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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 MARCH 31, 2004
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 May 10, 2004 was 9,435,138.
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BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2004
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31, 2004
and 2003 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 24
ITEM 4. CONTROLS AND PROCEDURES 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 5. OTHER INFORMATION 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 28
2
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 3,794 3,297
Accounts receivable, less allowance for doubtful
accounts of $213 at March 31, 2004 and $258 at
December 31, 2003 ............................. 7,217 6,308
Inventories, net ................................ 9,170 9,074
Prepaid expenses and other current assets ....... 889 652
Deferred income taxes ........................... 2,363 2,363
-------- --------
Total current assets ...... 23,433 21,694
Property and equipment, net ........................ 6,191 6,235
Intangible assets net of accumulated amortization
of $3,319 at March 31, 2004 and $3,230 at
December 31, 2003 ............................. 5,362 5,500
Goodwill ........................................... 307 307
Other assets ....................................... 532 519
Deferred tax assets ................................ 10,078 10,078
-------- --------
$ 45,903 44,333
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 3,078 2,451
Accrued expenses ................................ 3,184 3,227
Deferred revenue ................................ 202 249
Income tax payable .............................. 527 104
-------- --------
Total current liabilities . 6,991 6,031
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value. Authorized
20,000,000 shares: issued and outstanding
9,403,951 shares at March 31, 2004 and
9,376,860 at December 31, 2003 ................ 9 9
Additional paid-in capital ....................... 42,698 42,633
Accumulated deficit .............................. (3,743) (4,452)
Accumulated other comprehensive gain (loss) ...... (52) 112
-------- --------
Net stockholders' equity .. 38,912 38,302
-------- --------
$ 45,903 44,333
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------
Net sales ...................................... $ 12,286 10,899
Cost of sales .................................. 5,426 4,690
-------- --------
Gross profit ............................... 6,860 6,209
-------- --------
Operating expenses:
Research and development ................... 1,385 1,979
Sales and marketing ........................ 2,470 2,388
General and administrative ................. 1,955 1,576
Amortization of intangibles ................ 139 145
-------- --------
Total operating expenses .............. 5,949 6,088
-------- --------
Operating income ............................... 911 121
Interest income, net ........................... 11 11
Other expense, net ............................. (25) (18)
-------- --------
Income before income taxes ..................... 897 114
Income tax expense ............................. 188 11
-------- --------
Net income ............................. $ 709 103
======== ========
Net income per share:
Basic ...................................... $ 0.08 0.01
======== ========
Diluted .................................... $ 0.07 0.01
======== ========
Shares used to compute per share amounts:
Basic ...................................... 9,395 9,635
======== ========
Diluted .................................... 9,752 10,026
======== ========
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
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Amounts in thousands)
(Unaudited)
2004 2003
------- -------
Cash flows from operating activities:
Net income ..................................... $ 709 103
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 631 653
Changes in assets and liabilities:
Accounts receivable ....................... (991) (864)
Inventories ............................... (235) (350)
Prepaid expenses and other
current assets ....................... (240) (324)
Other assets .............................. (14) (11)
Accounts payable .......................... 669 (525)
Accrued expenses .......................... (34) (173)
Deferred revenue .......................... (47) (49)
Income taxes payable ...................... 446 313
------- -------
Net cash provided from (used in)
operating activities ...................... 894 (1,227)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............. (502) (238)
------- -------
Net cash used in investing
activities ........................... (502) (238)
------- -------
Cash flows from financing activities:
Proceeds from the exercise of options .......... 65 95
Payments to acquire treasury stock ............. -- (666)
------- -------
Net cash provided from (used in)
financing activities ...................... 65 (571)
------- -------
Net increase (decrease) in cash
and cash equivalents ................. 457 (2,036)
Effect of exchange rates on cash and cash
equivalents ..................................... 40 (65)
Cash and cash equivalents at beginning of
period .......................................... 3,297 5,941
------- -------
Cash and cash equivalents at end of period ........... $ 3,794 3,840
======= =======
Supplemental disclosure of cash flow
information: Cash paid during the
period for:
Interest .................................. $ 2 --
======= =======
Income taxes .............................. $ 132 --
======= =======
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, 2003. 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 months ended March
31,2004, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
This interpretation clarifies the application of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements" (ARB 51), and requires companies to
evaluate variable interest entities for specific characteristics to determine
whether additional consolidation and disclosure requirements apply. This
interpretation is immediately applicable for variable interest entities created
after January 31, 2003, and applies to the first fiscal year or interim period
beginning after June 15, 2003 for variable interest entities acquired prior to
February 1, 2003. The adoption of this interpretation did not have any impact on
our financial position or results of operations. In December 2003, the FASB
revised FIN 46 to exempt certain entities from its requirements and to clarify
certain issues arising during the implementation of FIN 4. The adoption of this
revised interpretation in the first quarter of 2004 did not have an impact on
our consolidated financial statements.
