EXHIBIT 10.12
SPLIT-DOLLAR LIFE INSURANCE AGREEMENT
THIRD PARTY OWED COLLATERALLY ASSIGNED
RESTRICTIVE AGREEMENT FOR MAJORITY SHAREHOLDER
This Agreement made this 17th day of September, 1999 by and
between Schwartz Irrevocable Descendants Trust, hereinafter
referred to as the ("Trust"), and Bio-Rad Laboratories, Inc.,
hereinafter referred to as the ("Corporation").
WITNESSETH:
WHEREAS, David Schwartz, hereinafter referred to as the Employee,
is and has been employed by the Corporation for over forty (40)
years, and his wife, Alice N. Schwartz, was formerly an employee
of the Corporation and has been a director for approximately 35
years and they both have performed unique and valuable services
for the establishment, growth and development of the Corporation;
and
WHEREAS, the Corporation has determined that in the event of the
demise of Employee and his wife, their heirs might be required to
sell a significant amount of their holdings in the Corporation in
order to satisfy estate taxes, which the Corporation believes
might result in a major disruption in the trading of the
Corporation's stock.
WHEREAS, the Corporation is willing to assist said Employee and
his wife in providing insurance protection for their family which
would provide proceeds to the heirs for the payment of a portion
of the aforementioned estate taxes; and
WHEREAS, the Employee and his wife (collectively, the "Insureds")
have established the Trust as a trust for the purpose of
receiving such insurance proceeds.
NOW, THEREFORE, in consideration of past services and future
services to be rendered, the parties agree that:
1
1. A $20,586,468 life insurance policy (the "Policy") on the
life of the Insureds will be purchased from Pacific Life
Insurance Company (the "Insurance Company"). The Trust will be
the owner of the Policy, subject to a split-dollar assignment to
the Corporation. Except to the extent that the Policy is needed
to secure the Corporation's interest in the Policy as hereinafter
provided, the Trust will retain all incidents of ownership
(including the right to dividends, if any, the right to surrender
or cancel the Policy and the right to borrow or withdraw against
the Policy).
2. All premiums due on the Policy shall be paid by the
Corporation to the Trust for payment to the Insurance Company.
3. The Corporation's interest in the cash surrender value of
the Policy shall be an amount equal to the lesser of the entire
cash surrender value or the Corporation's cumulative net premium
payments.
4. If the Insureds should die while this Agreement and the
Policy are in effect, the Corporation will be entitled to receive
an amount equal to its cumulative net premium payments. The
remainder of the death benefit, if any, shall belong to the
Trust.
5. The Trust agrees not to sell, assign, surrender or otherwise
terminate the Policy while this Agreement is in effect without
the consent of the Corporation.
6. This Agreement may be terminated as follows:
(a) For the period commencing on the date hereof and
continuing until September 16, 2009, by mutual
consent of the parties hereto.
(b) For the period commencing on September 16, 2009 and
continuing until the termination of the Agreement or the Policy:
(i) Either party may terminate this Agreement while no
premium under said Policy is overdue by written notice to
the other part sent by hand or registered mail to such
party's last known address. The effective date of such
termination shall be the date of mailing; or
(ii) By mutual consent of the parties hereto.
7. In the event of the termination of this Agreement under
Paragraph 6 hereof, the Trust shall pay to the Corporation an
amount equal to the Corporation's interest in the cash surrender
value of the Policy as stated in Paragraph 3, and upon such
payment the Corporation will release the collateral assignment
made to it. Should the Trust fail to pay the Corporation's total
interest in the cash surrender value within 60 days of
termination, the Corporation shall have the right to enforce any
rights it may have under the collateral assignment.
2
The Insurance Company and all persons having any
interest in the Policy may in any instance conclusively
rely upon the Corporation's certification that all
conditions precedent to its right to receive its
interest have occurred and shall be released from any
and all claims, demands and responsibility in acting
upon this certification and making payment to the
Corporation of its entire interest upon the
Corporation's sole signatures. The Corporation shall
pay over to the Trust any amount collected by it which
is in excess of the amount due to it.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day first above written.
BIO-RAD LABORATORIES, INC.
/s/ David Lehman BY: /s/ Thomas C. Chesterman
(Witness) Thomas C. Chesterman
Vice President and Chief Financial Officer
SCHWARTZ IRREVOCABLE
DESCENDANTS TRUST
/s/ Deborah L. Tannenbaum BY: /s/ Howard Foster
(Witness) Howard Foster
Trustee
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>7
<DESCRIPTION>EXHIBIT 13.1 - EXCERPT FROM 1999 ANNUAL REPORT
<TEXT>
EXHIBIT 13.1
Bio-Rad Laboratories, Inc.
SUMMARY OF OPERATIONS (In thousands, except per share data)
________________________________________________________________________________________________________________________
1999 1998 1997 1996 1995 1994
Net sales $549,489 $441,942 $426,914 $418,789 $396,618 $355,299
Cost of goods sold (1) 255,223 202,438 189,331 182,046 171,942 155,805
Gross profit 294,266 239,504 237,583 236,743 224,676 199,494
Selling, general and administrative expense 194,457 166,978 164,792 155,516 150,272 132,591
Product research and development expense 51,210 41,381 46,138 39,580 34,714 30,172
Purchased in-process research and
development expense 15,500 - - - - -
Restructuring costs - - - 2,700 1,500 -
Income from operations 33,099 31,145 26,653 38,947 38,190 36,731
Other income (expense):
Interest expense (12,741) (3,731) (1,216) (3,027) (4,465) (6,138)
Other, net (3,942) 6,814 (2,709) 553 (183) (6,596)
Income before taxes and extraordinary charge 16,416 34,228 22,728 36,473 33,542 23,997
Provision for income taxes 4,695 9,926 6,364 9,118 8,386 8,399
Income before extraordinary charge 11,721 24,302 16,364 27,355 25,156 15,598
Extraordinary charge (2) - - - (1,176) - -
Net income $ 11,721 $ 24,302 $ 16,364 $ 26,179 $ 25,156 $ 15,598
Basic earnings per share before
extraordinary charge (3) $0.97 $1.98 $1.33 $2.23 $2.06 $1.29
Extraordinary charge (2)(3) - - - (.10) - -
Basic earnings per share (3) $0.97 $1.98 $1.33 $2.13 $2.06 $1.29
Weighted average common shares (3) 12,110 12,264 12,260 12,273 12,206 12,113
Cash dividends paid per common share - - - - - -
Total assets $668,862 $367,299 $351,876 $284,925 $285,098 $263,650
Long-term debt, net of current maturities $239,211 $ 42,339 $ 38,952 $ 6,721 $ 20,922 $ 26,287
_______________________________________________________________________________________________________________________
<FN>
(1) In 1996, cost of goods sold includes a charge of $2.1 million for a write-down of inventory associated with the
restructuring costs.
(2) Extraordinary charge for redemption of subordinated debt: 1996 - $1,176, net of tax effect of $817.
(3) Restated to give effect to a stock split in the form of a 50% stock dividend in 1996.
1
Bio-Rad Laboratories, Inc.
