LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through funding from collaborative agreements and the issuance of equity securities and
debt instruments ($486 million from the beginning of 1999 to-date). As of September 30, 2003, future funding under terms of our existing agreements is approximately $50 million excluding milestone payments and royalties that we may earn under such collaborations.
Cash and Cash Equivalents. As of September 30, 2003, we had $78.4 million in cash and cash equivalents, including $6 million of restricted cash. Available cash is invested in accordance with our investment policy's primary objectives of liquidity, safety of principal and diversity of investments. Our cash is deposited only with financial institutions in Iceland, the United Kingdom and the United States having a high credit standing. This cash is largely invested in U.S. dollar denominated money market and checking accounts and also in Icelandic krona denominated accounts.
Operating Activities. Working capital needs resulted in $1.7 million of funds used in the nine-month period ended September 30, 2003 and provided $2.8 million in the nine-month period ended September 30, 2002. Net cash used in operating activities decreased $26.5 million in the nine-month period ended September 30, 2003 as compared to the nine-month period ended September 30, 2002. As more fully described above, this is as a result of our increased revenue base and the impacts of the cost reduction measures we implemented late in 2002.
Investing Activities. Our investing activities have consisted of capital expenditures and long-term strategic equity investments in, and acquisitions of, technologies and businesses that are complementary to our business. Purchases of property and equipment during the nine-month period ended September 30, 2003 were $0.7 million as compared to $14.1 million in the nine-month period ended September 30, 2002. We principally made replacement capital expenditures during the nine-month period ended September 30, 2003. During the nine-month period ended September 30, 2002 we expended $5.7 million in respect of the new building, $2.8 million for the purchase of DNA analyzers under our supply agreement with ABG and acquired $3.3 million of cash in the purchase of MediChem. There were also $3.9 million of MediChem transaction costs, resulting in a net outlay of cash for the nine month period ended September 30, 2002 in connection with the acquisition of $0.6 million. Although we expect to continue to make simply replacement capital expenditures, net cash used in investing activities may in the future fluctuate significantly from period to period due to the timing of our capital expenditures and other investments.
Financing Activities. Net cash of $1.7 million was provided by financing activities in the nine-month period ended September 30, 2003 as compared to $2.9 million provided in the nine-month period ended September 30, 2002. Financing activities for the nine-month period ended September 30, 2003 largely consisted of the sale and 18-month leaseback of certain laboratory equipment ($4.8 million), short-term borrowings ($2.0 million) and installment payments on our existing debt and capital lease obligations ($5.3 million). In December 2001, we established a $27.5 million bridge loan with an Icelandic financial institution to finance the construction of our new headquarters facility. We repaid the borrowings under the bridge loan in January and March 2002 with the proceeds from our Tier A $13.5 million bond offering, Tier C $7.3 million offering of privately placed bonds and Tier D $6.7 million bank loan. $14 million of cash that was restricted as of December 31, 2001 was provided in 2002 in the final financing (Tiers C and D) of our new headquarters facility.
We seek to maintain a desired level of floating-rate debt with respect to our overall debt portfolio denominated in U.S. Dollars. To this end, we have entered into two interest rate and cross-currency swaps to manage interest rate and foreign currency risk arising from long-term debt obligations denominated in Icelandic krona. These interest rate and cross-currency swaps with a remaining combined notional amount of 1,930 million Icelandic krona are designated as economic hedges of fixed rate foreign currency debt (Tier A and Tier C bonds), but do not qualify for hedge accounting under SFAS 133. The estimated fair value of these instruments is included in other long-term assets is $10.7 million and $6.4 million as of September 30, 2003 and December 31, 2002, respectively. The unrealized gain for the nine-month periods ended September 30, 2003 and 2002 resulting from the recording of these instruments together with the translation of the Tier A and Tier C bonds is $2.4 million and $1.6 million, respectively, and is included in other non-operating income and (expense), net in the Consolidated Statements of Operations.
General. Following the implementation in September 2002 of a plan to reduce headcount and maximize the use of automation in our core genetics operations and based upon current plans, we believe that our existing resources will be adequate to satisfy our capital needs for several years. Our cash requirements depend on numerous factors, including our ability to obtain new research collaboration agreements, to obtain subscription and collaboration agreements for the database services; to obtain and maintain contract service agreements in our chemistry services and clinical research trials groups; expenditures in connection with alliances, license agreements and acquisitions of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment, including capital equipment necessary to ensure that our sequencing and genotyping operations remain competitive; and capital expenditures required to expand our facilities. Changes in our research and development plans, the entry into clinical trials of a drug based on our discoveries, or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.
We will require significant additional capital in the future, which we may seek to raise through further public or private equity offerings, additional debt financing or added collaborations and licensing arrangements. No assurance can be given that additional financing or collaborations and licensing arrangements will be available when needed, or that if available, will be obtained on favorable terms. If adequate funds are not available when needed, we may have to curtail operations or attempt to raise funds on unattractive terms.
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