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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBER 000-21930
BIOSOURCE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0340829
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
542 FLYNN ROAD, CAMARILLO, CALIFORNIA 93012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 987-0086
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 periods 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 [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [_] No [X].
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of November 12, 2003 was 9,367,915.
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BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2003
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as
of September 30, 2003 and December 31, 2002 .................. 3
Condensed Consolidated Statements of
Operations for the Three and Nine months
ended September 30, 2003 and 2002 ............................ 4
Condensed Consolidated Statements of Cash
Flows for the Nine months ended September
30, 2003 and 2002 ............................................ 5
Notes to Condensed Consolidated Financial
Statements ................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ...................................................... 26
ITEM 4. CONTROLS AND PROCEDURES .......................................... 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................ 28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ........................ 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................................. 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 28
ITEM 5. OTHER INFORMATION ................................................ 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 28
SIGNATURES ................................................................ 30
2
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 1,544 5,941
Accounts receivable, less allowance
for doubtful accounts of $221 at
September 30, 2003 and $261 at
December 31, 2002 ........................... 7,199 6,157
Inventories, net .............................. 10,485 8,880
Prepaid expenses and other current
assets ...................................... 1,106 538
Deferred income taxes ......................... 2,245 1,873
-------- --------
Total current assets ................ 22,579 23,389
Property and equipment, net ...................... 6,675 7,398
Intangible assets net of accumulated
amortization of $3,090 at September 30,
2003 and $2,655 at December 31, 2002 ............ 5,641 6,076
Goodwill ......................................... 307 307
Other assets ..................................... 569 526
Deferred tax assets .............................. 8,810 8,810
-------- --------
$ 44,581 46,506
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 2,547 3,115
Accrued expenses .............................. 3,085 2,910
Deferred revenue .............................. 291 427
Income tax payable ............................ 403 341
-------- --------
Total current liabilities ........... 6,326 6,793
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value
Authorized 20,000,000 shares:
issued and outstanding 9,260,020
shares at September 30, 2003 and
9,676,931 at December 31, 2002 ............... 9 10
Additional paid-in capital ..................... 41,975 44,500
Accumulated deficit ............................ (3,036) (3,382)
Accumulated other comprehensive loss ........... (693) (1,415)
-------- --------
Net stockholders' equity ............ 38,255 39,713
-------- --------
$ 44,581 46,506
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREEAND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales ............................... $ 10,744 10,101 33,377 30,175
Cost of sales ........................... 5,079 4,365 15,160 13,109
-------- -------- -------- --------
Gross profit ........................ 5,665 5,736 18,217 17,066
-------- -------- -------- --------
Operating expenses:
Research and development ............ 1,687 1,557 5,530 4,362
Sales and marketing ................. 2,188 1,961 7,064 6,239
General and administrative .......... 1,729 1,394 4,664 4,325
Amortization of intangibles ......... 145 160 435 481
-------- -------- -------- --------
Total operating expenses ....... 5,749 5,072 17,693 15,407
-------- -------- -------- --------
Operating income (loss) ................. (84) 664 524 1,659
Interest income (expense), net .......... (2) 21 26 82
Other expense, net ...................... (19) (8) (101) (10)
-------- -------- -------- --------
Income (loss) before income taxes ....... (105) 677 449 1,731
Income tax expense (benefit) ............ (24) 149 103 381
-------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change ... (81) 528 346 1,350
Cumulative effect of accounting change
(net of applicable income taxes $1,759) -- 423 -- (2,447)
-------- -------- -------- --------
Net income (loss) ....................... $ (81) 951 346 (1,097)
======== ======== ======== ========
Net income (loss) per share before
accounting change:
Basic ............................... $ (0.01) 0.05 0.04 0.14
======== ======== ======== ========
Diluted ............................. $ (0.01) 0.05 0.04 0.13
======== ======== ======== ========
Net income (loss) per share:
Basic ............................... $ (0.01) 0.10 0.04 (0.11)
======== ======== ======== ========
Diluted ............................. $ (0.01) 0.05 0.04 (0.11)
======== ======== ======== ========
Shares used to compute per share
amounts:
Basic ............................... 9,181 9,651 9,418 9,830
======== ======== ======== ========
Diluted ............................. 9,181 10,029 9,729 10,289
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Amounts in thousands)
(Unaudited)
2003 2002
------- -------
Cash flows from operating activities:
Net income (loss) ....................................... $ 346 (1,097)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ...................... 1,966 1,686
Cumulative effect of accounting change ............. -- 4,629
Changes in assets and liabilities:
Accounts receivable ................................ (706) (33)
Inventories ........................................ (1,051) (516)
Prepaid expenses and other current assets .......... (562) (192)
Deferred income taxes .............................. (372) (1,500)
Other assets ....................................... (43) (31)
Accounts payable ................................... (697) 13
Accrued expenses ................................... 30 (173)
Deferred revenue ................................... (135) 35
Income taxes payable ............................... 563 375
------- -------
Net cash provided from (used in) operating activities ... (663) 3,196
------- -------
Cash flows from investing activities:
Purchase of property and equipment ...................... (752) (2,632)
------- -------
Net cash used in investing activities .............. (752) (2,632)
------- -------
Cash flows from financing activities:
Proceeds from the exercise of options ................... 580 224
Payments to acquire treasury stock ...................... (3,478) (4,611)
------- -------
Net cash used in financing activities ......................... (2,898) (4,387)
------- -------
Net decrease in cash and cash equivalents .......... (4,313) (3,823)
Effect of exchange rates on cash and cash equivalents ......... (84) 150
Cash and cash equivalents at beginning of period .............. 5,941 9,471
------- -------
Cash and cash equivalents at end of period .................... $ 1,544 5,798
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................... $ 2 1
======= =======
Income taxes ....................................... $ 700 24
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of BioSource
International, Inc. (the "Company," "we," "us," or "our") are unaudited and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2002. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments that are necessary for
a fair presentation. The results of operations for the three and nine months
ended September 30, 2003, are not necessarily indicative of results to be
expected for the full fiscal year.
2. GENERAL
The Company develops, manufactures, markets and distributes products and
services that are widely used in biomedical research. Our products and services
enable scientists to better understand the biochemistry, immunology and cell
biology of the human body, aging and certain diseases such as cancer, arthritis
and other inflammatory diseases, AIDS and certain other infectious diseases. We
have a wide variety of products, including immunoassay and ELISA test kits;
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. We also manufacture and market custom oligonucleotides, peptides and
antibodies to the specifications of our customers. We use recombinant DNA
technology to produce cytokines and other proteins.
Through the first nine months ended September 30, 2003, the Company capitalized
its annual catalog production costs. In the past, the Company has expensed
catalog production costs as incurred, which was primarily in the first quarter
of its fiscal year. During 2002, and after production of the 2002 catalog, the
Company put substantial effort into increasing the number of customers in its
customer database and in conjunction with that, increased its dependence on its
catalog to attract more customers. As a result, the Company believes that its
2003 catalog is a direct response advertisement whose primary purpose is to
elicit sales to customers that respond specifically to the catalog resulting in
probable future economic benefit. Accordingly, beginning in 2003, the Company is
capitalizing its catalog production costs and expensing them evenly throughout
the fiscal year in accordance with the AICPA's Statement of Position 93-07. In
the first nine months of 2002, the Company expensed approximately $490,000 of
catalog costs compared to $442,000 for the first nine months of 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the EITF reached a consensus on Issue No. 00-21, REVENUE
ARRANGEMENTS WITH MULTIPLE DELIVERABLES." EITF 00-21 addresses the accounting
for contractual arrangements in which revenue-generating activities are
performed. In some situations, the different revenue-generating activities
(deliverables) are sufficiently separable and there exists sufficient evidence
for fair values to account separately for the different deliverables (that is,
there are separate units of accounting). In other situations, some or all of the
different deliverables are closely interrelated or there is not sufficient
evidence of fair value to account separately for the different deliverables.
EITF 00-21 addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. EITF 00-21 is
effective for interim periods beginning after June 30, 2003. The adoption of
EITF 00-21 did not have a material effect on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others." FIN No. 45 requires a company
to recognize a liability for the obligations it has undertaken to issue a
guarantee. This liability would be recorded at the inception of the guarantee
and would be measured at fair value. The measurement provisions of this
statement apply prospectively to guarantees issued or modified after December
31, 2002. The disclosure provisions of the statement apply to financial
statements for periods ending after December 15, 2002. The adoption of FIN No.
45 did not have a material impact on the Company's financial position or results
of operations.