Consolidated Balance Sheets
(In thousands)
________________________________________________________________________________________
December 31,
Assets 1999 1998
Current Assets:
Cash and cash equivalents $ 17,087 $ 10,081
Accounts receivable, less allowance of $9,582 in 1999
and $3,629 in 1998 193,898 106,010
Inventories:
Raw materials 32,398 26,038
Work in process 31,936 21,614
Finished goods 61,943 44,759
Total inventories 126,277 92,411
Deferred tax assets 20,584 18,340
Prepaid expenses and other current assets 20,871 8,547
Total current assets 378,717 235,389
Property, Plant and Equipment:
Land and improvements 8,937 8,057
Buildings and leasehold improvements 73,230 56,280
Equipment 168,401 133,838
Total property, plant and equipment 250,568 198,175
Accumulated depreciation (124,626) (116,045)
Net property, plant and equipment 125,942 82,130
Marketable Securities 1,169 6,174
Goodwill 105,350 18,616
Other Assets 57,684 24,990
Total Assets $668,862 $367,299
________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
2
Bio-Rad Laboratories, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
__________________________________________________________________________________________
December 31,
Liabilities and Stockholders' Equity 1999 1998
Current Liabilities:
Notes payable $ 11,547 $ 8,721
Current maturities of long-term debt 10,413 672
Accounts payable 64,737 26,706
Accrued payroll and employee benefits 59,919 27,351
Sales, income and other taxes payable 14,086 6,396
Other current liabilities 41,819 27,398
Total current liabilities 202,521 97,244
Long-Term Debt, net of current maturities 239,211 42,339
Deferred Tax Liabilities 7,016 13,382
Total liabilities 448,748 152,965
Commitments and Contingent Liabilities
Stockholders' Equity:
Preferred stock, $1.00 par value, 2,300,000 shares authorized;
none outstanding - -
Class A common stock, $1.00 par value, 15,000,000 shares
authorized; outstanding 1999 - 9,977,862;
1998 - 9,973,679 9,978 9,974
Class B common stock, $1.00 par value, 6,000,000 shares
authorized; outstanding 1999 - 2,484,716;
1998 - 2,452,899 2,485 2,453
Additional paid-in capital 18,830 18,523
Class A treasury stock, 335,450 shares in 1999 and (7,392) (7,047)
306,368 shares in 1998 at cost
Retained earnings 200,993 189,838
Accumulated other comprehensive income:
Currency translation (4,741) 92
Net unrealized holding gain (loss) on marketable securities (39) 501
Total stockholders' equity 220,114 214,334
Total Liabilities and Stockholders' Equity $668,862 $367,299
__________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
3
Bio-Rad Laboratories, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
______________________________________________________________________________________________________________________
Year Ended December 31,
1999 1998 1997
Net sales $549,489 $441,942 $426,914
Cost of goods sold 255,223 202,438 189,331
Gross profit 294,266 239,504 237,583
Selling, general and administrative expense 194,457 166,978 164,792
Product research and development expense 51,210 41,381 46,138
Purchased in-process research and development expense 15,500 - -
Income from operations 33,099 31,145 26,653
Other income (expense):
Interest expense (12,741) (3,731) (1,216)
Investment income, net 873 8,790 1,601
Other, net (4,815) (1,976) (4,310)
Income before taxes 16,416 34,228 22,728
Provision for income taxes 4,695 9,926 6,364
Net income $ 11,721 $ 24,302 $ 16,364
Basic earnings per share:
Net income $0.97 $1.98 $1.33
Weighted average common shares 12,110 12,264 12,260
Diluted earnings per share:
Net income $0.96 $1.97 $1.32
Weighted average common shares 12,165 12,358 12,394
__________________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
4
Bio-Rad Laboratories, Inc.
Consolidated Statements of Cash Flows
(In thousands)
________________________________________________________________________________________________________
Year Ended December 31,
1999 1998 1997
Cash flows from operating activities:
Cash received from customers $527,132 $436,029 $414,694
Cash paid to suppliers and employees (453,266) (395,265) (381,489)
Interest paid (9,307) (3,833) (1,155)
Income tax payments (17,237) (9,370) (10,950)
Miscellaneous receipts (payments) (2,341) (226) 9
Net cash provided by operating activities 44,981 27,335 21,109
Cash flows from investing activities:
Capital expenditures, net (27,275) (21,176) (23,571)
Payments for acquisitions (202,828) - (31,238)
Purchases of marketable securities and investments (2,216) (19,086) (8,352)
Sales of marketable securities and investments 6,600 16,367 3,419
Foreign currency hedges, net 2,401 (1,360) 3,817
Net cash used in investing activities (223,318) (25,255) (55,925)
Cash flows from financing activities:
Net borrowings under line-of-credit arrangements (13,493) (1,365) 4,665
Long-term borrowings 353,108 133,710 87,275
Payments on long-term debt (151,788) (130,666) (55,329)
Arrangement and other fees for
long-term acquisition financing (5,008) -- --
Proceeds from issuance of common stock 343 103 1,459
Purchase of treasury stock (2,233) (4,665) (5,302)
Reissuance of treasury stock 1,322 1,978 750
Net cash provided by (used in) financing activities 182,251 (905) 33,518
Effect of exchange rate changes on cash 3,092 (1,937) 2,751
Net increase (decrease) in cash and cash equivalents 7,006 (762) 1,453
Cash and cash equivalents at beginning of year 10,081 10,843 9,390
Cash and cash equivalents at end of year $ 17,087 $ 10,081 $ 10,843
________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
5
Bio-Rad Laboratories, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
______________________________________________________________________
Year Ended December 31,
1999 1998 1997
Common Stock, $1.00 par value:
Balance at beginning of year $12,427 $ 12,421 $ 12,321
Issuance of common stock 36 6 100
Balance at end of year 12,463 12,427 12,421
Additional Paid-In Capital:
Balance at beginning of year 18,523 18,426 17,067
Issuance of common stock 307 97 1,359
Balance at end of year 18,830 18,523 18,426
Treasury Stock:
Balance at beginning of year (7,047) (6,006) (1,639)
Purchase of treasury stock (2,233) (4,665) (5,302)
Reissuance of treasury stock 1,888 3,624 935
Balance at end of year (7,392) (7,047) (6,006)
Retained Earnings:
Balance at beginning of year 189,838 167,182 151,003
Net income 11,721 24,302 16,364
Reissuance of treasury stock at
less than cost (566) (1,646) (185)
Balance at end of year 200,993 189,838 167,182
Accumulated Other Comprehensive Income:
Balance at beginning of year 593 4,654 4,756
Currency translation adjustments (4,833) 1,241 (4,719)
Net unrealized holding gains 66 819 5,746
Reclassification adjustment for
gains included in net income (606) (6,121) (1,129)
Balance at end of year (4,780) 593 4,654
________ ________ ________
Total Stockholders' Equity $220,114 $214,334 $196,677
Comprehensive Income:
Net income $ 11,721 $ 24,302 $ 16,364
Currency translation adjustments (4,833) 1,241 (4,719)
Net unrealized holding gains 66 819 5,746
Reclassification adjustments for
gains included in net income (606) (6,121) (1,129)
Total Comprehensive Income $ 6,348 $ 20,241 $ 16,262
_________________________________________________________________________
The accompanying notes are an integral part of these statements.
6
Bio-Rad Laboratories, Inc.
Notes to Consolidated Financial Statements
(In thousands of dollars, except share and per share data)
_________________________________________________________________
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Bio-Rad
Laboratories, Inc. and all subsidiaries ("Bio-Rad" or the "Company")
after elimination of intercompany balances and transactions. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Changes in such estimates may
affect amounts reported in the future. Certain amounts in the
financial statements of prior years have been reclassified to be
consistent with the 1999 presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid in-
vestments with original maturities of three months or less which are
readily convertible into cash. Cash equivalents are stated at cost,
which approximates market value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade accounts
receivable. The Company performs credit evaluation procedures and
with the exception of certain developing countries, generally does not
require collateral. As a result of increased risk in these countries,
some Bio-Rad sales are subject to collateral letters of credit.
Credit risk is limited due to the large number of customers and their
dispersion across many geographic areas. However, a significant
amount of trade receivables are with national healthcare systems in
countries within the European Economic Community. The Company does
not currently anticipate a credit risk associated with these receiv-
ables.
Inventory Valuation
Inventories are valued at the lower of average cost or market and
include material, labor and overhead costs.
Property, Plant and Equipment
Property, plant and equipment are carried at historical cost.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets ranging from two to thirty years.
Leasehold improvements are amortized over the lives of the respective
leases or the lives of the improvements, whichever is shorter.
7
Marketable Securities
The Company's marketable securities are classified as available-for-
sale and are recorded at current market value. Unrealized holding
gains and losses are included as a separate component of stockholders'
equity. Realized gains and losses are included in investment income.
For the purpose of determining realized gains and losses, the cost of
securities sold is based upon specific identification.
Goodwill
Goodwill, representing the excess of the cost over the net tangible
and identifiable intangible assets of acquired businesses, is stated
at cost and is amortized on a straight-line basis over the estimated
future periods to be benefited, typically ten to fifteen years.
Goodwill, other intangibles and other long-lived assets are
periodically reviewed for impairment to ensure they are properly
valued.
Revenue Recognition and Warranty
Bio-Rad recognizes revenues when products are shipped or services are
rendered and all significant obligations of the Company have been met.
Where appropriate, the Company also establishes a concurrent reserve
for returns and allowances.
The Company warrants certain equipment against defects in design,
materials and workmanship, generally for one year. Upon shipment of
equipment sold at a price which includes a warranty, the Company
establishes, as part of cost of goods sold, a provision for the
expected costs of such warranty.
Foreign Currency Translation
Balance sheet accounts of international subsidiaries are translated at
the current exchange rate as of the end of the accounting period.
Income statement items are translated at average exchange rates. The
resulting translation adjustment is recorded as a separate component
of stockholders' equity.
Forward Exchange Contracts
The Company does not use derivative financial instruments for
speculative or trading purposes. As part of distributing its
products, the Company regularly enters into intercompany transactions.