3. INVENTORIES (AMOUNTS IN THOUSANDS):
MARCH 31, 2004 DEC. 31, 2003
-------------- -------------
Raw materials ................ $3,197 3,193
Work in process .............. 503 455
Finished goods ............... 5,470 5,426
------ ------
$9,170 9,074
====== ======
6
4. PROPERTY AND EQUIPMENT (AMOUNTS IN THOUSANDS):
MARCH 31, DEC. 31,
2004 2003
-------- --------
Machinery and equipment ...................... $ 9,463 9,225
Office furniture and equipment ............... 4,320 4,270
Leasehold improvements ....................... 1,942 1,874
-------- --------
15,725 15,369
Less accumulated depreciation and amortization (9,534) (9,134)
-------- --------
$ 6,191 6,235
======== ========
5. 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 a stock option agreement
with a former Chief Executive Officer.
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 were 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 vested and were generally exercisable at the rate of
25% each year beginning one year from the date of grant. The stock options
generally expired ten years from the date of grant. On December 31, 2003, the
1993 Stock Option Plan expired by its own terms. Therefore, the Company will no
longer grant stock options under that plan.
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 would have changed to the pro forma amounts indicated
below:
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
(in thousands, except per share data)
NET INCOME:
As reported ................................... $ 709 103
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of tax effects ....................... (257) (278)
--------- ---------
Pro forma net income (loss) available to
common shareholders ...................... $ 452 (175)
========= =========
NET INCOME (LOSS) PER SHARE:
Basic - as reported ........................... $ 0.08 0.01
========= =========
Basic - pro forma ............................. $ 0.05 (0.02)
========= =========
Diluted - as reported ......................... $ 0.07 0.01
========= =========
Diluted - pro forma ........................... $ 0.05 (0.02)
========= =========
7
6. EARNINGS PER SHARE
The reconciliation of basic to diluted weighted average shares is as follows
(amounts in thousands):
THREE MONTHS ENDED
MARCH 31,
2004 2003
--------- --------
Weighted average shares used in
basic computation ............................ 9,395 9,635
Dilutive stock options and warrants ............... 357 391
--------- --------
Weighted average shares used for
diluted computation .......................... 9,752 10,026
========= ========
Options to purchase 757,884 and 1,036,962 shares were not included in the
computation of diluted net income per share for the three month periods ended
March 31, 2004 and 2003, 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 March 31, 2004 and 2003 but were not
included in the computation of diluted net income per share for the three months
ended March 31, 2004 and 2003 because their effect would be anti-dilutive.
