- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________________
For the Quarterly Period Ended September 30, 2000
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
--- ---
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of November 10, 2000 was 10,318,050.
- --------------------------------------------------------------------------------
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2000
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except for share and per share amounts)
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 9,226.7 4,644.5
Accounts receivable, less allowance for doubtful accounts
of $239.1 at September 30, 2000 and $328.1 at December 31, 1999 6,385.0 5,088.9
Inventories, net (note 4) 6,751.6 6,015.3
Prepaid expenses and other current assets 1,340.2 578.7
Deferred income taxes 4,123.1 1,997.8
-------------- -------------
Total current assets 27,826.6 18,325.2
Property and equipment, net (note 5) 5,706.4 5,392.6
Intangible assets net of accumulated amortization of $2,004.4
at September 30, 2000 and $1,186.4 at December 31, 1999 13,026.1 13,816.3
Other assets 353.4 819.3
Deferred income taxes 1,868.4 1,868.4
-------------- -------------
Total assets $ 48,780.9 40,221.8
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks, current portion (note 6) $ 1,222.9 2,754.4
Accounts payable 2,694.3 2,067.6
Accrued expenses 2,648.0 1,923.8
Deferred income 372.2 369.0
Income taxes payable - 225.5
-------------- -------------
Total current liabilities 6,937.4 7,340.3
Notes payable to banks, less current portion - 11,459.3
-------------- -------------
Total liabilities 6,937.4 18,799.6
Commitments and Contingencies (note 11)
Stockholders' equity: (note 9)
Common stock, $.001 par value. Authorized 20,000,000 shares;
issued 10,595,906 shares and outstanding 10,305,475
shares at September 30, 2000; issued 7,711,716 shares and
outstanding 7,425,716 shares at December 31, 1999 10.3 7.4
Additional paid-in capital 46,117.5 22,025.9
Retained earnings (accumulated deficit) (1,977.7) 948.1
Accumulated other comprehensive loss (2,306.6) (1,559.2)
-------------- -------------
Net stockholders' equity 41,843.5 21,422.2
-------------- -------------
Total liabilities and stockholders equity $ 48,780.9 40,221.8
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 and 1999
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-------------- ------------ -------------- ------------
Net sales $ 8,150.4 7,470.2 24,490.3 22,414.5
Cost of sales 3,395.1 2,913.5 9,710.6 8,691.1
-------------- ------------ -------------- ------------
Gross profit 4,755.3 4,556.7 14,779.7 13,723.4
Operating expenses:
Research and development 871.8 802.4 2,593.3 2,361.2
Sales and marketing 1,325.4 1,123.6 4,065.3 3,358.4
General and administrative 3,420.4 1,052.5 6,183.1 3,220.0
Amortization of intangibles 274.6 267.0 818.0 757.9
-------------- ------------ -------------- ------------
Total operating expenses 5,892.2 3,245.5 13,659.7 9,697.5
-------------- ------------ -------------- ------------
Operating income (loss) (1,136.9) 1,311.2 1,120.0 4,025.9
Interest income (expense), net 13.1 (253.3) (180.1) (739.9)
Other income (expense), net (46.8) 67.1 47.5 94.4
-------------- ------------ -------------- ------------
Income (loss) before income taxes (1,170.6) 1,125.0 987.4 3,380.4
Income tax expense (benefit) (609.0) 223.4 59.9 653.8
-------------- ------------ -------------- ------------
Net income (loss) (561.6) 901.6 927.5 2,726.6
Non-cash preferred stock dividend and
effects of beneficial conversion (2,384.1) - (3,853.4) -
-------------- ------------ -------------- ------------
Net income (loss) available to common stockholders $ (2,945.7) 901.6 (2,925.9) 2,726.6
============== ============ ============== ============
Net income (loss) per share:
Basic $ (0.35) 0.12 (0.37) 0.38
============== ============ ============== ============
Diluted $ (0.35) 0.12 (0.37) 0.35
============== ============ ============== ============
Shares used to compute net (loss) income per share:
Basic 8,362.0 7,248.3 7,997.3 7,205.9
============== ============ ============== ============
Diluted 8,362.0 7,830.3 7,997.3 7,702.2
============== ============ ============== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nne Months Ended September 30, 2000 and 1999
(unaudited)
Nine Months Ended
September 30,
2000 1999
----------- ---------
Cash flows from operating activities:
Net income $ 927.5 2,726.6
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,588.1 1,521.5
Changes in assets and liabilities
Accounts receivable (1,296.1) (1,763.0)
Inventories (1,103.5) (195.8)
Prepaid expenses and other current assets (761.5) 336.6
Deferred income taxes 346.6 -
Other assets 465.7 (18.6)
Accounts payable
652.2 (205.0)
Accrued expenses 1,051.8 (1,828.8)
Deferred income (22.0) (225.4)