The Company enters into forward foreign exchange contracts to hedge
against future movements in foreign exchange rates that affect foreign
currency denominated intercompany receivables and payables. These
contracts generally have maturity dates of 60 days or less, relate
primarily to currencies of industrial countries and are marked to
market at each balance sheet date. The resulting gains or losses are
included in other income and expense and offset exchange losses or
gains on the related receivables and payables. Unrealized gains and
losses are not deferred. Exchange gains and losses on these contracts
are net of premiums and discounts which result from interest rate
8
differentials between the U.S. and the countries of the currencies
being traded. The cash flows related to these contracts are
classified as cash flows from investing activities in the Statement of
Cash Flows.
Stock Compensation Plans
Stock-based compensation is recognized using the intrinsic value
method. For disclosure purposes, pro forma net income and earnings
per share are provided as if the fair value method had been applied.
Earnings Per Share
Basic earnings per share are calculated on the basis of the weighted
average number of common shares outstanding for each period. Diluted
earnings per share are calculated assuming the exercise of certain
stock options. Treasury stock is not considered outstanding for
purposes of calculating weighted average shares.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, notes payable, accounts
payable, long-term debt and forward exchange contracts, the carrying
amounts approximate fair value. The fair values of other instruments
are disclosed in relevant notes to the financial statements.
2. Acquisitions
In October 1999, the Company acquired Pasteur Sanofi Diagnostics S.A.,
a French corporation (PSD), from its shareholders, Sanofi-Synthelabo
S.A. and Institut Pasteur. The Company paid $202,828 for all of the
capital stock of PSD (and certain ancillary assets and assumed
liabilities related to PSD). PSD was founded by the Institut Pasteur
and operates in the HIV and infectious disease diagnostic product
market. The purchase of PSD was financed with the proceeds from a
$200,000 Senior Credit Agreement and a $100,000 Senior Subordinated
Credit Agreement (see Note 5). The acquisition was accounted for
using the purchase method of accounting. The operating results of PSD
have been included in the Consolidated Statement of Income from the
date of acquisition.
As a result of the acquisition, the Company recorded $88,630 of
goodwill. Goodwill reflects the excess of the purchase price,
purchase liabilities and liabilities assumed over the fair value of
net identifiable assets and in-process research and development
projects acquired. Acquired in-process research and development of
$15,500 was charged to expense in the fourth quarter in accordance
with generally accepted accounting principles. Purchase liabilities
recorded included approximately $14,000 for severance and other
9
employee costs and $4,000 for the consolidation and closure of certain
leased facilities. The Company expects to complete its workforce
reduction by September 30, 2000. The closure of facilities identified
by the Company will be completed in fiscal 2000, with lease payments,
net of sublease revenues, continuing until all contractual obligations
are met. For the year 1999 no material amounts were charged to the
purchase liability for severance and facility closures. The Company
does not believe that the final purchase price allocation will differ
significantly from the preliminary purchase price allocation recorded
in the current fiscal year.
As the Company's 1999 financial statements include only three months
of operations of PSD, the following selected unaudited pro forma
information is being provided to present a summary of the combined
results of Bio-Rad and PSD as if the acquisition had occurred as of
January 1, 1998, giving effect to purchase accounting adjustments and
actual costs of financing. The pro forma data is for informational
purposes only and may not necessarily reflect the results of
operations of Bio-Rad had PSD operated as part of the Company for the
years ended December 31, 1999 and 1998.
Unaudited Pro Forma
Year Ended December 31,
1999 1998
Sales $722,000 $669,800
Net income (loss) $6,300 $(5,000)
Basic earnings (loss)per share $0.52 $(0.41)
The pro forma amounts reflect the results of operations for Bio-Rad
and PSD and the following purchase accounting adjustments for the
periods presented:
Amortization of intangible assets and goodwill based on the
purchase price allocation for the period presented.
Amortization of debt financing fees and expenses over the
relative term of the following debt: Senior Credit
Agreement, Senior Subordinated Credit Facility and Senior
Subordinated Notes.
The additional interest expense on debt incurred to finance
the acquisition offset by a reduction of historical interest
resulting from the elimination of PSD's debt.
The estimated income tax effect on the pro forma
adjustments, including a limitation on the deductibility of
goodwill amortization.
The pro forma statements do not include the $15,500 write-
off of in-process research and development. This charge is
included in the Consolidated Statements of Operations of the
Company for 1999.
10
3. Marketable Securities
The Company's portfolio is comprised principally of equity securities
with an aggregate market value of $1,169 and $6,174 and cost of $1,224
and $5,469 at December 31, 1999 and 1998, respectively. At December
31, 1999, gross unrealized holding gains and losses were $104 and
$159, respectively. At December 31, 1998, gross unrealized holding
gains and losses were $1,044 and $339, respectively.
Information regarding the proceeds and gross realized gains and losses
from sales of securities is as follows:
Year Ended December 31,
1999 1998 1997
Proceeds $ 6,600 $ 16,367 $ 3,419
Gross realized gains $ 1,260 $ 9,168 $ 1,211
Gross realized losses (410) (548) (82)
Net realized gains $ 850 $ 8,620 $ 1,129
4. Investment in Affiliates
In December 1997, Bio-Rad began investing in Instrumentation
Laboratory, S.p.A. (IL), an Italian based clinical diagnostics
company. At December 31, 1999, Bio-Rad held approximately 27% of the
outstanding stock of IL. A privately held company based in Spain
controls over 50% of the outstanding stock of IL. The most recently
published financial statements for IL are as of February 28, 1999.
Given the limited availability of financial information and the low
volume of shares traded, Bio-Rad management does not believe there is
a sufficient liquid market for IL stock. Accordingly, the investment
is reported as Other Assets. Additionally, since Bio-Rad does not
have the ability to significantly influence the operating and
financial policies of IL, the investment has been recorded at its cost
of $18,830.
An unrealized holding gain of $652 was included in comprehensive
income in 1997. This amount was reversed in 1998 when the investment
in IL was reclassified to Other Assets.
5. Notes Payable and Long-Term Debt
Notes payable include local credit lines maintained by the Company's
subsidiaries aggregating approximately $32,742, of which $21,195 was
unused at December 31, 1999. The weighted average interest rate on
these lines was 5.76% and 5.14% at December 31, 1999 and 1998,
respectively. The parent company guarantees most of these credit
lines.
11
The principal components of long-term debt are as follows:
December 31,
1999 1998
Senior Subordinated Credit
Agreement $100,000 $ -
Term loan 100,000 -
Revolving credit agreement 49,000 42,000
Capitalized leases 624 606
Other - 405
249,624 43,011
Less current maturities 10,413 672
Long-Term Debt $239,211 $42,339
On September 30, 1999, the Company entered into a $200,000 Senior
Credit Agreement and a $100,000 Senior Subordinated Credit Agreement
to finance the acquisition of PSD and certain related assets and to
provide funds for working capital needs. The Senior Credit Agreement
included a term loan and revolving facility, each in the amount of
$100,000. Debt issue costs related to these financings were $8,600.
The $100,000 Senior Subordinated Credit Agreement was replaced on
January 31, 2000 (see Note 14).
The term loan and revolving facility are secured by an interest in the
Company's assets. Interest on both loans is based upon either the
Eurodollar, the Federal Funds effective or corporate based (prime)
rate. The term loan interest rate was 8.92% at December 31, 1999.
The revolving credit agreement provides for borrowings on a secured
basis through September 2004. The interest rate at December 31, 1999
was 9.13%. A commitment fee ranging from .30% to .50% annually is
charged on the daily unborrowed portion of the revolving credit
agreement.
The Company entered into interest rate swap agreements to reduce the
impact of changing interest rates on its revolving credit agreement.
At December 31, 1999, the Company had two interest rate swap
agreements with commercial banks, having an aggregate notional amount
of $25,000. The agreements essentially fix the Company's interest
rate exposure on $25,000 worth of floating rate loans under its
revolving credit agreement at 8.50%. The agreements mature December
29, 2000 and June 30, 2002. The resulting applicable interest rate
was 8.81% on the revolving facility versus an effective rate of 9.13%.
In terms of the interest rate swap, the Company is exposed to credit
loss in the event of nonperformance by a counterparty, however the
Company has not experienced such nonperformance to date and considers
such a possibility remote.
The Senior Credit Agreement (including amendments) requires the
Company, among other things, to comply with certain financial ratios.
The Company was in compliance with all financial ratios as of December
31, 1999. This agreement also contains certain other restrictions,
including limitations on payment of cash dividends, sales of assets,
incurrence of indebtedness, the creation of liens, making certain
investments and engaging in sale/leaseback transactions.
12
Maturities of long-term debt at December 31, 1999, are as follows:
2000 - $10,413; 2001 - $15,137; 2002 - $20,074; 2003 - $25,000;
2004 - $79,000; thereafter - $100,000.