6
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN 46 requires a company to consolidate variable interest entity if
it is designated as the primary beneficiary of that entity even if the company
does not have a majority voting interest. A variable interest entity is
generally defined as an entity where its equity is unable to finance its
activities or when the owners of the entity lack the risk and rewards of
ownership. The provisions of this statement apply at inception for any entity
created after January 31, 2003. For an entity created before February 1, 2003,
the provisions of this interpretation must be applied at the beginning of the
first interim or annual period beginning after June 15, 2003. The Company
believes that the adoption of FIN No. 46 will not have a material impact on its
financial position or results of operations.
3. INVENTORIES (AMOUNTS IN THOUSANDS):
SEPT. 30, DEC. 31,
2003 2002
------- -------
Raw materials ................ $ 3,054 2,703
Work in process .............. 755 493
Finished goods ............... 6,676 5,684
------- -------
$10,485 8,880
======= =======
4. PROPERTY AND EQUIPMENT (AMOUNTS IN THOUSANDS):
SEPT. 30, DEC. 31,
2003 2002
-------- --------
Machinery and equipment ...................... $ 9,443 9,241
Office furniture and equipment ............... 4,072 3,708
Leasehold improvements ....................... 1,794 1,530
-------- --------
15,309 14,479
Less accumulated depreciation and amortization (8,634) (7,081)
-------- --------
$ 6,675 7,398
======== ========
5. GOODWILL AND INTANGIBLE ASSETS - ADOPTION OF FINANCIAL ACCOUNTING
STATEMENT 142
The Company implemented Financial Accounting Standard ("FAS") 141 and 142 in
January 2002. Through the first nine months of 2002, the Company recognized a
charge, net of applicable income taxes, of $2,447,000 representing the
cumulative effect of a change in accounting principle resulting from the
implementation of FAS 142. The charge included the write off of all of the
goodwill related to the acquisition of Quality Controlled Biochemicals ("QCB")
and Biofluids in December 1998. The Company continues to carry certain
identifiable intangible assets with definite useful lives on its balance sheet.
The amortization associated with these identifiable intangible assets was
approximately $145,000 and $160,000 for the quarters ended September 30, 2003
and 2002, respectively and $435,000 and $481,000 for the nine months ended
September 30, 2003 and 2002, respectively.
6. STOCK OPTIONS, PURCHASE PLANS AND WARRANTS
The Company currently has two stock option plans in place - the 1993 Stock
Incentive Plan (the "1993 Plan") and the 2000 BSI non-qualified stock option
Plan (the "2000 Plan"). The Company is also a party to several stock option
agreements with several of its executive officers.
Under the 2000 Plan, non-qualified stock options may be granted to full-time
employees, part-time employees, directors and consultants of the Company to
purchase a maximum of 2,000,000 shares of the company's common stock. Options
granted under the 2000 Plan vest and are generally exercisable at the rate of
25% each year beginning one year from the date of grant. The stock options
generally expire ten years from the date of grant.
Under the 1993 Plan, incentive and non-qualified stock options may be granted to
full-time employees, part-time employees, directors and consultants of the
Company to purchase a maximum of 2,000,000 shares of common stock. Options
granted under the 1993 Plan vest and are generally exercisable at the rate of
25% each year beginning one year from the date of grant. The stock options
generally expire ten years from the date of grant.
7
The Company applies APB Opinion No. 25 in accounting for its stock option grants
to employees and directors, and accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements as the
market value of the Company's common stock at the date of grant was equal to its
exercise price on such date. Had the Company determined compensation cost based
upon the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income (loss) would have changed to the pro forma amounts
indicated below:
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
(in thousands, except per share data)
NET INCOME (LOSS):
As reported ............................ $ 346 (1,097)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of tax effects ................ (915) (1,697)
-------- --------
Pro forma net loss available to
common shareholders ............... $ (569) (2,794)
======== ========
NET INCOME (LOSS) PER SHARE:
Basic - as reported .................... $ 0.04 (0.11)
======== ========
Basic - pro forma ...................... $ (0.06) (0.28)
======== ========
Diluted - as reported .................. $ 0.04 (0.11)
======== ========
Diluted - pro forma .................... $ (0.06) (0.28)
======== ========
7. EARNINGS PER SHARE
The reconciliation of basic to diluted weighted average shares is as follows
(amounts in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ ------
Weighted average shares used in
basic computation ..................... 9,181 9,651 9,418 9,830
Dilutive stock options and warrants ........ 0 378 311 459
------ ------ ------ ------
Weighted average shares used for
diluted computation ................... 9,181 10,029 9,729 10,289
====== ====== ====== ======
Options to purchase 2,048,205 and 1,212,904 shares were not included in the
computation of diluted net income per share for the three month periods ended
September 30, 2003 and 2002, respectively because their effect would be
anti-dilutive.
Options to purchase 911,822 and 1,122,276 shares were not included in the
computation of diluted net income per share for the nine month periods ended
September 30, 2003 and 2002, respectively because their effect would be
anti-dilutive.
Warrants to purchase 1,287,000 shares at a weighted average exercise price of
$7.77 per share were outstanding as of September 30, 2003 and 2002 but were not
included in the computation of diluted net income per share for the three and
nine months ended September 30, 2003 and 2002 because their effect would be
anti-dilutive.
8
8. STOCKHOLDERS' EQUITY
Comprehensive income (loss) is determined as follows (amounts in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ ------
Net income (loss) ........................ $ (81) 951 346 (1,097)
Foreign currency translation
adjustments, net of tax ............... 123 30 723 730
------ ------ ------ ------
Total comprehensive income (loss) ........ $ 42 981 1,069 (367)
====== ====== ====== ======
9. BUSINESS SEGMENTS
The Company is engaged in a single industry, the licensing, development,
manufacture, marketing and distribution of immunological reagents, test kits and
oligonucleotides used in biomedical research and human diagnostics. Our
customers are not concentrated in any specific geographic region and no single
customer accounts for a significant amount of our sales.
Management of the Company has determined its reportable segments are strategic
business units that offer both sales to external customers from geographic
company facilities and sales to external customers in certain geographic
regions. These Strategic Business Units ("SBU's") are Signal Transduction
Products, Cytokine Products, and Custom Products. Significant reportable
business segments are the United States and European facilities, and sales to
external customers are summarized as those located in the United States, Europe,
Japan and other. We evaluate performance for the "Sales-from" segments on net
revenue and profit and loss from operations. Our SBU's are managed separately
because each business requires different marketing and distribution strategies.
Business information is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
SALES - FROM SEGMENTS (IN THOUSANDS):
Net sales to external customers from:
United States:
Domestic ...................... $ 5,917 5,951 18,325 17,952
Export ........................ 1,106 1,055 3,400 3,164
-------- -------- -------- --------
Total United States .... 7,023 7,006 21,725 21,116
Europe ............................ 3,721 3,095 11,652 9,059
-------- -------- -------- --------
Consolidated ........... $ 10,744 10,101 33,377 30,175
======== ======== ======== ========
Operating income (loss):
United States ..................... $ (665) (20) (1,573) (340)
Europe ............................ 581 684 2,097 1,999
-------- -------- -------- --------
Consolidated ........... $ (84) 664 524 1,659
======== ======== ======== ========
SALES - TO SEGMENTS (IN THOUSANDS):
Net sales to external customers in:
United States ..................... $ 5,917 5,951 18,329 17,952
Europe ............................ 3,162 2,725 9,957 7,984
Japan ............................. 867 842 2,693 2,601
Other ............................. 798 583 2,398 1,638
-------- -------- -------- --------
Consolidated ........... $ 10,744 10,101 33,377 30,175
======== ======== ======== ========
SALES - BY PRODUCT GROUP (IN THOUSANDS):
Net sales by product group:
Cytokine .......................... $ 4,862 4,627 15,222 13,872
Signaling ......................... 2,308 2,013 7,049 5,273
Custom ............................ 3,574 3,461 11,106 11,030
-------- -------- -------- --------
Consolidated ........... $ 10,744 10,101 33,377 30,175
======== ======== ======== ========
9
10. LINE OF CREDIT
In June 2003, the Company established a one-year revolving loan with a
commercial bank that allows the Company to withdraw from time to time amounts
that in the aggregate are not to exceed $2,500,000. The loan was established for
working capital and stock repurchase needs, when and as necessary. The principal
terms of the revolving loan include an interest rate of 2.75% on borrowed funds
and a quarterly unused balance fee of .375%. The principal covenants include
maintaining quarterly profitability, a maximum liability to tangible net worth
ratio of 1.0 to 1.0, and a minimum cash balance of $750,000 as of the end of
each fiscal quarter. The Company received a waiver from its commercial bank for
the three months ended September 30, 2003 with respect to the profitability
covenant it maintains on this one-year revolving loan. As of September 30, 2003
and from October 1, 2003 through November 12, 2003, the Company had no
borrowings under the revolving loan. The Company currently anticipates
maintaining the revolving loan until such time that management or the Board
believes that working capital and stock repurchase needs no longer require its
availability.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the consolidated financial statements, the
notes thereto and other information, including information set forth in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and all
other filings we made with the Securities and Exchange Commission from time to
time.