7. STOCKHOLDERS' EQUITY
Comprehensive income is determined as follows (amounts in thousands):
THREE MONTHS ENDED
MARCH 31,
2004 2003
--------- --------
Net income ........................................ $ 709 103
Foreign currency translation adjustments,
net of tax ..................................... (164) 240
--------- --------
Total comprehensive income ........................ $ 545 343
========= ========
8. 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 product group requires different marketing and distribution
strategies. Business information is summarized as follows:
8
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------
SALES - FROM SEGMENTS (IN THOUSANDS):
Net sales to external customers from:
United States:
Domestic ................................ $ 6,350 6,027
Export .................................. 1,605 1,116
-------- --------
Total United States .............. 7,955 7,143
Europe ...................................... 4,331 3,756
-------- --------
Consolidated ..................... $ 12,286 10,899
======== ========
Operating income (loss):
United States ............................... $ (183) (737)
Europe ...................................... 1,094 858
-------- --------
Consolidated ..................... $ 911 121
======== ========
SALES - TO SEGMENTS (IN THOUSANDS):
Net sales to external customers in:
United States ............................... $ 6,352 6,027
Europe ...................................... 3,902 3,286
Asia-Pacific ................................ 1,619 1,235
Other ....................................... 413 351
-------- --------
Consolidated ..................... $ 12,286 10,899
======== ========
SALES - BY PRODUCT GROUP (IN THOUSANDS):
Net sales by product group:
Cytokine .................................... $ 5,763 4,920
Signaling ................................... 2,560 2,250
Custom ...................................... 3,963 3,729
-------- --------
Consolidated ..................... $ 12,286 10,899
======== ========
9. 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 and December 31, 2003 with respect to
the profitability covenant it maintains on this one-year revolving loan. The
Company had no borrowings under the revolving loan during 2004. The line of
credit expires on June 30, 2004. The Company currently anticipates maintaining
the revolving loan until such time that management believes that working capital
and stock repurchase needs no longer require its availability.
9
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, 2003, 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 -
BioSource develops, manufactures, markets and distributes products and services
that are widely used in biomedical research. Its 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. The Company
has a wide variety of products, including immunoassay and ELISA test kits and
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. The Company also manufactures and markets custom oligonucleotides,
peptides and antibodies to the specifications of its customers. It uses
recombinant DNA technology to produce cytokines and other proteins and has
registered its analyte specific reagents with the FDA for which it has received
a license to sell such products as Class I Medical Devices. The Company markets
these products to in vitro diagnostic manufacturers and clinical reference
laboratories as "active ingredients" in the tests those parties produce to
identify specific diseases or conditions. In order to market these products as
medical devices, BioSource is required to be in compliance with the FDA's
Current Good Manufacturing Practices and Regulations. The Company believes it
offers a unique combination of technological, production, and research and
development skills resulting in a spectrum of products and services for the
worldwide pharmaceutical and biotechnology industries.
The Company manufactures products for inventory and typically ships products
shortly after receipt of orders and anticipates that it will continue to do so
in the future. Accordingly, the Company has not developed a significant backlog
of products and does not anticipate it will develop a material backlog of
products in the future.
During 2003, to better drive sales and profitability growth, and to focus on key
market opportunities, the Company began analyzing its business as three separate
product categories, or Strategic Business Units, "SBUs." These SBUs consist 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.
In November 2003, the Company hired Terrance J. Bieker as its new President and
Chief Executive Officer. With Mr. Bieker's leadership, during the fourth quarter
of 2003, the Company developed and implemented a business plan that clarifies
the Company's strategic focus for the future. This fundamental shift in strategy
is to focus the Company's time, effort and financial resources on its core
strengths as an assay company. These assay products are higher margin products
and generally fall into two categories, Cytokine and Signal Processing Assays.
The Company will be placing a more direct focus in the sales of cytokine assays
and their directly related products and the sales of signal transduction assays
and their directly related products. This strategic plan is designed to allow
10
BioSource to penetrate and increase its market share in the cytokine assay
market and continue to maintain a strong leadership position in the signaling
market, which includes the trademarked PhosphoELISA(TM) assays. This strategy
will focus the Company's direction on these high margin products and allow it to
more effectively market their complimentary product lines, including our Phospho
Site Specific Antibodies, or PSSA's, and our sera and media and custom products:
peptides, antibodies and oligonucleotides.
As a result of this new strategic direction, certain assumptions related to
fixed, working and human assets have been and will continue to be evaluated.