6. Income Taxes
The U.S. and international components of income before taxes are
as follows:
Year Ended December 31,
1999 1998 1997
U.S. $ 15,176 $ 24,173 $ 11,343
International 1,240 10,055 11,385
Income before taxes $ 16,416 $ 34,228 $ 22,728
The provision for income taxes consists of:
Year Ended December 31,
1999 1998 1997
Current:
U.S. Federal $ 4,583 $ 8,564 $ 3,277
International 8,323 4,974 3,226
U.S. State 853 374 552
13,759 13,912 7,055
Deferred (9,064) (3,986) (691)
Provision for income taxes $ 4,695 $ 9,926 $ 6,364
The Company's income tax provision differs from the amount
computed by applying the U.S. federal statutory rate to income
before taxes as follows:
Year Ended December 31,
1999 1998 1997
U.S. statutory tax rate 35% 35% 35%
State taxes, net of
federal income tax benefit 2 (1) 1
Foreign Sales Corporation
tax benefit (10) (5) (6)
Research and development
tax credit (1) (1) (2)
International taxes in excess
of U.S. Foreign Tax Credit 12 - 1
Loss carryforwards utilized (5) (1) (6)
Amortization of goodwill 4 - 2
Foreign losses in connection
with the PSD acquisition
not benefited 31 - -
Favorable resolution of U.S.
income tax disputes (40) - -
Other 1 2 3
Provision for income taxes 29% 29% 28%
13
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of deferred tax
assets and liabilities are as follows:
December 31,
1999 1998
Deferred Tax Assets:
Reserves for obsolete inventory,
warranty and bad debts $ 12,622 $ 12,102
Eliminated intercompany profit 3,661 3,265
Tax benefit of foreign loss
carryforwards 16,457 4,732
Other 11,975 3,583
44,715 23,682
Valuation allowance (24,131) (5,342)
Deferred Tax Assets $ 20,584 $ 18,340
Deferred Tax Liabilities:
Deferred gain on condemnation $ 3,522 $ 4,473
Depreciation 1,567 1,174
Development cost of Hercules
facility 1,385 1,413
Other 542 6,322
Deferred Tax Liabilities $ 7,016 $ 13,382
The valuation allowance is needed to reduce the deferred tax
assets to an amount that is more likely than not to be realized.
The net change in the valuation allowance in 1999 was an increase
of $18,789, primarily resulting from an increase in tax loss
carryforwards. The net change in 1998 was an increase of $2,057,
primarily resulting from an increase in tax loss carryforwards.
At December 31, 1999, Bio-Rad's international subsidiaries had
combined net operating loss carryforwards of $40,231. A portion
of these loss carryforwards will expire in the following years:
2000 - $809; 2001 - $394; 2002 - $754; 2003 - $150; 2004 - $178;
2005 - $1,639 and 2008 - $393. The remainder of these loss
carryforwards have no expiration date. The utilization of these
carryforwards is limited to the separate taxable income of each
individual subsidiary.
Bio-Rad does not provide for taxes which would be payable if the
cumulative undistributed earnings of its international subsidiaries,
approximately $36,916 at December 31, 1999, were remitted to the U.S.
parent company. Unless it becomes advantageous for tax or foreign
exchange reasons to remit a subsidiary's earnings, such earnings are
indefinitely reinvested in subsidiary operations. The withholding tax
and U.S. federal income taxes on these earnings, if remitted, would in
large part be offset by tax credits.
14
7. Stockholders' Equity
Stock Classification
The Company's outstanding stock consists of Class A Common Stock
(Class A) and Class B Common Stock (Class B). Each share of Class A
and Class B participates equally in the earnings of Bio-Rad, and is
identical in most respects except that Class A has limited voting
rights. Each share of Class A is entitled to one-tenth of a vote on
most matters, and each share of Class B is entitled to one vote.
Additionally, Class A stockholders are entitled to elect 25% of the
Board of Directors and Class B stockholders are entitled to elect the
balance of the directors. Cash dividends may be paid on Class A
shares without paying a cash dividend on Class B shares but no cash
dividend may be paid on Class B shares unless at least an equal cash
dividend is paid on Class A shares. Class B shares are convertible at
any time into Class A shares on a one-for-one basis at the option of
the stockholder.
Stock Option Plans
Bio-Rad maintains incentive and non-qualified fixed stock option plans
for officers and certain other key employees. Under the Amended 1994
Stock Option Plan, the Company may grant options to its employees for
up to 1,175,000 shares of common stock provided that no option shall
be granted after March 1, 2004. Under the plans, Class A and Class B
options are granted at prices not less than fair market value on the
date of grant, are exercisable on a cumulative basis at a rate not
greater than 25% per annum commencing one year after the date of grant
and expire five years after the date of grant.
The Company has made no charge to income with respect to any stock
options. At the time options are exercised, the par value of the
shares is credited to common stock and the excess is credited to
additional paid-in capital. The Company may receive income tax
benefits from the exercise of non-qualified stock options and from
certain dispositions of stock received by employees under qualified or
incentive stock options. The fair value of each option granted since
January 1, 1995, was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions for
grants in 1999, 1998 and 1997, respectively: no dividend yield for
all periods; expected lives of 2.2 and 3.0 years in 1999, 2.0 and 2.9
years in 1998 and 1.8 and 2.8 years in 1997; expected volatility of
34%, 35% and 33%; and risk-free interest rates ranging from 4.72% to
4.82%, 5.39% to 5.48% and 5.63% to 6.15%.
15
Activity under the plans is summarized below (amounts reported in the Price columns
represent the weighted average exercise price):
Year Ended December 31,
1999 1998 1997
Shares Price Shares Price Shares Price
Outstanding at beginning of year 561,047 $23.73 517,018 $21.40 482,900 $16.34
Granted 166,080 19.89 150,653 23.54 147,050 32.54
Exercised (60,914) 8.47 (89,625) 10.09 (90,445) 11.88
Forfeited (19,712) 25.10 (14,677) 25.07 (19,909) 25.38
Expired (1,386) 7.37 (2,322) 9.46 (2,578) 12.04
Outstanding at end of year 645,115 $24.18 561,047 $23.73 517,018 $21.40
Options exercisable at year-end 280,825 222,539 172,689
Weighted average fair value of
options granted during the year $6.46 $7.62 $10.76
The following summarizes information about fixed stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
$18.00 - $19.69 206,131 2.4 years $19.04 85,851 $18.13
$19.80 - $23.94 184,916 3.2 22.49 44,441 22.63
$25.92 - $29.33 124,813 1.3 26.50 85,909 26.51
$31.63 - $35.89 129,255 2.1 32.53 64,624 32.53
$18.00 - $35.89 645,115 2.4 24.18 280,825 24.72
16
Employee Stock Purchase Plan
Under the Amended and Restated 1988 Employee Stock Purchase Plan (the
Plan), the Company has authorized the sale of 745,000 shares of Class
A to eligible employees. The purchase price of the shares under the
Plan is the lesser of 85% of the fair market value on the first day of
each calendar quarter, or 85% of the fair market value on the last day
of each calendar quarter. Employees may designate up to 10% of their
compensation for the purchase of stock. Under the Plan, the Company
sold 58,762 shares for $1,098, 51,446 shares for $1,129 and 43,785
shares for $982 to employees in 1999, 1998 and 1997, respectively. At
December 31, 1999, 105,364 shares remained authorized under the Plan.
The fair value of the employees' purchase rights since 1995 was
estimated using the Black-Scholes model with the following assumptions
for 1999, 1998 and 1997, respectively: no dividend yield for all
periods; an expected life of three months for all periods; expected
volatility ranging from 22% to 35%, from 28% to 38% and from 19% to
30%; and risk-free interest rates ranging from 4.28% to 4.88%, from
4.27% to 5.23% and from 5.02% to 5.41%. The weighted average fair
value of those purchase rights granted in 1999, 1998 and 1997 was
$4.74, $5.55 and $5.50, respectively.
Pro Forma Disclosures
If compensation cost for the Company's stock-based compensation plans
had been determined based upon the fair value at grant dates for
awards under those plans consistent with the method of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation", the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
1999 1998 1997
Net income As reported $11,721 $24,302 $16,364
Pro forma $10,469 $23,026 $15,173
Diluted earnings per As reported $0.96 $1.97 $1.32
share Pro forma $0.86 $1.86 $1.22
Under the requirements of SFAS No. 123, the above disclosures
relate only to options granted after December 15, 1994, and do
not include the impact of outstanding options that were made
prior to the period for which SFAS No. 123 is effective. Since
employee stock options vest over several years, and additional
grants are likely to be made in the future, during the phase-in
period of SFAS No. 123 the disclosures are not likely to be
representative of the effects on reported pro forma net income or
earnings per share in future years.