This Form 10-Q contains forward-looking statements, which are made pursuant to
the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. Within this Form 10-Q, words such as "believes," "designed,"
"anticipates," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
These forward-looking statements involve a number of risks and uncertainties,
including the timely development and market acceptance of our products and
technologies and other factors described throughout this Form 10-Q and in our
other filings with the Securities and Exchange Commission. The actual results
that we achieve may differ from any forward-looking statements due to such risks
and uncertainties. We do not undertake any obligation to revise or update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
OVERVIEW
Our Company develops, manufactures, markets and distributes products and
services that are widely used in biomedical research. Our products and services
enable scientists to better understand the biochemistry, immunology and cell
biology of the human body, aging and certain diseases such as cancer, arthritis
and other inflammatory diseases, and AIDS and certain other infectious diseases.
We have a wide variety of products, including immunoassay and ELISA test kits;
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. We also manufacture and market custom oligonucleotides, peptides and
antibodies to the specifications of our customers. We use recombinant DNA
technology to produce cytokines and other proteins. We have registered our
analyte specific reagents with the FDA and have received a license to sell these
products as Class I Medical Devices. We market these products to IN VITRO
diagnostic manufacturers and clinical reference laboratories as "active
ingredients" in the tests they produce to identify various specific diseases or
conditions. In order to market these products as medical devices, we are
required to be in compliance with the FDA's Current Good Manufacturing Practices
and Regulations.
CRITICAL ACCOUNTING POLICIES
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
10
liabilities. On an on-going basis, the Company evaluates its estimates. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. Specifically, management must make estimates in the following areas:
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The Company had $7,420,000 in gross trade accounts receivable and
$221,000 in allowance for doubtful accounts on the consolidated balance
sheet at September 30, 2003. The Company has procedures in place to
adequately review the credit worthiness of new customers and also to
properly review orders from existing customers to determine if a change
in credit terms is warranted. The Company determines its allowance for
doubtful accounts by looking at its entire outstanding invoices and,
based on certain criteria including past payment history and current
credit worthiness, determines specific customers and invoices that need
a specific allowance. This review of our allowance for doubtful
accounts is done timely and consistently throughout the year. The
Company has accounts receivable amounts from certain customers as of
September 30, 2003 whereby, if their financial condition changed and a
significant allowance needed to be created, could have a material
adverse effect on the Company's financial results for 2003.
INVENTORY ADJUSTMENTS TO LOWER OF COST OR MARKET.
The Company reviews the components of its inventory on a regular basis
for excess, obsolete and impaired inventory based on estimated future
usage and sales. The manufacturing process for antibodies has and may
continue to produce quantities substantially in excess of forecasted
usage and anticipated antibody sales volumes are highly uncertain and
realization of individual product cost may not occur. As a result, the
Company reserves its entire manufactured antibody inventory at 100% of
its value. As of September 30, 2003, the Company had $5,052,000 of
manufactured antibodies in its inventory and a reserve for these
antibodies totaling $5,052,000. The Company will continue to monitor
its antibody inventory and the continued need for a 100% reserve.
Additionally, material inventory write-downs in our inventory can occur
if competitive conditions or new product introductions by our customers
or us vary from our current expectations.
DEFERRED TAX ASSETS AND DEFERRED INCOME TAXES.
The Company has $11,055,000 in deferred income tax assets on its
consolidated balance sheet as of September 30, 2003. As of September
30, 2003, no valuation allowance has been set up to offset any of the
deferred tax assets. The ability to realize these deferred tax assets
depends entirely on the Company generating taxable income in the
future. The Company has used historical information as well as a
projected financial outlook to project taxable income amounts. The
Company believes it is more likely than not that it will be able to
realize these benefits in the future. A material change in our expected
realization of these assets would occur if the ability to deduct tax
loss carryforwards against future taxable income is altered. If our
projections involving tax planning and operating strategies do not
materialize or if significant changes in tax laws occur within the
various tax jurisdictions in which we operate, we would have to set up
a valuation allowance against our deferred tax assets that could
materially affect our tax expense and our financial results.
The Company believes the following critical accounting policies affect
our more significant judgements and estimates used in preparation of
our consolidated financial statements.
REVENUE RECOGNITION. The Company's revenue is generated from the sale
of products primarily manufactured internally. The Company does have a
small amount of products that are sold on an original equipment ("OEM")
basis. The Company sells standard and custom products directly to end
users and distributors and recognizes revenue upon transfer of title to
the customer, which occurs upon shipment. General sales and payment
terms to distributors are similar to those granted to end user
customers. Certain end user customers prepay for product and request
shipment of the product at future dates, primarily sera or media
products. The Company records deferred revenue until such time as a
product is shipped to a customer. Approximately 32% of the Company's
net sales for the nine months ended September 30, 2003
11
were to distributors compared to 28% for the nine months ended
September 30, 2002. The Company's distribution agreements do not
provide a general right of return. The amount of the Company's
inventory held by distributors is not believed to be substantial.
The Securities and Exchange Commission's Staff Accounting Bulletin No.
101, "Revenue Recognition," ("SAB 101") provides guidance on the
application of generally accepted accounting principles to selected
revenue recognition issues. The Company believes that its revenue
recognition policy is consistent with this guidance and in accordance
with generally accepted accounting principles. We do not anticipate any
changes to our revenue recognition and shipping policies in the future.
LONG-LIVED ASSETS. It is our policy, and in accordance with SFAS No.
144, to account for long-lived assets, including intangibles, at
amortized cost. As part of an ongoing review of the valuation and
amortization of long-lived assets, management assesses the carrying
value of such assets if facts and circumstances suggest that they may
be impaired. If this review indicates that long-lived assets will not
be recoverable, as determined by a non-discounted cash flow analysis
over the remaining amortization period, the carrying value of the
Company's long-lived assets would be reduced to its estimated fair
value based on discounted cash flows. As a result, the Company has
determined that its long-lived assets are not impaired as of September
30, 2003.
GOODWILL. FAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized to earnings, but instead
be reviewed for impairment in accordance with FAS No. 142. Effective
January 1, 2002, the Company's goodwill and other intangible assets are
accounted for under FAS No. 141 "Business Combinations" and FAS No. 142
"Goodwill and Other Intangible Assets." The Company used the present
value method for determining the fair value of its reporting units.
Through the first nine months of 2002, the Company recognized a charge,
net of applicable income taxes, of $2,447,000 representing the
cumulative effect of a change in accounting principle resulting from
the implementation of FAS 142. The charge included the write off of all
of the goodwill related to the acquisition of Quality Controlled
Biochemicals ("QCB") and Biofluids in December 1998. The Company
continues to carry certain identifiable intangible assets with definite
useful lives on its balance sheet. The amortization associated with
these identifiable intangible assets was approximately $435,000 and
$481,000 for the nine months ended September 30, 2003 and 2002,
respectively.
The Company reviewed its remaining goodwill for impairment in the third
quarter of 2002 and determined that the carrying value was not
impaired. Accordingly, the Company continues to carry the goodwill
related to its 1996 acquisition of certain assets and assumed
liabilities of Medgenix Diagnostics, SA, now BioSource Europe, S.A., a
wholly owned subsidiary of the Company, on its Consolidated Balance
Sheets.
ADVERTISING COSTS. For the nine months ended September 30, 2003, the
Company capitalized its annual catalog production costs. In the past,
the Company has expensed catalog production costs as incurred, which
was primarily in the first quarter of its fiscal year. During 2002, and
after production of the 2002 catalog, the Company put substantial
effort into increasing the number of customers in its customer database
and in conjunction with that, increased its dependence on its catalog
to attract more customers. As a result, the Company believes that its
2003 catalog is a direct response advertisement whose primary purpose
is to elicit sales to customers who respond specifically to the catalog
resulting in probable future economic benefit. Accordingly, beginning
in 2003, the Company is capitalizing its catalog production costs and
expensing them evenly throughout the fiscal year in accordance with the
AICPA's Statement of Position 93-07. In the first nine months of 2002,
the Company expensed approximately $490,000 of catalog costs compared
to $442,000 for the first nine months of 2003.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES: Net sales for the quarter ended September 30, 2003 were $10.7 million,
an increase of $600,000, or 6%, (3% after eliminating the $358,000 positive
impact of foreign exchange), compared to net sales for the quarter ended
September 30, 2002. The Company's increased sales and marketing expenditures,
including increased catalog distribution, and its continued investment in
research and development activities resulting in new products for sale, have
been primary drivers for its sales growth.