With a more focused approach on assay kits and the directly related product
lines, certain other non-strategic products have been and may continue to be
discontinued. The Company realizes that certain of its products may not possess
the characteristics for significant growth or adequate profit margins in order
for the Company to continue to provide such products. This strategic shift has
and will continue to cause the Company to review its existing product line and
certain inventory levels and values.
The implementation of this new strategy is intended to bring continued positive
organic growth to the Company's sales for 2004 and beyond. The increased
investment in sales and marketing, in conjunction with our new strategy is
designed to bring a more focused approach to promoting and selling assays and
their directly related products. In addition, we have incorporated a corporate
account strategy into our selling approach which we believe will help support
our organic sales growth. With this strategy of a more focused approach on
assays and their directly related product lines the Company believes overall
gross profit and gross product margins should improve in 2004, when compared to
2003 due to its more focused approach on selling assays, a higher margin product
than many of its other products. As a result, the Company also believes
operating results should also improve in 2004 compared to 2003. Management's
longer term financial objective is to generate increasing annual operating
profits to the Company.
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
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 $7,430,000 in gross trade accounts receivable and
$213,000 in allowance for doubtful accounts on the consolidated balance
sheet at March 31, 2004. 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 on a regular basis throughout the year. The Company
has accounts receivable amounts from certain customers as of March 31,
2004 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 2004.
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
11
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 March 31,
2004, the Company had $5,035,000 of manufactured antibodies in its
inventory and a reserve for these antibodies totaling $5,035,000. 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 $12,441,000 in deferred income tax assets on its
consolidated balance sheet as of March 31, 2004. A large component of
the Company's deferred tax assets is its net operating losses. The
federal NOL's are available to offset future taxable income, if any,
through 2020 to 2023. The state NOL's are available to offset future
taxable income, if any, through 2006 to 2023.
As of March 31, 2004, the Company has a valuation allowance for
deferred tax assets related to net operating losses it has accumulated
for the State of Massachusetts. This allowance is included in the net
deferred tax assets on its balance sheet as of March 31, 2004. The
ability to realize these net 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, except for the
valuation allowance previously discussed, it is more likely than not
that they will be able to realize the current value of net 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. In such cases, the Company records deferred revenue until
such time as a product is shipped to a customer. Approximately 27% of
the Company's net sales for the three months ended March 31, 2004 were
to distributors compared to 25% for the three months ended March 31,
2003. The Company's distribution agreements do not provide a general
right of return. The amount of the Company's products held by
distributors in inventory is not believed to be substantial.
The Securities and Exchange Commission's Staff Accounting Bulletin No.
104, "Revenue Recognition," ("SAB 104") 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. No impairment indicators were
identified during the first quarter of 2004 and accordingly, the
Company has determined that its long-lived assets are not impaired as
of March 31, 2004.
12
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
NET SALES: Net sales for the quarter ended March 31, 2004 were $12.3 million, an
increase of $1.4 million or 13% compared to net sales for the quarter ended
March 31, 2003. The Company's revenues benefited by a $594,000, or 6% positive
impact of foreign exchange for the quarter ended March 31, 2004 when compared to
the quarter ended March 31, 2003.
For the three months ended March 31, 2004, sales of the Company's Signal
Transduction Products, grew 14% compared to the comparable prior year quarter,
from $2.3 million to $2.6 million. Signal Transduction Products represented
approximately 21% of our total sales for both the three months ended March 31,
2004 and 2003. The Company believes the signal transduction market is growing
and that it has opportunities for continued growth in this market. The Company's
sales growth in its Cytokine Products for the quarter ending March 31, 2004 was
17%, increasing from $4.9 million to $5.7 million compared to the three months
ended March 31, 2003. The Cytokine Products represent approximately 47% of our
total sales for the three months ended March 31, 2004 and 45% for the three
months ended March 31, 2003, 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 32% and 34% of our total sales for the three months
ended March 31, 2004 and 2003 respectively, increased 7% compared to the
comparable prior year quarter, from $3.7 million to $4.0 million. 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 March 31, 2004, the Company's North American net
sales increased 5% as compared to the three months ended March 31, 2003.