17
8. Earnings Per Share
Weighted average shares used for diluted earnings per share
include the dilutive effect of outstanding stock options of
55,000, 94,000 and 134,000 shares, for the years ended
December 31, 1999, 1998 and 1997, respectively.
Options to purchase 261,000, 229,000 and 133,000 shares of common
stock were outstanding during 1999, 1998 and 1997, respectively,
but were excluded from the computation of diluted earnings per
share because the exercise price of the options was greater than
the average market price of the common shares. The options were
still outstanding at the end of 1999.
9. Other Income and Expense
Other, net includes the following income and (expense)
components:
Year Ended December 31,
1999 1998 1997
Amortization of goodwill $(3,813) $(2,068) $(1,612)
Exchange gains (losses) (886) 22 (711)
Other non-operating litigation
costs, net 73 117 (1,606)
Miscellaneous other items (189) (47) (381)
Other, net $(4,815) $(1,976) $(4,310)
Exchange gains (losses) include premiums and discounts on forward
foreign exchange contracts.
10. Supplemental Cash Flow Information
The reconciliation of net income to net cash provided by operating
activities is as follows:
Year Ended December 31,
1999 1998 1997
Net income $11,721 $24,302 $16,364
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 27,495 20,975 19,470
Foreign currency hedge transactions, net (2,401) 1,360 (4,001)
Gains on dispositions of marketable securities (850) (8,620) (1,129)
Increase in accounts receivable, net (16,082) (5,739) (6,176)
(Increase) decrease in inventories 4,095 (166) (14,831)
(Increase) decrease in other current assets 5,609 4,629 (6,369)
Increase (decrease) in accounts payable and
other current liabilities 26,153 (4,808) 18,775
Increase in income taxes payable 4,804 1,040 1,122
Decrease in deferred taxes (16,946) (5,292) (1,276)
Other 1,383 (346) (840)
Net cash provided by operating activities $44,981 $27,335 $21,109
18
11. Commitments and Contingent Liabilities
Rents and Leases
Net rental expense under operating leases was $13,607 in 1999,
$12,622 in 1998 and $11,339 in 1997. Leases are principally
for facilities and automobiles.
Annual future minimum lease payments at December 31, 1999, under
operating leases are as follows: 2000 - $10,166; 2001 - $7,554; 2002 -
$4,914; 2003 - $3,605; 2004 - $2,769; subsequent to 2004 - $7,084.
Deferred Profit Sharing Retirement Plan
The Company has a profit sharing plan covering substantially all U.S.
employees. Contributions are made at the discretion of the Board of
Directors. Bio-Rad has no liability other than for the current year's
contribution. Contributions charged to income were $4,030,
$3,566 and $3,285 in 1999, 1998 and 1997, respectively.
Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts as a hedge
against foreign currency denominated intercompany receivables and
payables. At December 31, 1999, the Company had contracts maturing in
January 2000 to sell foreign currency with a market value of $64,390 and
to purchase foreign currency with a market value of $6,339.
At December 31, 1998, the Company had contracts maturing in January 1999
to sell foreign currency with a market value of $48,053 and to purchase
foreign currency with a market value of $1,811.
12. Legal Proceedings
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of
management, the outcome of these claims, legal actions and complaints
would have no material adverse effect on the future results of operations
or the financial position of the Company.
13. Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998 which changed the way the
Company reports information about its operating segments.
Bio-Rad is a multinational manufacturer and worldwide distributor of life
science research products, clinical diagnostics and analytical
instruments. Bio-Rad has three reportable segments: Life Science,
Clinical Diagnostics and Analytical Instruments. These reportable
segments are strategic business lines that offer different products and
services and require different marketing strategies.
The Life Science segment develops, manufactures, sells and services liquid
chromatography, electrophoresis, gene amplification and transformation,
imaging and image analysis, DNA sequencing and sample preparation products.
19
These products are sold to university and medical school laboratories,
pharmaceutical and biotechnology companies, and government and industrial
research facilities.
The Clinical Diagnostics segment develops, manufactures, sells and services
automated test systems, informatics systems, test kits and specialized
quality controls for the healthcare market. These products are sold to
reference laboratories, hospital laboratories, state newborn screening
facilities, physicians office laboratories, and insurance and forensic
testing laboratories.
The Analytical Instruments segment develops, manufactures, sells and
services FT-IR spectroscopy systems, semiconductor test and manufacturing
instruments, spectral reference publications and software. These products
are sold to industrial companies, government institutions, academia and
forensic analysis laboratories.
The accounting policies of the segments are the same as those described in
Significant Accounting Policies (see Note 1). Segment profit or loss used
for corporate management purposes includes an allocation of corporate
expense based upon sales and an allocation of interest expense based upon
accounts receivable and inventories. In addition, certain items that are
classified as non-operating expenses and reported as other income and
expense on a consolidated basis are included in segment profit or loss.
Segments are expected to manage only assets completely under their control.
Accordingly, segment assets include primarily accounts receivable,
inventories and gross machinery and equipment.
Information regarding industry segments at December 31, 1999, 1998 and 1997
and for the years then ended is as follows:
Life Clinical Analytical
Science Diagnostics Instruments
Segment net sales 1999 $234,696 $249,243 $ 67,974
1998 209,655 170,002 66,100
1997 205,704 150,095 75,800
Allocated interest expense 1999 $ 3,761 $ 7,775 $ 1,206
1998 1,501 1,464 571
1997 550 428 212
Depreciation and
amortization 1999 $ 8,003 $ 15,466 $ 1,335
1998 7,328 11,242 1,652
1997 7,258 7,553 3,768
Segment profit (loss) 1999 $ 16,643 $ 16,661 $ 2,928
1998 12,649 18,160 (2,166)
1997 6,816 19,257 (1,003)
Segment assets 1999 $131,689 $320,419 $ 35,387
1998 124,219 129,089 38,607
1997 116,289 111,453 44,964
20
Capital expenditures 1999 $ 10,673 $ 13,388 $ 1,378
1998 6,487 15,213 1,912
1997 7,461 14,432 1,991
Capital expenditures include capitalized leases of $100, $311 and
$331 in 1999, 1998 and 1997, respectively.
Inter-segment sales are primarily from Life Science to Clinical
Diagnostics and are priced to give Life Science a market
representative gross margin. This represents the difference
between total segment net sales and consolidated net sales. The
difference between total segment allocated interest expense,
depreciation and amortization, and capital expenditures and the
corresponding consolidated amounts is attributable to the
Company's corporate headquarters. The following reconciles total
segment profit to consolidated income before taxes:
Year Ended December 31,
1999 1998 1997
Total segment profit $36,232 $28,643 $25,070
Gross profit on inter-segment sales (1,204) (1,925) (2,338)
Net corporate operating, interest
and other expense not allocated
to segments (3,985) (1,280) (1,605)
Purchased in-process research and
development (15,500) -- --
Investment income, net 873 8,790 1,601
Consolidated income before taxes $16,416 $34,228 $22,728
The following reconciles total segment assets to consolidated total
assets:
December 31,
1999 1998 1997
Total segment assets $487,495 $291,915 $272,706
Cash and other current assets 58,542 36,968 39,025
Net property, plant and
equipment excluding segment
specific gross machinery and
equipment (41,378) (11,364) (5,635)
Other long-term assets 164,203 49,780 45,780
Total assets $668,862 $367,299 $351,876
21
The following presents sales to external customers by geographic area
based primarily on the location of the use of the product or service:
Year Ended December 31,
1999 1998 1997
Europe $188,969 $141,004 $132,551
Pacific Rim 110,729 88,917 98,070
United States 225,795 195,309 184,533
Other (primarily Canada
and Latin America) 23,996 16,712 11,760
Total net sales $549,489 $441,942 $426,914
The following presents long-lived assets by geographic area based upon
the location of the asset:
December 31,
1999 1998 1997
Europe $ 34,129 $ 7,860 $ 7,004
Pacific Rim 6,954 4,933 3,885
United States 247,293 118,628 112,967
Other (primarily Canada
and Latin America) 1,769 489 602
Total long-lived assets $290,145 $131,910 $124,458
14. Subsequent Event
The Company entered into a $100,000 Senior Subordinated Credit
Agreement dated January 31, 2000. This agreement had a one-year term
and provided for an automatic rollover for an additional term maturing
in September 2005. The proceeds of this transaction were used to
replace the Senior Subordinated Credit Agreement dated September 30,
1999. Fees paid in January 2000 to replace and initiate the Senior
Subordinated Credit Agreements were $4,000. The replacement loan was
repaid in February 2000.