12
To better drive sales and profitability growth and focus on key market
opportunities the Company has divided its business into three core areas: The
Strategic Business Units ("SBU's") of Signal Transduction Products, Cytokine
Products, and Custom Products. Signal Transduction Products consist of the
proteins, antibodies, assays and other reagents used to study internal cellular
processes. Our phosphospecific antibodies and phosphoELISA(TM)s are included in
this SBU. Cytokine Products include the proteins, antibodies, assays and other
reagents that are used to study the processes by which cells communicate.
Interleukin, growth factor and other biological response modifier products are
included in this group. Custom Products includes oligonucleotides, custom
peptides and antibodies, cell culture and diagnostics and other reagents not
specifically categorized.
For the three months ended September 30, 2003, sales of the Company's Signal
Transduction Products, grew 15% compared to the comparable prior year quarter,
from $2,013,000 to $2,308,000. Signal Transduction Products represented
approximately 21% of our total sales for the three months ended September 30,
2003 and 20% of sales for the three months ended September 30, 2002. The Company
believes its volume of transactions in the signal transduction market is growing
and has opportunities for continued significant growth in this market. The
Company's sales growth in its Cytokine Products for the quarter ending September
30, 2003 was 5%, increasing from $4,627,000 to $4,862,000, compared to the three
months ended September 30, 2002. The Cytokine Products represent approximately
46% of our total sales for the three months ended September 30, 2003 and 2002,
respectively. The Cytokine market is a mature market which the Company believes
continues to have opportunities for solid sales growth through focused sales and
marketing efforts and through targeted research and development activities. The
Company's Custom Product lines, which represented approximately 33% and 34% of
our total sales for the three months ended September 30, 2003 and 2002
respectively, increased 3% compared to the comparable prior year quarter, from
$3,461,000 to $3,574,000. Increased diagnostic, sera and media and custom
antibody sales were offset by a decrease in oligonucleotide and custom peptide
sales.
For the three months ended September 30, 2003, the Company's North American net
sales were flat as compared to the three months ended September 30, 2002.
European sales for the three months ended September 30, 2003 increased 15% (9%
excluding the favorable effects of currency fluctuations), as compared to the
comparable prior year period. Sales in Japan and the rest of the world increased
18%, for the three months ended September 30, 2003 as compared to the three
months ended September 30, 2002. The increase in sales in Japan and the rest of
the world is primarily attributable to increased sales of diagnostic products
through our non-European distribution networks.
GROSS PROFIT: Gross profit margin was 53% for the three months ended September
30, 2003 and 57% for the three months ended September 30, 2002. Lower margins in
our Custom Product lines, an increase in our royalty expense and an increase in
our scrap and obsolescence accounted for a significant portion of the margin
decrease
RESEARCH AND DEVELOPMENT: Research and development expense for the three months
ended September 30, 2003 and 2002 was $1.7 million and $1.6 million and
represented 16% and 15% of sales, respectively. The increase of approximately
$100,000 in research and development expenses for the three months ended
September 30, 2003 when compared to the comparable prior year period reflects
the Company's incremental investment in additional personnel and materials
primarily in the Cytokine and Signal Transduction research areas. This total
investment in the Company's research capabilities has resulted in the increased
release of higher quality and novel products, which has produced increased sales
in both the Cytokine and Signaling product lines. Quarterly expenditures in
research and development for the remainder of 2003 are expected to be slightly
less than those occurring in the third quarter of 2003 due to one time start up
costs for products introduced in the first three quarters of 2003 and expected
efficiencies in R & D processing.
SALES AND MARKETING: Selling and marketing expenses were $2.2 million for the
three months ended September 30, 2003 and $2.0 million for the three months
ended September 30, 2002, representing 20% and 19% of sales, respectively. The
increase in sales and marketing is due to additional personnel costs and
marketing programs.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $1.7
million for the three months ended September 30, 2003, and $1.4 million for the
three months ended September 30, 2002, an increase of approximately $300,000.
This increase was due primarily to a charge of $235,000 related to costs
incurred in connection with the indefinite leave of absence and resignation of
Leonard Hendrickson, the Company's former President and Chief Executive Officer,
which occurred in September of 2003. As a percentage of sales, general and
administrative expenses represented 16% and 14% for the three months ended
September 30, 2003 and 2002, respectively.
13
Excluding the $235,000 charge for costs incurred with the leave of absence and
resignation of Mr. Hendrickson, G&A expenses as a percentage of sales would have
been 14%.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets for each of
the three months ended September 30, 2003 and 2002 amounted to $145,000 and
$160,000, respectively, and was related primarily to the amortization of the
identifiable intangible assets from the QCB and Biofluids acquisitions
transacted in 1998.
INTEREST INCOME (EXPENSE), NET: Net interest expense for the three months ended
September 30, 2003 was $2,000 which resulted from interest expense from
borrowings on the revolving loan offset by interest income derived from cash
investments. Interest income for the three months ended September 30, 2002 was
$21,000, which was related to interest income on cash invested in short-term
securities.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES: Net sales for the nine months ended September 30, 2003 were $33.4
million, an increase of $3.2 million, or 11% (6% after eliminating the
$1,529,000 positive impact of foreign exchange), compared to net sales for the
nine months ended September 30, 2002. The Company's increased sales and
marketing expenditures, including increased catalog distribution, and its
continued investment in research and development activities resulting in new
products for sale, have been primary drivers for sales growth in North America
and Europe.
For the nine months ended September 30, 2003, sales of the Company's Signal
Transduction Products, grew 34% compared to the comparable prior year period,
from $5,273,000 to $7,049,000. Signal Transduction Products represent
approximately 21% of our total sales for the nine months ended September 30,
2003 and 17% of sales for the nine months ended September 30, 2002. The Company
believes its volume of transactions in the signal transduction market is growing
and has opportunities for continued significant growth in this market. The
Company's sales growth in its Cytokine Products for the nine months ending
September 30, 2003 was 10%, increasing from $13,871,000 to $15,222,000 compared
to the nine months ended September 30, 2002. The Cytokine product line
represents approximately 46% of our total sales for each of the nine-month
periods ended September 30, 2003 and 2002. The Cytokine market is a mature
market which the Company believes continues to have opportunities for solid
sales growth through focused sales and marketing efforts and through targeted
research and development activities. Sales from the Company's Custom Product
lines increased 1% compared to the comparable prior year period, from
$11,030,000 to $11,107,000. The Custom Product line represents approximately 33%
of our total sales for the nine months ended September 30, 2003 as compared to
37% for the nine months ended September 30, 2002.
For the nine months ended September 30, 2003, the Company achieved net sales
growth in North America of 3% as compared to the nine months ended September 30,
2002. European sales for the nine months ended September 30, 2003 increased 24%
(12% excluding the favorable effects of currency fluctuations), as compared to
the comparable prior year period. Sales in Japan and the rest of the world
increased 19% for the nine months ended September 30, 2003 as compared to the
nine months ended September 30, 2002. Increases in diagnostic sales through our
non-European distributors were major contributors to this growth.
GROSS PROFIT: Gross profit margin was 55% for the nine months ended September
30, 2003 and 57% for the nine months ended September 30, 2002. The Company's
margin decreased 2% in part due to increases in its scrap and obsolescence and
lower margins in its custom product lines during the first nine months of 2003.
Lower margins from our European operations also contributed to this margin
reduction
RESEARCH AND DEVELOPMENT: Research and development expenses for the nine months
ended September 30, 2003 and 2002 were $5.5 million and $4.4 million and
represented 17% and 14% of sales, respectively. The increase in research and
development expenses for the nine months ended September 30, 2003, when compared
to the comparable prior year period reflects the Company's incremental
investment in additional personnel and materials in the Cytokine and Signal
Transduction research areas. The Company has made significant investments in its
R & D capabilities over the past 18 months. The result of this investment has
been the release of significantly more and higher quality novel products, and
resulted in increased sales in both the Cytokine and Signaling product lines.
Quarterly expenditures in R&D for the remainder of 2003 are expected to be less
than those in the first three
14
quarters of 2003 due to one time start up costs for products introduced in the
first three quarters of 2003 and expected efficiencies in R & D processing.
SALES AND MARKETING: Selling and marketing expenses were $7.1 million for the
nine months ended September 30, 2003 and $6.2 million for the nine months ended
September 30, 2002, representing 21% and 21% of sales, respectively. The
increase is due to additional investment in personnel and marketing programs.