European sales for the three months ended March 31, 2004 increased 19% as
compared to the comparable prior year period due in part to increased sales in
our European signaling products. Sales in Japan and the rest of the world
increased 28%, for the three months ended March 31, 2004 as compared to the
three months ended March 31, 2003. The increase in sales in Japan and the rest
of the world in the first quarter of 2004 compared to the first quarter of 2003
is primarily attributable to increased sales to our Japanese distributors.
GROSS PROFIT: Gross profit margin was 56% for the three months ended March 31,
2004 and 57% for the three months ended March 31, 2003. The Company's increases
in its Custom and European gross margins when compared to the first quarter of
2003 were offset by a decline in gross margins in the US. The Company does not
believe this is indicative of any trends and expects its gross profit margin to
fluctuate somewhat during the remaining quarters of 2004.
RESEARCH AND DEVELOPMENT: Research and development expense for the three months
ended March 31, 2004 and 2003 was $1.4 million and $2.0 million and represented
11% and 18% of sales, respectively. The decrease of approximately $600,000 is
related to reductions in payroll and related costs and general lab supplies and
reflects the Company's efforts to align R & D investment to its core
capabilities and new strategic direction. The Company anticipates its R & D
expenses to moderately increase in the remaining quarters of 2004.
SALES AND MARKETING: Selling and marketing expenses were $2.5 million for the
three months ended March 31, 2004 and $2.4 million for the three months ended
March 31, 2003, representing 20% and 22% of sales, respectively. The increase in
sales and marketing is due to modest increases in payroll and office expenses.
The Company anticipates its sales and marketing expenses to remain relatively
constant throughout the remaining quarters of 2004
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $1.9
million for the three months ended March 31, 2004, and $1.6 million for the
three months ended March 31, 2003, an increase of approximately $300,000. This
increase was due primarily to increases in benefits, legal, accounting and other
consulting fees. As a percentage of sales, general and administrative expenses
represented 16% and 14% for the three months ended March 31, 2004 and 2003,
respectively. The Company anticipates its general and administrative expenses
will rise slightly in the remaining quarters of 2004 due to increases in
benefits, legal and accounting fees related to implementation of new regulatory
requirements resulting from the Sarbanes-Oxley Act of 2002.
13
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets for each of
the three months ended March 31, 2004 and 2003 amounted to $139,000 and
$145,000, respectively, and was related primarily to the amortization of the
identifiable intangible assets.
INTEREST INCOME, NET: Net interest income for the three months ended March 31,
2004 and 2003 was $11,000 which primarily resulted from interest income derived
from an income tax refund.
INCOME TAX EXPENSE: The Company's effective income tax rate was 21% with an
income tax expense of $188,000 for the quarter ended March 31, 2004. The
Company's income taxes have and may continue to fluctuate in the future
depending on a number of factors, including the ability to use its deferred tax
assets as of March 31, 2004. The Company believes it is more likely than not
that it will be able to use those assets. In addition, 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 $3,794,000 as of March 31, 2004, increased by
$497,000 from $3,297,000 at December 31, 2003. For the three months ended March
31, 2004, the Company received $65,000 from the issuance of common stock related
to the exercise of stock options and spent $502,000 on capital expenditures,
primarily for the purchase of laboratory and manufacturing equipment. Net cash
provided from operating activities for the three months ended March 31, 2004 was
$894,000, derived primarily from operating income for the three months ended
March 31, 2004. Working capital, which is the excess of current assets over
current liabilities, was $16,442,000 at March 31, 2004, as compared to
$15,663,000 at December 31, 2003, representing an increase of $779,000.