The Company sold $150,000 aggregate principal amount of Senior
Subordinated Notes due in 2007 under an indenture dated February 17,
2000. The notes were offered at 98.832% of par and pay a fixed rate
of interest of 11.625% per year. The notes are redeemable at the
Company's option prior to the due date under certain terms and
conditions. The Company's obligations under the notes are not secured
and rank junior to all of the Company's existing and future senior
debt. The indenture requires the Company, among other things, to
comply with certain financial ratios and covenants. The proceeds from
this transaction were used (1) to repay the $100,000 Senior
Subordinated Credit Agreement dated January 31, 2000, (2) to
permanently retire $20,000 of the $100,000 term loan, and (3) to repay
a portion of the outstanding borrowings under the revolving facility.
22
15. Quarterly Financial Data - (unaudited)
Summarized quarterly financial data for 1999 and 1998 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1999
Net sales $125,738 $115,794 $113,527 $194,430
Gross profit 70,182 65,241 61,628 97,215
Net income (loss) 10,802 7,881 4,253 (11,215)
Basic earnings (loss)
per share $0.89 $0.65 $0.35 $(0.92)
Diluted earnings (loss)
per share $0.89 $0.65 $0.35 $(0.92)
1998
Net sales $116,174 $107,898 $ 98,982 $118,888
Gross profit 64,076 58,857 53,577 62,994
Net income 8,776 7,151 1,938 6,437
Basic earnings per share $0.72 $0.58 $0.16 $0.52
Diluted earnings per share $0.71 $0.58 $0.16 $0.52
16. Information Concerning Common Stock - (unaudited)
The Company's Class A and Class B Common Stock are listed on the
American Stock Exchange with the symbols BIO.A and BIO.B,
respectively. The following sets forth, for the periods indicated,
the high and low prices for the Company's Class A and Class B Common
Stock.
Class A Class B
High Low High Low
1999
First Quarter 21-3/4 18-7/8 21-3/8 19-3/8
Second Quarter 29 20-3/8 27-1/2 23-3/8
Third Quarter 28 25-5/8 27 25-7/8
Fourth Quarter 27-1/2 22-1/2 27-1/8 23-1/8
1998
First Quarter 27 22-1/2 26-3/8 23-1/4
Second Quarter 34-1/8 24-1/8 33-3/4 27
Third Quarter 31-7/8 23-5/16 29-1/2 24-1/4
Fourth Quarter 24-3/4 19-1/2 22-3/8 19-3/4
On February 28, 2000, the Company had 570 holders of record of
Class A Common Stock and 265 holders of record of Class B Common
Stock. Bio-Rad has never paid a cash dividend and has no present
plans to pay cash dividends.
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Bio-Rad Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of
Bio-Rad Laboratories, Inc. (a Delaware Corporation) and
subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the period
ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Bio-Rad Laboratories, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Francisco, California, February 9, 2000,
except for Note 14, as to which the date is
February 17, 2000
24
Bio-Rad Laboratories, Inc.
Management's Discussion and Analysis
________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This discussion should be read in conjunction with the
information contained in the Company's Consolidated Financial
Statements and the accompanying notes which are an integral part
of the statements. References are to the Notes to Consolidated
Financial Statements.
The following shows operating income and expense items as a
percentage of net sales:
Year Ended December 31,
1999 1998 1997
Net sales 100.0 100.0 100.0
Cost of goods sold 46.5 45.8 44.3
Gross profit 53.5 54.2 55.7
Selling, general and
administrative expense 35.4 37.8 38.7
Product research and
development expense 9.3 9.4 10.8
Purchased in-process
research and development 2.8 - -
Income from operations 6.0 7.0 6.2
===== ===== =====
Net income 2.1 5.5 3.8
===== ===== =====
The year 1999 is highlighted by the October 1, 1999 acquisition
of Pasteur Sanofi Diagnostics, S.A. (PSD). The details of the
acquisition are discussed and disclosed throughout the remainder
of the Management Discussion and Analysis of Operations of the
1999 Annual Report. The significance of this transaction is that
the acquisition enhances Bio-Rad's clinical diagnostics market
position in the following ways: the companies have complementary
product lines with few actual overlapping products. The combined
company has increased geographic reach. There is an opportunity
to apply emerging Bio-Rad technologies to the combined product
portfolio. Finally, the Company expects to achieve operational
efficiencies. Profit performance in 2000 and 2001 could be
impacted when compared to prior years or until fully assimilated
and reorganized.
25
Corporate Results -- Sales, Margins and Expenses
Bio-Rad's net sales (sales) in 1999 were $549.5 million, an
increase of 24.3% over 1998 sales. Included in the 1999 fourth
quarter sales was $60.2 million from the recently acquired PSD
operations (see Note 2). Excluding this amount, Bio-Rad's sales
grew by 10.7% over the year 1998. For the year 1999, the impact
from currency translation on sales was less than $1.0 million.
The strengthening of the Japanese Yen offset the negative impact
from most European currencies. Excluding any impact from
currency for 1999, the Life Science and Clinical Diagnostics
segments (excluding the PSD acquisition) grew by 11.9% and 11.2%,
respectively. The growth in the Life Science segment is
attributable to laboratory products and scientific imaging
equipment excellent performance. The Clinical Diagnostics
segment growth was a result of the continuing demand for the
Company's diabetes monitoring and quality control systems. The
Analytical Instruments segment grew by 2.8% as the market for the
Company's semiconductor test and manufacturing equipment grew
significantly in the second half of 1999.
Bio-Rad's sales in 1998 amounted to $441.9 million, an increase
of 3.5% over sales in 1997. The effect of a strengthening U.S.
dollar caused a reduction in sales growth of 2.5% or
approximately $10.5 million. When 1998 sales are compared to
1997 at constant 1997 exchange rates, sales for the Company grew
6.0%. Eliminating the effect of a strengthened U.S. dollar,
sales increased 16% and 4% in the Clinical Diagnostics and Life
Science segments, respectively. The Analytical Instruments
segment experienced lower sales as the markets it served
contracted almost worldwide. The growth in the Clinical
Diagnostics segment was attributed to the December 1997 purchase
of the controls business from Chiron Diagnostics Corporation.
The Life Science segment experienced strong growth in the U.S.
especially in the imaging and microscopy product lines.
Consolidated gross margins were 53.5% for 1999 compared to 54.2%
in the prior year. After adjusting for the acquisition of PSD,
gross margins for the businesses operated for twelve months were
55.3%, an improvement over the 54.2% recorded in 1998. The Life
Science segment's gross margin improved by 1% as sales growth
provided the opportunity to lower fixed factory overhead and new
product pricing remained firm. The Clinical Diagnostics
segment's gross margin declined slightly, (0.3%), as pricing
pressure in the healthcare industry remained a considerable
factor. Also, the cost of foreign sourced products rose as the
Yen strengthened when compared to the dollar. The Analytical
Instruments segment's gross margin improved as demand increased
and pricing improved for the Company's semiconductor test and
manufacturing equipment. Cost reductions begun in prior years
have been fully implemented across this segment.
26
Consolidated gross margins were 54.2% for 1998 compared to 55.7%
for 1997. Gross margins overall were adversely affected by lower
prices on international sales caused by the strengthening U.S.
dollar and a majority of manufacturing costs being U.S. dollar
denominated. The Life Science segment margins declined from
higher service and warranty costs, and were particularly impacted
in Asia. The Clinical Diagnostics segment gross margins declined
3.1% of sales, in part from the Chiron acquisition, where several
large supply agreements existed. Continued consolidation in the
diagnostic laboratory and the role of government in diagnostic
reimbursement maintained severe pressure on prices received for
diagnostics products. Analytical Instruments segment margins
were negatively impacted by an increasingly weak semiconductor
market and the strengthening dollar.
Consolidated selling, general and administrative expense (SG&A)
decreased to 35.4% of sales in 1999 when compared to 37.8% for
1998. After adjusting for the PSD acquisition, SG&A expense for
the Company was 36.2%, a decline of 1.6% of sales from the prior
year. For the Company excluding PSD, total SG&A grew by less
than 60% of sales growth. The Company continues to make the
efficient use of SG&A expense a priority. The acquisition of PSD
should allow the Company to further leverage this expense in a
larger sales environment through the elimination of redundant
facilities and positions. In absolute dollars, the largest
increase in SG&A expense was in the Life Science segment as the
Clinical Diagnostics segment grew only slightly and Analytical
Instruments segment declined.
SG&A decreased to 37.8% of sales in 1998 from 38.7% in 1997.
Spending increased in absolute dollars only in the Clinical
Diagnostics segment, yet at a growth rate of approximately half
that in sales. The Life Science and Analytical Instruments
segments each had declines in absolute spending both from the
currency effect on foreign incurred SG&A and cost elimination
programs begun in late 1997.