The Company expects its quarterly sales and marketing expenses to decline in the
fourth quarter of 2003 from spending levels incurred in the first three quarters
of 2003 as a result of specific branding efforts occurring during the first nine
months of 2003 that are not anticipated to continue in the last quarter of 2003.
For the nine months ended September 30, 2003, the Company capitalized its annual
catalog production costs. In the past, the Company has expensed catalog
production costs as incurred, which was primarily in the first quarter of its
fiscal year. During 2002, and after production of the 2002 catalog, the Company
put substantial effort into increasing the number of customers in its customer
database and in conjunction with that, increased its dependence on its catalog
to attract more customers. As a result, the Company believes that its 2003
catalog is a direct response advertisement whose primary purpose is to elicit
sales to customers that respond specifically to the catalog resulting in
probable future economic benefit. Accordingly, beginning in 2003, the Company is
capitalizing its catalog production costs and expensing them evenly throughout
the fiscal year in accordance with the AICPA's Statement of Position 93-07. In
the first nine months of 2002, the Company expensed approximately $490,000 of
catalog costs compared to $442,000 for the first nine months of 2003.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $4.7
million and $4.3 million for the nine-month periods ended September 30, 2003 and
2002, respectively. As a percentage of sales, general and administrative
expenses represented 14% for both the nine months ended September 30, 2003 and
2002, respectively. Excluding a $235,000 charge for costs incurred with the
indefinite leave of absence and resignation of Mr. Hendrickson, the Company's
former CEO, G&A expenses as a percentage of sales would have been 13%.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets for each of
the nine months ended September 30, 2003 and 2002 amounted to $435,000 and
$481,000, respectively and is related primarily to the amortization of the
identifiable intangible assets from the QCB and Biofluids acquisitions
transacted in 1998.
INTEREST INCOME, NET: Net interest income for the nine months ended September
30, 2003 was $26,000 and $82,000 for the nine months ended September 30, 2002.
These amounts were primarily related to interest income on cash invested in
short-term securities during each of the respective nine-month periods.
INCOME TAX EXPENSE: The effective tax rate for the nine months ending September
30, 2003 is 23% compared to 22% for the nine months ended September 30, 2002.
The Company continues to benefit from R & D and other tax credits which when
applied to income levels for the periods presented is resulting in effective tax
rates lower than the current applicable federal and state statutory rates.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents equal to $1,544,000 as of September 30, 2003,
decreased by $4,397,000 from $5,941,000 at December 31, 2002. The decrease in
cash for the nine months ended September 30, 2003 was partially due to a cash
outlay of $3.5 million for the repurchase of 658,000 shares of the Company's
common stock through its stock repurchase program initiated in October 2001. For
the nine months ended September 30, 2003, the Company received $580,000 from the
issuance of common stock related to the exercise of stock options and spent
$752,000 on capital expenditures, primarily used for the purchase of laboratory
and manufacturing equipment. Net cash used in operating activities for the nine
months ended September 30, 2003 was $663,000 compared to net cash provided from
operations of $3,196,000 for the nine months ended September 30, 2002. The net
cash provided for operating activities in 2002 was positively affected by net
income before cumulative effect of accounting change of $1,350,000. Working
capital, which is the excess of current assets over current liabilities, was
$16,253,000 at September 30, 2003, as compared to $16,596,000 at December 31,
2002, representing a decrease of $343,000.
In October of 2001, the Company announced that its Board of Directors had
approved a stock repurchase program. The Board originally authorized the Company
to repurchase up to $5 million of its common stock and have the
15
program expire on June 30, 2003. The repurchases are to be made at the
discretion of management and could be made at any time, as market conditions
warrant. On July 19, 2002, the Company amended the stock repurchase program and
increased its repurchase commitment by $5 million to a total of $10 million. On
April 22, 2003, the Company again amended the stock repurchase program extending
the expiration date of the Company's current program from June 2003 until June
2004. In addition, the Board approved adding $5 million to its current $10
million dollar allowable repurchase commitment, bringing the total limit to $15
million. During the first nine months of 2003, the Company spent $3.5 million
repurchasing 658,000 shares of its common stock under its stock repurchase
program, bringing the total number of shares repurchased since October 2001 to
1,536,000 and total cash outlays to $8,700,000. All repurchased shares have been
retired. This has contributed to the reduction in weighted average basic shares
outstanding for the nine months ended September 30, 2003 to 9,418,000 compared
to the 9,830,000 diluted shares for the nine months ended September 30, 2002.
Since inception of the current stock repurchase program, the Company has
repurchased 15% of its outstanding common stock.
In June 2003, the Company established a one-year revolving loan with a
commercial bank that allows the Company to withdraw from time to time amounts
that in the aggregate are not to exceed $2,500,000. The loan was established for
working capital and stock repurchase needs, when and as necessary. The principal
terms of the revolving loan include an interest rate of 2.75% on borrowed funds
and a quarterly unused balance fee of .375%. The principal covenants include
maintaining quarterly profitability, a maximum liability to tangible net worth
ratio of 1.0 to 1.0, and a minimum cash balance of $750,000 as of the end of
each fiscal quarter. The Company received a waiver from its commercial bank for
the three months ended September 30, 2003 with respect to its profitability
covenant it maintains on this one-year revolving loan. As of September 30, 2003
and from October 1, 2003 through November 12, 2003, the Company had no
borrowings under the revolving loan. The Company currently anticipates
maintaining the revolving loan until such time that management or the Board
believes that working capital and stock repurchase needs no longer require its
availability.
The Company has never paid dividends on common stock and has no plans to do so
in fiscal 2003. Our earnings will be retained for reinvestment in the business.
The Company expects to be able to meet its future cash and working capital
requirements for operations and capital additions through currently available
funds and cash generated from operations, if any. However, we may raise
additional capital or utilize our revolving loan from time to time to take
advantage of favorable conditions in the market or in connection with our
corporate development activities.
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this report before purchasing shares of our common
stock. Investing in our common stock involves a high degree of risk. If any of
the following events or outcomes actually occur, our business, operating results
and financial condition would likely suffer. As a result, the trading price of
our common stock could decline, and you may lose all or part of the money you
paid to purchase our common stock.
RISKS RELATED TO OUR BUSINESS
FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.
We historically have sought, and will continue to seek, to increase our sales
and profitability primarily through the acquisition or internal development of
new product lines, additional customers and new businesses. Our historical
revenue growth is primarily attributable to our acquisitions and new product
development and, to a lesser extent, to increased revenues from our existing
products. We expect that future acquisitions, if successfully consummated, will
create increased working capital requirements, which will likely precede by
several months any material contribution of an acquisition to our net income.
Our ability to achieve our expansion objectives and to manage our growth
effectively and profitably depends upon a variety of factors, including:
o our ability to internally develop new products;
o our ability to make profitable acquisitions;
16
o integration of new facilities into existing operations;
o hiring, training and retention of qualified personnel;
o establishment of new relationships or expansion of existing
relationships with customers and suppliers; and
o availability of capital.
In addition, the implementation of our growth strategy will place significant
strain on our administrative, operational and financial resources and increased
demands on our financial systems and controls. Our ability to manage our growth
successfully will require us to continue to improve and expand these resources,
systems and controls. If our management is unable to manage growth effectively,
our operating results could be adversely affected. Moreover, there can be no
assurance that our historic rate of growth will continue, that we will continue
to successfully expand or that growth or expansion will result in profitability.
WE CANNOT GUARANTEE THAT OUR FUTURE ACQUISITIONS WILL BE SUCCESSFUL.
We compete for acquisition and expansion opportunities with companies which have
significantly greater financial and management resources than us. There can be
no assurance that suitable acquisition or investment opportunities will be
identified, that any of these transactions can be consummated, or that, if
acquired, these new businesses can be integrated successfully and profitably
into our operations. These acquisitions and investments may also require a
significant allocation of resources, which will reduce our ability to focus on
the other portions of our business, including many of the factors listed in the
prior risk factor.
REDUCTION OR DELAYS IN RESEARCH AND DEVELOPMENT BUDGETS AND IN GOVERNMENT
FUNDING MAY NEGATIVELY IMPACT OUR SALES.
Our customers include researchers at pharmaceutical and biotechnology companies,
academic institutions and government and private laboratories. Fluctuations in
the research and development budgets of these researchers and their
organizations could have a significant effect on the demand for our products.
Research and development budgets fluctuate due to numerous factors that are
outside our control and are difficult to predict, including changes in available
resources, spending priorities and institutional budgetary policies. Our
business could be seriously damaged by any significant decrease in life sciences
research and development expenditures by pharmaceutical and biotechnology
companies, academic institutions or government and private laboratories.