The Company has a stock repurchase program under which it can repurchase up to
$15 million of its common stock. Consistent with its determination to adopt the
stock repurchase program in October 2001, the Company's Board of Directors
continues to believe that the price at which the Company's common stock is
currently trading is not a proper reflection of its long-term value, and that
utilizing the Company's excess cash to repurchase its shares, in the discretion
of management and when market conditions permit, is an efficient way in which to
continue to increase that value. During the first three months of 2004, the
Company did not repurchase any shares of its common stock under its stock
repurchase program. From October 2001 through May 7, 2004, the Company has
repurchased 1,536,000 common shares, representing approximately 15% of its
outstanding common shares, with cash outlays totaling $8,700,000. All
repurchased shares have been retired.
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 and December 31, 2003 with respect to
the profitability covenant it maintains on this one-year revolving loan. The
Company had no borrowings under the revolving loan during 2004. The line of
credit expires on June 30, 2004. 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 2004. 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.
14
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 occurs, 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 EXECUTE ON OUR NEWLY ADOPTED LONG-TERM STRATEGIC PLAN COULD IMPAIR
OUR BUSINESS.
The Company historically has sought to increase its 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. In the quarter
ended December 31, 2003, we adopted a fundamental shift in strategy to focus our
time, effort and financial resources on our core strengths as an assay company.
We have built a strategic plan to continue to penetrate and increase our market
share in the cytokine assay market and continue to maintain a strong leadership
position in the signal transduction assay market. This strategy will focus our
energies on these high margin products and allow us to pull through our
complimentary product lines, including our Phospho Site Specific Antibodies, or
PSSA's, sera and media and our custom products, peptides, antibodies and
oligonucleotides.
Our ability to achieve our new strategic objectives depends upon a variety of
factors, including:
o the market's continuing acceptance of our assay products;
o our ability to internally develop new products;
o our ability to acquire products or licenses to necessary technologies;
o our ability to facilitate transactions with strategic partners;
o establishment of new relationships or expansion of existing
relationships with customers and suppliers; and
o availability of capital.
Additionally, our shift in strategy has caused us to evaluate other
non-strategic products, such as outsourced cell surface marker antibodies and
discontinue them. The Company reviewed its catalog of products in the fourth
quarter of 2003 and eliminated over 400 non-strategic products. This evaluation
of catalog products is expected to continue in the future. While the impact to
our financial results from our continuing evaluation of catalog products is
unknown at this time, any such evaluation could be material to the operating
results of the Company.
If our management is unable to manage this strategic shift effectively, our
operating results could be adversely affected. Moreover, there can be no
assurance that our historic rate of growth will continue through this strategic
shift, 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.
The Company competes 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.
15
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
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.
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. 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.
OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO EXPAND OUR BUSINESS OR OTHERWISE
ACHIEVE OUR LONG-TERM OBJECTIVES IS UNCERTAIN.
In the future, in order to expand our business through internal development or
acquisitions or to otherwise achieve our long-term objectives, 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.
16
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.
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.
17
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 product's 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.
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 are critical to
our success. We are in a very competitive industry and 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 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,
18
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
Any disruption in standard air transport systems could have an adverse effect on
our business.
WE RELY ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL RISKS.
International sales accounted for approximately 48% of our revenues in the first
three months of 2004 and 45% of our revenues in the first three months of 2003.
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;
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; 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; and
o potentially adverse tax consequences of overlapping tax structure.
IMPAIRMENT OF THE ABILITY TO TRANSPORT GOODS INTERNATIONALLY.
We intend to continue generating 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 35% of our sales for the three months ended March 31,
2004 were made in foreign currencies, primarily Euros and British pounds. A
significant portion of the foreign currencies in which we conduct our business
is currently denominated in Euros. The Company is not certain about the 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
19
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 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;
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.
20
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 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 May 1, 2004, 71 of our 258 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
21
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;
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.
22
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;
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 $4.89 to $13.69 per share from January 1, 2001
through May 11, 2004 and from $6.40 to $8.50 per share from January 1, 2004
through May 10, 2004.
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.
