of short-term investments					(2,430	)		—
Purchase of property, plant & equipment					(6,450	)		(9,517	)
Capitalization of software development costs					(2,492	)		(2,275	)
Capitalization of patent costs					(681	)		(467	)
Other assets					(24	)		(84	)

Net cash used in investing activities					(5,724	)		(12,343	)
Financing activities
Principal payments on long-term debt					(2,000	)		(12,000	)
Net capital contribution from merger with Gen-Probe Holding					—			75,878

Net cash provided (used) in financing activities					(2,000	)		63,878

Net increase in cash and cash equivalents					2,049			74,102
Cash and cash equivalents at the beginning of the period					8,641			17,750

Cash and cash equivalents at the end of the period				$	10,690		$	91,852

Supplemental disclosure of cash flow information:
Cash paid for:
	Interest			$	538		$	740

	Income taxes			$	105		$	1,165

See accompanying notes.

Notes to the Consolidated Financial Statements (unaudited)

Note 1 — Basis of Presentation

The accompanying interim financial statements of Gen-Probe Incorporated (“Gen-Probe” or the “Company”) at September 30, 2002, and for the three and nine month periods ended September 30, 2001 and 2002, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, the unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary to state fairly the financial information therein, in accordance with generally accepted accounting principles. Interim results are not necessarily indicative of the results which may be reported for any other interim period or for the year ending December 31, 2002.

You should also read the financial statements and notes in the Company’s Information Statement, included as Exhibit 99.1 to the Registration Statement on Form 10 filed with the SEC on September 5, 2002, which includes audited financial statements and footnotes for the fiscal years ended December 31, 1999, 2000 and 2001.

Note 2 — Reporting Periods

The Company operates and reports on fiscal periods ending on the Friday closest to the end of the month except for year-end, which closes December 31. For ease of presentation, the quarterly reporting periods are deemed to end on March 31, June 30 and September 30. The three month periods ended September 30, 2001 and 2002 each included 13 weeks and the nine month periods ended September 30, 2001 and 2002 each included 39 weeks.

Note 3 — Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001.

SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. The Company adopted SFAS No. 142 effective January 1, 2002.

With the adoption of SFAS No. 142, the Company will no longer amortize goodwill, which has been estimated to reduce annual amortization expense and increase the Company’s operating income by approximately $612,000. Goodwill and intangibles with indefinite lives will be assigned to reporting units as determined by the Company for purposes of impairment testing and tested using a two-step approach for impairment annually or whenever there is an impairment indicator.

The Company has performed the first of the required impairment tests of goodwill and indefinite lived intangible assets to determine if a transition impairment charge should be recognized under SFAS 142. The Company has determined that there have been no impairments. In the future, the Company will test for impairment at least annually.

The following table presents a reconciliation of net income and per share data to what would have been reported had the new rules been in effect during the three month and nine month periods ended September 30, 2001 (in thousands, except per share data):


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

	2001		2002		2001		2002

Reported net income	$	4,111	$	4,423	$	3,145	$	8,057
Add back goodwill amortization, net of tax		153		—		612		—

Adjusted net income	$	4,264	$	4,423	$	3,757	$	8,057

Basic and diluted net income per common share:
Reported net income	$	0.17	$	0.19	$	0.13	$	0.34
Goodwill amortization, net of tax		0.01		—		0.03		—

Adjusted net income	$	0.18	$	0.19	$	0.16	$	0.34

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which was adopted by the Company beginning in fiscal 2002. This statement established a number of rules for the recognition, measurement and display of long-lived assets which are impaired and either held for sale or continuing use within the business. In addition, the Statement expanded the definition of a discounted operation to individual reporting units or asset groupings for which identifiable cash flow exists. The adoption of the statement as of January 1, 2002 did not have a significant impact on the Company’s financial statements.

Note 4 — Net Income Per Share

Gen-Probe computes net income per share in accordance with SFAS No. 128, “Earnings Per Share”, and SEC Staff Accounting Bulletin (“SAB”) No. 98. Under the provisions of SFAS No. 128, basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period.

Under the provisions of SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. No common shares have been issued for nominal consideration. The Company has outstanding for all periods 23,799,945 shares of common stock. The Company considers common equivalent shares from the exercise of stock options in the instance where the shares are dilutive to net income of the Company by application of the treasury stock method.

The following table sets forth the computation of basic and diluted shares (in thousands except per share data):

Three Months

Nine Months

Ended

September 30,

2001

2002

2001

2002

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