A significant portion of our sales has been to researchers, universities,
government laboratories and private foundations whose funding is dependent upon
grants from government agencies such as the U.S. National Institutes of Health
(the "NIH") and similar domestic and international agencies. Although the level
of research funding has increased during the past several years, we cannot
assure that this trend will continue. Government funding of research and
development is subject to the political process, which is inherently fluid and
unpredictable. Our revenues may be adversely affected if our customers delay
purchases as a result of uncertainties surrounding the approval of government
budget proposals. Also, government proposals to reduce or eliminate budgetary
deficits have sometimes included reduced allocations to the NIH and other
government agencies that fund research and development activities. A reduction
in government funding for the NIH or other government research agencies could
seriously damage our business.
Many of our customers receive funds from approved grants at particular times of
the year, as determined by the federal government. Grants have, in the past,
been frozen for extended periods or have otherwise become unavailable to various
institutions without advance notice. The timing of the receipt of grant funds
affects the timing of purchase decisions by our customers and, as a result, can
cause fluctuations in our sales and operating results.
17
WE RELY ON RAW MATERIALS AND SPECIALIZED EQUIPMENT FOR OUR MANUFACTURING, WHICH
WE MAY NOT ALWAYS BE ABLE TO OBTAIN ON FAVORABLE TERMS.
Our manufacturing process relies on the continued availability of high-quality
raw materials and specialized equipment. It is possible that a change in
vendors, or in the quality of the raw materials supplied to us, could have an
adverse impact on our manufacturing process and, ultimately, on the sale of our
finished products. We have from time to time experienced a disruption in the
quality or availability of key raw materials, which has created minor delays in
our ability to fill orders for specific test kits. This could occur again in the
future, resulting in significant delays, and could have a detrimental impact on
the sale of our products and our results of operations. In addition, we rely on
highly specialized manufacturing equipment that if damaged or disabled could
adversely affect our ability to manufacture our products and therefore
negatively impact our business.
OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO EXPAND OUR BUSINESS IS UNCERTAIN.
In the future, in order to expand our business through internal development or
acquisitions, we may need to raise substantial additional funds through equity
or debt financings, research and development financings or collaborative
relationships. However, this additional funding may not be available or, if
available, it may not be available on economically reasonable terms. In
addition, any additional funding may result in significant dilution to existing
stockholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through collaborative partners that may require
us to release material rights to our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS FOR NEW PRODUCTS MAY BE UNSUCCESSFUL.
We incur significant research and development expenses to develop new products
and technologies. There can be no assurance that any of these products or
technologies will be successfully developed or that if developed, will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and technologies. Any failure to translate research and
development expenditures into successful new product introductions could have an
adverse effect on our business.
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT.
Our business model of providing products to researchers working on a variety of
genetic projects requires us to develop a wide spectrum of products. To generate
broad product lines it is advantageous to sometimes license technologies from
others rather than depending exclusively on our own employees. As a result, we
believe our ability to license new technologies from third parties is and will
continue to be important to our ability to offer new products.
In addition, from time to time we are notified or become aware of patents held
by third parties that are related to technologies we are selling or may sell in
the future. After a review of these patents, we may decide to obtain a license
for these technologies from these third parties or discontinue the products.
There can be no assurance that we will be able to continue to successfully
identify new technologies developed by others. Even if we are able to identify
new technologies of interest, we may not be able to negotiate a license on
favorable terms, or at all. If we lose the rights to patented technology, we may
need to discontinue selling certain products or redesign our products, and we
may lose a competitive advantage. Potential competitors could in-license
technologies that we fail to license and potentially erode our market share for
certain products. Our licenses typically subject us to various
commercialization, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons out of our control. For example, the licensor could lose patent
protection for a number of reasons, including invalidity of the licensed patent.
We do not always receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
We are currently in the process of negotiating several of these licenses and
expect that we will also negotiate these types of licenses in the future. There
can be no assurances that we will be able to negotiate these licenses on
favorable terms, or at all.
18
OUR FUTURE SUCCESS DEPENDS ON THE TIMELY INTRODUCTION OF NEW PRODUCTS AND THE
ACCEPTANCE OF THESE NEW PRODUCTS IN THE MARKETPLACE.
Our ability to gain access to technologies needed for new products and services
also depends in part on our ability to convince licensors that we can
successfully commercialize their inventions. We cannot assure that we will be
able to continue to identify new technologies developed by others. Even if we
are able to identify new technologies of interest, we may not be able to
negotiate a license on favorable terms, or at all.
IF WE FAIL TO INTRODUCE NEW PRODUCTS, OR OUR NEW PRODUCTS ARE NOT ACCEPTED BY
POTENTIAL CUSTOMERS, WE MAY LOSE MARKET SHARE.
Rapid technological change and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers make an investment of time
in selecting and learning to use a new product, and then are reluctant to
switch. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
In the past we have experienced, and are likely to experience in the future,
delays in the development and introduction of products. We cannot assure that we
will keep pace with the rapid rate of change in life sciences research, or that
our new products will adequately meet the requirements of the marketplace or
achieve market acceptance. Some of the factors affecting market acceptance of
new products include:
o availability, quality and price relative to competitive products;
o the timing of introduction of the product relative to competitive
products;
o customers' opinion of the products utility;
o ease of use;
o consistency with prior practices;
o scientists' opinion of the product's usefulness;
o citation of the product in published research; and
o general trends in life sciences research.
The expenses or losses associated with unsuccessful product development
activities or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition. The
development, introduction and marketing of innovative products in our rapidly
evolving markets will require significant sustained investment. We cannot assure
that cash from operations or other sources will be sufficient to meet these
ongoing requirements.
COMPLIANCE WITH NEW RULES AND REGULATIONS CONCERNING CORPORATE GOVERNANCE MAY BE
COSTLY AND COULD HARM OUR BUSINESS.
The Sarbanes-Oxley Act, which was signed into law in July 2002, mandates, among
other things, that companies adopt new corporate governance measures and imposes
comprehensive reporting and disclosure requirements, sets stricter independence
and financial expertise standards for audit committee members and imposes
increased civil and criminal penalties for companies, their chief executive
officers and chief financial officers and directors for securities law
violations. In addition, the Nasdaq National Market, on which our common stock
is traded, has adopted additional comprehensive rules and regulations relating
to corporate governance. These laws, rules and
19
regulations will increase the scope, complexity and cost of our corporate
governance, reporting and disclosure practices, which could harm our results of
operations and divert management's attention from business operations. We also
expect these developments to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to
accept reduced coverage or incur substantially higher costs to obtain coverage.
Further, our board members, chief executive officer and chief financial officer
could face an increased risk of personal liability in connection with the
performance of their duties. As a result, we may have difficulty attracting and
retaining qualified board members and executive officers, which could harm our
business.
FAILURE TO ATTRACT AND RETAIN QUALIFIED SCIENTIFIC OR PRODUCTION PERSONNEL OR
LOSS OF KEY MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining this qualified personnel
base. Although we believe we have been and will be able to attract and retain
these personnel, there can be no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production and marketing, will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business. We generally do not enter into employment
agreements requiring these employees to continue in our employment for any
period of time.
Our success also will continue to depend to a significant extent on the members
of our management team. We do not maintain any "key man" insurance policies
regarding any of these individuals. We may not be able to retain the services of
our executive officers and key personnel or attract additional qualified members
to management in the future. The loss of services of any of our key management
or employees, could have a material adverse effect upon our business.
MANY OF OUR CUSTOMERS ARE OBTAINING OUR PRODUCTS THROUGH NEW DISTRIBUTION
CHANNELS AND METHODS THAT MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
A number of our customers have developed purchasing initiatives to reduce the
number of vendors they purchase from in order to lower their supply costs. In
some cases, these customers have established agreements with large distributors
which include discounts and the distributors' direct involvement with the
purchasing process. For similar reasons, many larger customers, including the
federal government, have special pricing arrangements, including blanket
purchase agreements. These agreements may limit our pricing flexibility with
respect to our products, which could adversely impact our business, financial
condition and results of operations. In addition, although we accept and process
some orders through our Internet website, we also implement sales through a
third party Internet vendor. Internet sales through third parties will
negatively impact our gross margins because we pay commission on these Internet
sales. On the other hand, if we do not enter into arrangements with third-party
e-commerce providers, we may lose customers who prefer to purchase products
using these Web sites. Our business may be harmed as a result of these Web sites
or other sales methods which may be developed in the future.
WE RELY ON AIR TRANSPORT TO SHIP PRODUCTS TO OUR CUSTOMERS.
We rely on the timely transport of raw materials. Any disruption in
transportation systems could have an adverse impact on our ability to
manufacture and supply products.
WE RELY ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL RISKS.