23
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 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 32.1% of our outstanding common stock, based upon
the beneficial ownership of our common stock as of May 10, 2004. 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;
o will significantly influence all matters requiring stockholder
approval, including the approval of mergers and other significant
corporate transactions, 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, preventing or deterring 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.
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 DISCLOSURE OF MARKET RISK
We conduct business in various foreign currencies, including Euros and British
pounds, 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 dates that they are converted. We are also
subject to exchange rate exposures arising from the translation and
consolidation of the financial results of our foreign subsidiaries. Although a
significant portion of the foreign currencies in which we conduct our business
is currently, or is anticipated in the future to be, denominated in Euros as a
result of the European Monetary Union, we are not certain about the effect of
the Euro on our business, financial condition or results of operations. We do
not currently hedge either our translation risk or our economic risk associated
with the exchange of foreign currencies into U.S. dollars. There can
24
be no assurances that future changes in currency exchange rates will not have a
material impact on our future cash collections and operating results.
Our exposure to market risks for changes in interest rates relates primarily to
outstanding commercial debt. Due to the pay down of our commercial debt, we
anticipate no material market risk exposure for changes in interest rates.
Accordingly, we have not included quantitative tabular disclosures.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
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 March 31, 2004, the end of the period
covered by this report. Based upon that evaluation, Mr. Bieker and Mr. Best
believe that, as of March 31, 2004, the Company's disclosure controls and
procedures were effective in causing materials to be recorded, processed,
summarized and 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 March 31, 2004, there have been no significant changes in the Company's
internal controls or in other factors that materially affect, or that are
reasonably likely to materially affect, these internal controls.
25
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.
None.
ITEM 5. OTHER INFORMATION
Effective as of April 1, 2004, the Company entered into an executive employment
agreement with Jozef Vangenechten to serve as our Executive Vice President -
Commercial Operations. Prior to the Company's employment of Dr. Vangenechten, he
served as the Managing Director of our Belgium subsidiary through our engagement
of Vita B.V.B.A., a consulting firm in which Dr. Vangenechten is a beneficial
owner and serves as President ("VITA"). Pursuant to his employment agreement,
Dr. Vangenechten receives a net annual base salary of approximately $100,000,
which is payable in a combination of both U.S. Dollars and Euros, which the
President may increase at the end of each year of Dr. Vangenechten's employment.
In addition to the base salary to be paid to Dr. Vangenechten, the Company will
pay various living expenses during the term of his employment in an aggregate
net annual amount equal to $41,800. Dr. Vangenechten is also eligible to receive
an annual bonus under the Company's management incentive plan. The management
incentive plan will provide for the payment of a bonus equal to $62,000 upon
achieving specified target objectives set forth in the management incentive
plan, and payments of such lesser or greater amounts upon achieving results less
than or greater than the specified target objectives as shall be contained in
the management incentive plan. The agreement terminates on December 31, 2007. In
the event that Dr. Vangenechten's employment is terminated without cause during
the term of the agreement, the Company is obligated to continue to pay Dr.
Vangenechten an amount equal to $22,500 and the US$ equivalent of (euro)119,000
over a period of 9 months following the effective date of such termination. In
connection with his employment, Dr. Vangenechten was also granted stock options
to purchase 50,000 shares of Common Stock of the Company at an exercise price
equal to the fair market value of the Company's Common Stock on the date of
grant, or $7.00 per share. Concurrent with our execution of the executive
employment agreement with Dr. Vangenechten, the Company's Belgium subsidiary
executed a new management agreement with VITA pursuant to which VITA was
re-engaged to manage, oversee and direct the business and affairs of the
Company's Belgium subsidiary, subject to the supervision of the subsidiary's
Board of Directors. For its services, VITA will invoice the Belgium subsidiary
on a monthly basis but will not be entitled to receive more than (euro)102,700
in any calendar year. The agreement with VITA may be terminated by the Belgium
subsidiary at any time upon thirty days notice and without penalty to the
Company's subsidiary. However, if the VITA agreement is terminated without
cause, Dr. Vangenechten's executive employment agreement will also terminate,
and he will be entitled to receive from the Company the termination payment
described above. Notwithstanding this, if the Company can terminate Dr.