Product research and development expense (R&D) increased by 23.7%
in 1999 to $51.2 million including the operations of PSD compared
to $41.4 million for the year 1998. Both Life Science and
Clinical Diagnostics segments (excluding PSD) increased R&D
spending at a rate higher than sales growth as the Company is
focusing on programs to increase sales both through new product
development and the acquisition of existing businesses. Future
spending levels are expected to be at or near current levels as a
percentage of sales. Included in income from operations is the
write-off of $15.5 million "purchased in-process research and
development expense" (IPR&D). IPR&D represents the value
assigned in a purchase business combination to research and
development projects of the acquired business that have been
commenced but not completed at acquisition. In accordance with
SFAS No. 2, "Accounting for Research and Development Costs" the
27
value of IPR&D must be charged to expense as part of the
allocation of the purchase price.
R&D decreased in 1998 by 10% to $41.4 million compared to $46.1
million for the year 1997. Spending declined in the Life Science
and Analytical Instruments segments and increased 3% in the
Clinical Diagnostics segment. Declines in the Life Science and
Analytical Instruments segments were due to the completion or
termination of projects.
Corporate Results -- Non-Operating Items
Interest expense increased substantially for the year 1999 as the
purchase of PSD was financed almost entirely with borrowed funds.
The Company borrowed approximately $225 million on October 1,
1999 to pay for the acquisition, including one time bank charges
and fees for a $200 million Credit Facility and an interim $100
million Senior Subordinated Credit Facility. Costs associated
with the Credit Facility were capitalized and will be amortized
over the five year life of the revolver and term loan. Expenses
for the Senior Subordinated Credit Facility amounted to $3.6
million to December 31, 1999. Going forward, the Company expects
to experience significantly higher interest expense. At December
31, 1999 the debt to equity ratio was 119% compared to 24% at
December 31, 1998. Average borrowings for the years 1999 and
1998 were $97.8 million and $52.3 million, respectively.
Investment income in 1999, 1998 and 1997 includes gains on sales
of marketable securities. During 1999, Bio-Rad realized $0.9
million of investment income as it liquidated its investment of
marketable securities to raise cash just prior to the PSD
acquisition. During 1998, Bio-Rad realized significant income,
$8.6 million, as it sold some of its investment in marketable
securities to increase its investment in Instrumentation
Laboratory (see Note 4).
Net other income and expense for 1999 is comprised principally of
amortization of goodwill and exchange losses (see Note 9). Net
other income and expense for 1998 was principally amortization of
goodwill. Net other income and expense for 1997 was principally
non-operating litigation costs and amortization of goodwill.
Bio-Rad's hedging program is limited to nonspeculative forward
foreign exchange contracts (with major financial institutions)
which hedge the exposure of intercompany receivables and
payables. The net exchange gain or loss results from the
estimating inherent in projecting intercompany balances and from
transaction charges.
Bio-Rad's consolidated effective tax rate was 29%, 29% and 28% in
1999, 1998 and 1997, respectively. The tax rate for all years
reflects the utilization of loss carryforwards, foreign sales
corporation benefits and foreign tax credits. The effective tax
28
rate in future periods is expected to rise as the deductibility
of goodwill amortization, interest expense as well as the
utilization of loss carry-forwards are dependent on the source
and amount of income generated by the Company.
Financial Condition
As a result of the substantial amount of debt and debt service
obligations undertaken in relation to the acquisition of PSD, the
Company now faces increased risk from inadequate levels of
liquidity and capital resources.
The Company became substantially leveraged as it entered into new
credit facilities. The Company entered into a $200 million
Credit Facility (consisting of a $100 million term loan and a
$100 million revolving facility) on September 30, 1999, replacing
the $100 million credit agreement previously in place. The new
facility provides for borrowing on a secured basis through
September 30, 2004. Interest is based upon the Eurodollar rate,
the Federal Funds effective rate or corporate based (prime)rate.
The Company also entered into an interim $100 million Senior
Subordinated Credit Agreement on September 30, 1999. This
agreement had a one year term and provided for an automatic
rollover for an additional term expiring September 30, 2005.
This credit facility was replaced on January 29, 2000 with a new
interim $100 million Senior Subordinated Credit Agreement. The
Company repaid amounts outstanding under this agreement with
proceeds from the February 2000 issuance of $150.0 million
aggregate principal amount of Senior Subordinated Notes due 2007.
The lenders have placed restrictions on the Company's ability to:
borrow further, service this and other debt, make expenditures
for capital improvements, pay dividends, repurchase the Company's
own stock and/or make strategic and tactical investments in
support of operating the business. The Company is also required
to comply with certain financial ratios. The amount of debt
undertaken in connection with this acquisition could materially
impact the financial condition of the Company should management's
plan for operating the new entity not be successful.
At December 31, 1999, the Company had available $17.1 million in
cash and cash equivalents, $21.2 million under its international
lines of credit, $51.0 million under its principal revolving
credit agreement (see Note 5) and marketable securities with a
market value of $1.2 million. We believe that this availability,
together with cash flow from operations, will be adequate to meet
our current objectives for operations, research and development
and investment in our systems and equipment.
Net cash provided by operations was $45.0 million, $27.3 million
and $21.1 million in 1999, 1998 and 1997, respectively.
29
Consolidated net accounts receivable increased approximately $90
million in 1999 when compared to 1998. This increase is
primarily attributable to receivables acquired from PSD of
approximately $75 million and an increase in fourth quarter sales
of $15 million for Bio-Rad's same period comparable operations.
Bio-Rad's management regularly reviews the allowance for
uncollectible receivables and believes net receivables are fully
realizable.
For the year ended December 1999, consolidated inventories rose
$34.0 million to $126.3 million. The PSD acquisition added
approximately $36.0 million to the Clinical Diagnostics segment
inventories. Inventory changes for comparable segments were
generally in line with sales activity, rising in the Life Science
segment, and declining in the Analytical Instruments segment.
Management regularly reviews the impact of obsolescence on
current inventory caused by the introduction of new products.
Management will continue its focus on inventory control in the
coming year to moderate capital requirements.
A valuation reserve is necessary for deferred tax assets (see
Note 6) primarily because realization of tax attributable to
foreign loss carryforwards is uncertain.
Net capital expenditures in 1999 totaled $27.3 million compared
to $21.2 million and $23.6 million in 1998 and 1997,
respectively. Expenditures in all years include clinical
diagnostic equipment placed with customers to be used with the
Company's diagnostic reagents. Expenditures in 1998 include
additions to the Clinical Diagnostics segment's southern
California manufacturing facilities to accommodate the
consolidation of operations and assets acquired in the fourth
quarter of 1997. Management regularly approves capital spending
in the normal course of business.
The Board of Directors authorized the Company to repurchase up to
$18 million of common stock over an indefinite period of time.
Through January 2000, the Company has repurchased 567,786 shares
of Class A Common Stock and 30,000 shares of Class B Common Stock
for a total of $14.1 million. The indenture restricts the
Company's ability to repurchase its own stock to an amount not to
exceed $4.0 million in the aggregate. Share repurchases made
during 1999 amounted to $2.2 million. The repurchase is designed
to improve shareholder value and to satisfy the Company's
obligations under the employee stock purchase and stock option
plans.
30
Euro - A New European Currency
On January 1, 1999, certain member countries of the European
Union began to fix the conversion rates between their national
currencies and a common currency, the "Euro". Over the period
January 1, 1999 through January 1, 2002 participating countries
will gradually transition from their national currencies to the
Euro.
This transition will have business implications including the
need to adjust internal systems to accommodate the Euro and
cross-border price transparency. A group of Corporate and
European managers have been assigned the task of preparing and
accommodating the changes required to continue to do business in
the European Union. The Company does not presently expect that
the efforts involved will have a material impact on operations,
financial position or liquidity. There will be increased
competitive pressures, and marketing strategies will need to be
continuously evaluated until the transition is complete. As a
result of competitive forces and emerging government regulations,
the Company cannot guarantee that all problems will be foreseen
and remediated, and that no material disruption will occur.
Year 2000
The scope of the Year 2000 compliance effort included (i) IT,
such as software and hardware; (ii) non-IT systems or embedded
technology for manufacturing and laboratory equipment,
environmental and safety systems, facilities and utilities (iii)
date-sensitive Company products; and (iv) the readiness of key
third party suppliers and customers.
From inception of the Company's effort on the Year 2000 issues
through December 31, 1999, the Company spent an estimated $8.0
million related to the Year 2000 readiness issue. The costs
captured include external consultants, and purchased software and
hardware. No internal costs were captured as they principally
related to payroll costs for the information systems group
working on the Year 2000 project. The Company expensed as
incurred costs related to assessment and remediation. These
costs were funded through operating cash flows. From December
31, 1999 to February 18, 2000, no material problems were reported
in any of the Company's facilities or operations. As of the date
of this filing, the Company had not experienced any material Year
2000 problems with its IT or non-IT systems or products, nor had
the Company experienced any material problems with any of its key
customers or suppliers. The Company has no indication of any
problems related to any customers or vendors.