International sales accounted for approximately 45% and 41% of our revenues in
the first nine months of 2003 and 2002, respectively. International sales can be
subject to many inherent risks that are difficult or impossible for us to
predict or control, including:
o unexpected changes in regulatory requirements and tariffs;
20
o difficulties and costs associated with in staffing and managing foreign
operations, including foreign distributor relationships;
o longer accounts receivable collection cycles in certain foreign
countries;
o adverse economic or political changes;
o unexpected changes in regulatory requirements;
o more limited protection for intellectual property in some countries;
o changes in our international distribution network and direct sales
force;
o potential trade restrictions, exchange controls and import and export
licensing requirements;
o problems in collecting accounts receivable;
o potentially adverse tax consequences of overlapping tax structure; and
o impairment of the ability to transport goods internationally.
We intend to continue to generate revenues from sales outside North America in
the future. Future distribution of our products outside North America also may
be subject to greater governmental regulation. These regulations, which include
requirements for approvals or clearance to market, additional time required for
regulatory review and sanctions imposed for violations, as well as the other
risks indicated in the bullets listed above, vary by country. We may not be able
to obtain regulatory approvals in the countries in which we currently sell our
products or in countries where we may sell our products in the future. In
addition, we may be required to incur significant costs in obtaining necessary
regulatory approvals. Failure to obtain necessary regulatory approvals or any
other failure to comply with regulatory requirements could result in a material
reduction in our revenues and earnings.
We also depend on third-party distributors for a material portion of our
international sales. If we lose or suffer any significant reduction in sales to
any material distributor, our business could be materially adversely affected.
In addition, approximately 32% of our sales in the nine months ended September
30, 2003, were made in foreign currencies, primarily the Euro. A significant
portion of the foreign currencies in which we conduct our business is currently,
or may in the future be, denominated in Euros. We are not certain about the
future effect of the Euro on our business, financial condition or results of
operations. In the past, gains and losses on the collection of our accounts
receivable arising from international operations have contributed to negative
fluctuations in our results of operations. In general, increases in the exchange
rate of the United States dollar to foreign currencies cause our products to
become relatively more expensive to customers in those countries, leading to a
reduction in sales or profitability in some cases. We historically have not, and
currently are not, using hedging transactions or other means to reduce our
exposure to fluctuations in the value of the United States dollar as compared to
the foreign currencies in which many of our sales are made.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our operating results may vary significantly from quarter to quarter and from
year to year as a result of a variety of factors. These factors include:
o level of demand for our products;
o changes in our customer and product mix;
o timing of acquisitions and investments in infrastructure;
21
o competitive conditions;
o timing and extent of intellectual property litigation;
o exchange rate fluctuations; and
o general economic and political conditions.
We believe that quarterly comparisons of our financial results may not
necessarily be meaningful and should not be relied upon as an indication of
future performance. Additionally, if our operating results in one or more
quarters do not meet the expectations of security analysts or others, the price
of our common stock could be materially adversely affected. Our continued
investment in product development and sales and marketing are significantly
ongoing expenses. If revenue in a particular period falls short of expectations,
we may not be able to reduce significantly our expenditures for that period,
which would materially adversely affect the operating results for that period.
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL
PROPERTY RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS.
We regard our trademarks, trade secrets and other intellectual property as a
component of our success. We rely on trademark law and trade secret protection
and confidentiality and/or license agreements with employees, customers,
partners and others to protect our intellectual property. Effective trademark
and trade secret protection may not be available in every country in which our
products are available. We cannot be certain that we have taken adequate steps
to protect our intellectual property, especially in countries where the laws may
not protect our rights as fully as in the United States. In addition, our
third-party confidentiality agreements can be breached and, if they are, there
may not be an adequate remedy available to us. If our trade secrets become
known, we may lose our competitive position.
INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS.
Litigation regarding patents and other intellectual property rights is extensive
in the biotechnology industry. We are aware that patents have been applied for,
and in some cases issued to others, claiming technologies that are closely
related to ours. As a result, and in part due to the ambiguities and evolving
nature of intellectual property law, we periodically receive notices of
potential infringement of patents held by others. Although to date we have
successfully resolved these types of claims, we may not be able to do so in the
future.
In the event of an intellectual property dispute, we may be forced to litigate.
This litigation could involve proceedings declared by the U.S. Patent and
Trademark Office or the International Trade Commission, as well as proceedings
brought directly by affected third parties. Intellectual property litigation can
be extremely expensive, and these expenses, as well as the consequences should
we not prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology we use, we
might need to discontinue an important product or product line, alter our
products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all.
In addition to intellectual property litigation, other substantial, complex or
extended litigation could result in large expenditures by us and distraction of
our management. For example, lawsuits by employees, stockholders, collaborators
or distributors could be very costly and substantially disrupt our business.
Disputes from time to time with companies or individuals are not uncommon in our
industry, and we cannot assure you that we will always be able to resolve them
out of court.
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous and
radioactive materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state, local and foreign regulations, the risk
of accidental contamination of property or injury to individuals from these
materials cannot be completely
22
eliminated. In the event of an accident, we could be liable for any damages that
result, which could seriously damage our business and results of operations.
OUR SALES ARE SUBJECT TO SEASONALITY, WHICH MEANS THAT WE HAVE LESS REVENUE IN
SOME MONTHS.
We experience a slowing of sales in Europe during the summer months and
worldwide during the Christmas holidays. Generally, our fourth quarter revenues
are lower than our revenues in each of the first three quarters of the year. We
believe that period to period comparisons of our operating results may not
necessarily be reliable indicators of our future performance. It is likely that
in some future period our operating results will not meet expectations or those
of public market analysts, which could result in reductions in the market price
of our common stock.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
We face a potential risk of liability claims based on our products and services,
and we have faced such claims in the past. We carry product liability insurance
coverage which is limited in scope and amount but which we believe to be
adequate. We cannot assure you, however, that we will be able to maintain this
insurance at reasonable cost and on reasonable terms. We also cannot assure that
this insurance will be adequate to protect us against a product liability claim,
should one arise.
THE LABOR LAWS APPLICABLE TO OUR EMPLOYEES IN EUROPE MAY RESTRICT THE
FLEXIBILITY OF OUR MANAGEMENT.
As of October 31, 2003, 63 of our 262 employees worked for our BioSource Europe
subsidiary, which is located in Nivelles, Belgium. As a result of Belgian labor
laws, we are required to make specified severance payments in the event we
terminate a European employee. Accordingly, our management may be limited by the
application of the Belgian labor laws in the determination of staffing levels,
and may have less flexibility in making such determinations than our competitors
whose employees are not subject to similar labor laws.
RISKS ASSOCIATED WITH OUR INDUSTRY
THE BIOMEDICAL RESEARCH PRODUCTS INDUSTRY IS VERY COMPETITIVE, AND WE MAY BE
UNABLE TO CONTINUE TO COMPETE EFFECTIVELY IN THIS INDUSTRY IN THE FUTURE.
We are engaged in a segment of the biomedical research products industry that is
highly competitive. We compete with many other suppliers and new competitors
continue to enter the markets. Many of our competitors, both in the United
States and elsewhere, are major pharmaceutical, chemical and biotechnology
companies, and many of them have substantially greater capital resources,
marketing experience, research and development staffs, and facilities than we
do. Any of these companies could succeed in developing products that are more
effective than the products that we have or may develop and may also be more
successful than us in producing and marketing their products. We expect this
competition to continue and intensify in the future. Competition in our markets
is primarily driven by:
o product performance, features and liability;
o price;
o timing of product introductions;
o ability to develop, maintain and protect proprietary products and
technologies;
o sales and distribution capabilities;
o technical support and service;
o brand royalty;
23
o applications support; and
o breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to
our products, our business, financial condition and results of operations could
be materially adversely affected.
Our competitors have in the past and may in the future compete by lowering
prices. Our failure to anticipate and respond to price competition could reduce
our revenues and profits, and may damage our market share.
Our industry has also seen substantial consolidation in recent years, which has
led to the creation of competitors with greater financial and intellectual
property resources than us. In addition, we believe that the success that others
have had in our industry will attract new competitors. Some of our current and
future competitors also may cooperate to better compete against us. We may not
be able to compete effectively against these current or future competitors.
Increased competition could result in price reductions for our products, reduced
margins and loss of market share, any of which could adversely impact our
business, financial condition and results of operations.
AS A RESULT OF CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY, WE MAY LOSE
EXISTING CUSTOMERS OR HAVE GREATER DIFFICULTY OBTAINING NEW CUSTOMERS.
In recent years, the United States pharmaceutical industry has undergone
substantial consolidation. As part of many business combinations, companies
frequently reduce the number of suppliers used and we may not be selected as a
supplier after any business combination. Further, mergers or corporate
consolidations in the pharmaceutical industry could cause us to lose existing
customers and potential future customers, which could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE CURRENTLY SUBJECT TO GOVERNMENT REGULATION.