Vangenechten's executive employment agreement for cause, or as a result of his
death or permanent disability, any termination of the VITA agreement without
cause at that time will not entitle him to receive the termination payment.
Pursuant to the provisions of a Separation Agreement between the Company and
Charles Best, the Company's Chief Financial Officer, dated December 17, 1999, as
of April 29, 2003, Mr. Best became entitled to exercise a right of termination
of his employment with the Company and to thereby receive a payment equal to his
current base salary, payable over a period of one year following such exercise.
Mr. Best's right to exercise that termination right was scheduled to terminate
as of the close of business on April 29, 2004. In early April 2004, Mr. Best
indicated his intention to exercise his right of termination and to pursue other
opportunities. However, Mr. Best also indicated his
26
willingness to continue providing services to the Company for any period
necessary for the Company's President and Chief Executive Officer, and the Board
of Directors, to locate a suitable replacement. In consideration of Mr. Best's
willingness to continue providing services to BioSource, the Company executed an
amendment to Mr. Best's Separation Agreement, which extended the period in which
Mr. Best was able to exercise his right of termination for an additional sixty
days. The amendment also provided that the Company would pay Mr. Best's current
medical benefits up to a period of six months after he exercised his right of
termination. On May 7, 2004, Mr. Best tendered his resignation as Executive Vice
President and Chief Financial Officer and exercised his right of termination to
be effective as of May 14, 2004.
As a result of the proposed departure of Mr. Best, the Company entered into an
executive employment agreement with Alan Edrick, effective May 10, 2004, to
serve as its new Executive Vice President and Chief Financial Officer, effective
May 17, 2004. Prior to joining the Company, Mr. Edrick most recently served as
Senior Vice President and Chief Financial Officer at North American Scientific,
Inc., a leading medical device and specialty pharmaceutical company. Pursuant to
his employment agreement, Mr. Edrick receives an annual base salary of $190,000,
which the President may increase at the end of each year of Mr. Edrick's
employment. In addition to his base salary, Mr. Edrick will receive an
additional $72,000 as a signing bonus, which amount will be payable in thirty
equal monthly installments of $2,400 each commencing May 10, 2004, and ending on
the earlier of November 10, 2006 or the date upon which Mr. Edrick's employment
with the Company terminates for any reason. Mr. Edrick is also eligible to
receive an annual bonus under the Company's management incentive plan. The
management incentive plan will provide for the payment of a bonus equal to
thirty percent (30%) of Mr. Edrick's then-current base salary upon achieving
specified target objectives set forth in the management incentive plan, and
payments of such lesser or greater amounts upon achieving results less than or
greater than the specified target objectives as shall be contained in the
management incentive plan. The agreement terminates on May 9, 2008. In the event
that Mr. Edrick's employment is terminated without cause by the Company, or for
good reason by Mr. Edrick (as defined in the agreement), during the term of the
agreement, the Company is obligated to continue to pay Mr. Edrick's then-current
base salary for a period of 9 months following the effective date of such
termination. In connection with his employment, Mr. Edrick was also granted
stock options to purchase 100,000 shares of Common Stock of the Company at an
exercise price equal to the fair market value of the Company's Common Stock on
the date of grant, or $7.99 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Executive Employment Agreement between Registrant and
Kevin Reagan, dated as of February 15, 2004.
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.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated February
26, 2004, reporting the issuance of a press release announcing
the Company's financial results for the fiscal year ended
December 31, 2003.
27
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: May 13, 2004 /S/ TERRANCE J. BIEKER
----------------------------------------
Terrance J. Bieker
President and Chief Executive Officer
Date: May 13, 2004 /S/ CHARLES C. BEST
----------------------------------------
Charles C. Best
Executive Vice President and
Chief Financial Officer
28
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Executive Employment Agreement between Registrant and Kevin
Reagan, dated as of February 15, 2004.
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.
29