Initial orders and shipments for the first six weeks of the new
year indicate that there may have been some accelerated
31
purchasing during the fourth quarter of 1999. The Company,
however, feels given the nature of its products that any anomaly
to its established sales cycle will be short-lived.
Financial Risk Management
Bio-Rad uses derivative financial instruments to reduce the
Company's exposure to fluctuations in foreign exchange rates and
interest rates. No derivative financial instruments are entered
into for the purpose of speculating or trading. Company policy
limits all derivative positions exclusively to reducing risk by
hedging an underlying economic exposure that can be effectively
correlated to the Company's chosen hedging vehicle. Changes in
the value of the derivative are generally offset by reciprocal
changes in Bio-Rad's underlying asset.
Bio-Rad operates and conducts business in many foreign countries
and is exposed to movements in foreign currency exchange rates.
Additionally, Bio-Rad's consolidated net equity is impacted by
the conversion of the net assets of international subsidiaries
for which the functional currency is not the U.S. dollar.
Foreign currency exposures are managed on a centralized basis by
the Company's Treasury Department. This allows for the netting
of natural offsets and lowers transaction costs and exposures.
Bio-Rad currently makes more than 50% of its sales outside the
United States and weakening in one currency can often be offset
by strengthening in another.
Bio-Rad typically enters into forward exchange contracts to sell
its foreign currency. Contracts are entered into typically for
30 to 60 days, primarily in British Sterling, Japanese Yen,
Italian Lira and German Marks. The costs are recognized in
income monthly and generally are the reciprocal of the change in
underlying assets. Bio-Rad does not hold any derivative
contracts that hedge its foreign currency denominated net asset
exposures.
Bio-Rad uses sensitivity analysis to assess the market risk
associated with its foreign currency exchange risk. Market risk
is the potential change in fair value of derivative positions
from an adverse movement in currency exchange rates. The forward
foreign exchange contracts at December 31, 1999 had a net fair
value of $58.1 million. A 10% adverse loss on quoted foreign
currency exchange rates would result in a $5.8 million loss.
This impact, of a change in exchange rates, excludes from the
analysis the offset derived from the change in the Company's
underlying assets and liabilities, which could reduce the effect
to zero.
32
New Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities" effective for fiscal years beginning after June 15,
1999, with early adoption permitted. The FASB has now delayed
the SFAS No. 133 for all fiscal quarters of all fiscal years
beginning after June 15, 2000. This statement establishes
accounting and reporting standards requiring companies to record
all derivatives on the balance sheet as either assets or
liabilities and measure those instruments at fair value. The
manner in which companies are to record gains or losses resulting
from changes in the values of those derivatives depends on the
use of the derivative and whether it qualifies for hedge
accounting. The impact of SFAS No. 133 on the Company's
financial statements will depend on a variety of factors,
including future interpretive guidance from the FASB, the future
level of forecasted and actual foreign currency transactions, the
extent of the Company's hedging activities, the types of hedging
instruments used and the effectiveness of such instruments.
However, the Company does not expect the effect of adopting SFAS
No. 133 to have a material effect on its financial statements.
Forward Looking Statements
Other than statements of historical fact, statements made in this
Annual Report include forward looking statements, such as
statements with respect to the Company's future financial
performance, operating results, plans and objectives. We have
based these forward looking statements on our current
expectations and projections about future events. However,
actual results may differ materially from those currently
anticipated depending on a variety of risk factors including
among other things: our ability to successfully integrate with
PSD, which we recently renamed "Bio-Rad Pasteur"; our substantial
leverage and ability to service our debt; our ability to
successfully develop and market new products; our reliance on and
access to necessary intellectual property; competition in and
government regulation of the industries in which we operate; and
the monetary policies of various countries. We undertake no
obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future
events, or otherwise.
33
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>8
<DESCRIPTION>EXHIBIT 21.1 - LISTING OF SUBSIDIARIES
<TEXT>
EXHIBIT 21.1 - LISTING OF SUBSIDIARIES
JURISDICTION OF
SUBSIDIARY ORGANIZATION
Bio-Rad Laboratories Pty. Limited Australia
Sanofi Diagnostics Pasteur Pty. Australia
Bio-Rad Laboratories Ges.m.b.H. Austria
Sanofi Diagnostics Pasteur HgmbH Austria
Bio-Rad International, Inc. (FSC) Barbados
Bio-Rad Laboratories S.A.-N.V. Belgium
RSL N.V. Belgium
Bio-Metrics Properties, Limited California, USA
Bio-Rad Laboratories (Israel) Inc. California, USA
Bio-Rad Leasing Corporation California, USA
Bio-Rad Pacific Limited California, USA
Bio-Rad Laboratories (Canada) Limited Canada
Sanofi Diagnositcs Pasteur Inc. Canada
Beijing Bio-Rad Analytical
Biochemistry Instrument Co., Ltd. China
SoftShell International, Ltd. Colorado, USA
Bio-Metrics, Limited Delaware, USA
Bio-Rad Export, Inc. (DISC) Delaware, USA
Bio-Metrics (U.K.) Limited England
Bio-Rad Laboratories Europe Limited England
Bio-Rad Laboratories Limited England
Bio-Rad Lasersharp Limited England
Bio-Rad Limited England
Bio-Rad Micromeasurements Limited England
Bio-Rad Microscience Limited England
Micromeasurements Limited England
Sadtler Research Laboratories Limited England
Sanofi Diagnostics Pasteur Ltd. England
Bio-Rad S.A. France
Sanofi Diagnostics France
Sanofi Diagnostics Pasteur France
ADIL Instruments S.A. France
Bio-Rad Laboratories G.m.b.H. Germany
Sanofi Diagnostics GMB Germany
Bio-Rad China Limited Hong Kong
Bio-Rad Laboratories(India)Private Limited India
Bio-Rad Laboratories Israel Limited Israel
Bio-Rad Laboratories S.r.l. Italy
Sanofi Diagnostics Pasteur S.r.l. Italy
Nippon Bio-Rad Laboratories K.K. Japan
Sanofi Fujirebio Japan
Bio-Rad Korea Ltd. Korea
Bio-Rad Micromeasurements, Inc. Massachusetts, USA
Bio-Rad Laboratories Mexico, S.A. de C.V. Mexico
Sanofi Diagnostics Pasteur Mexico
Bio-Rad Laboratories B.V. The Netherlands
Sanofi Diagnostics Pasteur BV The Netherlands
Sandia Systems, Inc. New Mexico, USA
Polaron Instruments, Inc. Pennsylvania, USA
Sanofi Polska SP ZOO Poland
Sanofi Diagnostics Pasteur LDA Portugal
Bio-Rad Laboratories Ltd. Russia
Bio-Rad Laboratories (Singapore) Pte.Limited Singapore
Sanofi Africa Ltd. South Africa
Bio-Rad Laboratories S.A. Spain
Sanofi Diagnostics Pasteur ESP Spain
Bio-Rad Laboratories AB Sweden
Bio-Rad Laboratories AG Switzerland
Sanofi Diagnostics Pasteur S.A. Switzerland
Sanofi Pacific Diagnostics Ltd. Thailand
Blood Virus Diagnostics Inc. Washington, USA
Genetic Systems Corporation Washington, USA
Sanofi Diagnostics Pasteur Inc. Washington, USA
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>9
<DESCRIPTION>EXHIBIT 23.1 - CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TEXT>
EXHIBIT 23.1 - CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by
reference in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-53335 and
33-53337). It should be noted that we have not audited any
financial statements of the Company subsequent to December 31,
1999 or performed any audit procedures subsequent to the date of
our report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Francisco, California,
March 28, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>10
<DESCRIPTION>EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
<TEXT>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from Bio-Rad Laboratories, Inc. Form 10-K for the year ended
December 31, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,087
<SECURITIES> 0
<RECEIVABLES> 203,480
<ALLOWANCES> 9,582
<INVENTORY> 126,277
<CURRENT-ASSETS> 378,717
<PP&E> 250,568
<DEPRECIATION> 124,626
<TOTAL-ASSETS> 668,862
<CURRENT-LIABILITIES> 202,521
<BONDS> 239,211
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 12,463
<OTHER-SE> 207,651
<TOTAL-LIABILITY-AND-EQUITY> 668,862
<SALES> 549,489
<TOTAL-REVENUES> 549,489
<CGS> 255,223
<TOTAL-COSTS> 255,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,741
<INCOME-PRETAX> 16,416
<INCOME-TAX> 4,695
<INCOME-CONTINUING> 11,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,721
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.96