Our business is currently subject to regulation, supervision and licensing by
federal, state and local governmental authorities. Also, from time to time we
must expend resources to comply with newly adopted regulations, as well as
changes in existing regulations. If we fail to comply with these regulations, we
could be subject to disciplinary actions or administrative enforcement actions.
These actions could result in penalties, including fines.
RISKS ASSOCIATED WITH OUR COMMON STOCK
OUR STOCK PRICE HAS BEEN VOLATILE.
Our common stock is quoted on the Nasdaq National Market, and there has been
substantial volatility in the market price of our common stock. The trading
price of our common stock has been, and is likely to continue to be, subject to
significant fluctuations due to a variety of factors, including:
o fluctuations in our quarterly operating and earnings per share results;
o the gain or loss of significant contracts;
o loss of key personnel;
o announcements of technological innovations or new products by us or our
competitors;
o delays in the development and introduction of new products;
o legislative or regulatory changes;
o general trends in the industry;
24
o recommendations and/or changes in estimates by equity and market
research analysts;
o biological or medical discoveries;
o disputes and/or developments concerning intellectual property,
including patents and litigation matters;
o public concern as to the safety of new technologies;
o sales of common stock of existing holders;
o securities class action or other litigation;
o developments in our relationships with current or future customers and
suppliers; and
o general economic conditions, both in the United States and abroad.
As a result of these factors, and potentially others, the sales price of our
common stock has ranged from $2.41 to $32.00 per share from January 1, 1998,
through September 30, 2003, and from $5.00 to $7.97 per share from January 1,
2003, through September 30, 2003.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have affected the market price of our common stock, as
well as the stock of many biotechnology companies. Often, price fluctuations are
unrelated to operating performance of the specific companies whose stock is
affected.
In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has occurred against the issuing
company. If we were subject to this type of litigation in the future, we could
incur substantial costs and a diversion of our management's attention and
resources, each of which could have a material adverse effect on our revenue and
earnings. Any adverse determination in this type of litigation could also
subject us to significant liabilities.
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND UNDER APPLICABLE LAW
COULD IMPAIR THE ABILITY OF A THIRD PARTY TO TAKE OVER OUR COMPANY.
We are subject to various legal and contractual provisions that may impede a
change in our control, including the following:
o our adoption of a stockholders' rights plan, which could result in the
significant dilution of the proportionate ownership of any person that
engages in an unsolicited attempt to take over our company; and
o the ability of our board of directors to issue additional shares of our
preferred stock, which shares may be given superior voting,
liquidation, distribution and other rights as compared to our common
stock.
These provisions, as well as other provisions in our certificate of
incorporation and bylaws and under the Delaware General Corporations Law, may
make it more difficult for a third party to acquire our company, even if the
acquisition attempt was at a premium over the market value of our common stock
at that time.
Our principal stockholders and management own a significant percentage of our
capital stock and will be able to exercise significant influence over our
affairs. Our executive officers, directors and principal stockholders will
continue to beneficially own 34% of our outstanding common stock, based upon the
beneficial ownership of our common stock as of September 30, 2003. In addition,
these same persons also hold options to acquire additional shares of our common
stock, which may increase their percentage ownership of the common stock further
in the future. Accordingly, these stockholders:
o will be able to significantly influence the composition of our board of
directors;
25
o will significantly influence all matters requiring stockholder
approval, including change of control transactions; and
o will continue to have significant influence over our business.
This concentration of ownership of our common stock could have the effect of
delaying or preventing a change of control of us or otherwise discouraging a
potential acquirer from attempting to obtain control of us. This in turn could
have a negative effect on the market price of our common stock. It could also
prevent our stockholders from realizing a premium over the market prices for
their shares of common stock.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
AFFAIRS.
Our executive officers, directors and principal stockholders beneficially own
approximately 34% of our outstanding common stock, based upon the beneficial
ownership of our common stock as of September 30, 2003. As a result, these
stockholders, if they act together, could exert substantial influence over
matters requiring stockholder approval, including the election of directors and
approval of mergers and other significant corporate transactions. The voting
power of such persons may have the effect of delaying, preventing or deterring a
change in control, and could affect the market price of our common stock.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.
Some investors favor companies that pay dividends, particularly in general
downturns in the stock market. We have never declared or paid any cash dividends
on our common stock. We currently intend to retain any future earnings for
funding growth and we do not currently anticipate paying cash dividends on our
common stock in the foreseeable future. Because we may not pay dividends, the
return on this investment likely depends on selling this stock at a profit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
We conduct business in various foreign currencies and are therefore subject to
the transaction exposures that arise from foreign exchange rate movements
between the dates that foreign currency transactions are initiated and the date
that they are converted. We are also subject to certain exposures arising from
the translation and consolidation of the financial results of our foreign
subsidiaries. There can be no assurance that actions taken to manage such
exposures will continue to be successful or that future changes in currency
exchange rates will not have a material impact on our future cash collections
and operating results. We do not currently hedge either our transaction risk or
our economic risk.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
Members of the Company's management, including the Company's President and Chief
Executive Officer, Terrance J. Bieker, and Chief Financial Officer, Charles
Best, evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of September 30, 2003, the end of the
period covered by this report. Based upon that evaluation, Mr. Bieker and Mr.
Best believe that, as of September 30, 2003, the Company's disclosure controls
and procedures were effective in causing materials to be recorded, processed,
summarized and
26
reported by our management on a timely basis and to ensure that the quality and
timeliness of the Company's public disclosures complies with its Securities and
Exchange Commission disclosure obligations.
As of September 30, 2003, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
internal controls known to Mr. Bieker or to Mr. Best.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 18, 2003, the Company held its Annual Meeting of
Stockholders. At the annual meeting, there were 9,614,055 shares
entitled to vote and 8,436,179 shares were represented at the meeting
in person or by proxy. The following sets forth the identity of
directors elected for one year and until their respective successors
have been elected. In addition, the results of the voting on the
ratification of appointment of the Company's auditors are included:
1. Election of directors
BROKER
FOR AGAINST ABSTAIN NON-VOTES
------------------------------------------
Jean-Pierre L. Conte 8,343,782 0 92,397 0
Leonard M. Hendrickson 8,054,895 0 381,284 0
David J. Moffa 8,346,662 0 89,517 0
John R. Overturf, Jr. 8,357,743 0 78,436 0
Robert J. Weltman 8,387,823 0 48,356 0
2. Ratification of Auditors
BROKER
FOR AGAINST ABSTAIN NON-VOTES
------------------------------------------
8,386,748 39,120 10,311 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certificate of Terrance J. Bieker, Chief Executive
Officer of BioSource International, Inc. pursuant to
Rule 13a-14(a) under the Securities and Exchange Act
of 1934, as amended.
31.2 Certificate of Charles C. Best, Chief Financial
Officer of BioSource International, Inc. pursuant to
Rule 13a-14(a) under the Securities and Exchange Act
of 1934, as amended.
32.1 Certificate of Terrance J. Bieker and Charles C.
Best, Chief Executive Officer and Chief Financial
Officer, respectively, of BioSource International,
Inc. pursuant to Rule 13a-14(b) under the Securities
and Exchange Act of 1934, as amended.
28
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated July 22,
2003, reporting the issuance of a press release announcing the
Company's financial results for the fiscal quarter ended June
30, 2003.
The Company filed a current report on Form 8-K dated September
15, 2003, reporting the issuance of a press release announcing
the commencement of an indefinite medical leave of absence of
its then President and Chief Executive Officer.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOSOURCE INTERNATIONAL, INC.
(Registrant)
Date: November 13, 2003 /S/ TERRANCE J. BIEKER
----------------------------------------
Terrance J. Bieker
President and Chief Executive Officer
Date: November 13, 2003 /S/ CHARLES C. BEST
----------------------------------------
Charles C. Best
Executive Vice President and
Chief Financial Officer
30
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
31.1 Certificate of Terrance J. Bieker, Chief Executive Officer of
BioSource International, Inc. pursuant to Rule 13a-14(a) under
the Securities and Exchange Act of 1934, as amended.
31.2 Certificate of Charles C. Best, Chief Financial Officer of
BioSource International, Inc. pursuant to Rule 13a-14(a) under
the Securities and Exchange Act of 1934, as amended.
32.1 Certificate of Terrance J. Bieker and Charles C. Best, Chief
Executive Officer and Chief Financial Officer, respectively,
of BioSource International, Inc. pursuant to Rule 13a-14(b)
under the Securities and Exchange Act of 1934, as amended.
31