Income taxes payable (200.2) (292.4)
--------- --------
Net cash provided by (used in) operating activities 1,648.6 55.7
--------- --------
Cash flows used in investing activities: purchases of property and equipment (1,083.9) (810.8)
--------- ---------
Cash flows provided by (used in) financing activities:
Proceeds from the exercise of options 2,909.1 188.6
Proceeds from the exercise of warrants 750.0 -
Proceeds from the issuance of Common Stock 5,350.0
Proceeds from the issuance of preferred stock and warrants 8,414.2 -
Repayments to bank (12,990.9) (1,889.8)
Payments on capital lease obligations (13.3) -
---------- ---------
Net cash provided by (used in) financing activities 4,419.1 (1,701.2)
---------- ---------
Net increase (decrease) in cash and cash equivalents 4,983.8 (2,456.3)
Effect of exchange rates on cash and cash equivalents (401.6) (102.7)
Cash and cash equivalents at beginning of year 4,644.5 7,076.9
----------- ---------
Cash and cash equivalents at end of period $ 9,226.7 4,517.9
=========== =========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 325.5 880.1
========== =========
Income taxes $ 473.2 327.6
========== =========
Supplemental disclosure of non-cash information:
Preferred stock accretion $ 2,425.8 0.0
========== =========
Income tax benefit from exercise of stock options $ 2,471.8 0.0
========== =========
The accompanying notes are an integral part of these 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 are unaudited
and have been prepared by our company 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/A, for the fiscal year
ended December 31, 1999. In the opinion of management, the accompanying
condensed consolidated unaudited financial statements include all adjustments,
which are necessary for a fair presentation. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
results to be expected for the full fiscal year.
2. General
Our company develops, manufactures, markets and distributes products and
services that are widely used in biomedical research. Our products and services
enable scientists to better understand the biochemistry, immunology and cell
biology of the human body, aging and certain diseases such as cancer, arthritis
and other inflammatory diseases, 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.
Our principal offices are located at 542 Flynn Road, Camarillo, California,
93012, and our telephone number is (805) 383-5200.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of BioSource
International, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
Financial Instruments
The carrying value of financial instruments such as cash and cash
equivalents, accounts receivable, payables and short-term debt approximates
their fair value at September 30, 2000 and December 31, 1999 due to the short-
term nature of these instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value) for raw materials and work in process and the average-
cost method for finished goods.
Depreciation and amortization
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment and goodwill is provided using the straight-line method
over the estimated useful lives of the related assets, which generally range
from three to fifteen years. Real property is depreciated over thirty-nine
years. Leasehold improvements are amortized using the straight-line method over
their estimated useful lives or the lease term, whichever is shorter.
6
License Agreements
License agreements are recorded at cost and are amortized using the
straight-line method over the shorter of the estimated useful lives of the
license or the license term which is generally between five and ten years. These
costs are included in other assets in the accompanying condensed consolidated
balance sheet.
Sale Recognition
Sales and related cost of goods sold are recognized upon the shipment of
product. Customer prepayments for sera, media and buffer, custom antibody or
custom peptide products are recorded as deferred revenue until the product is
shipped. Upon shipment, the sale and related cost of goods sold is recognized.
In 1999 we earned royalties on certain products licensed to others and classify
those royalties in net sales.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Long-lived Assets
It is our policy 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 it may be impaired. If this review
indicates that the 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 our long-lived assets would be reduced to the estimated fair
market value based on discounted cash flows.
Comprehensive income
We adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. SFAS No.
130 establishes standards to measure all changes in equity that result from
transactions and other economic events other than transactions with owners.
Comprehensive income is the total of net earnings and all other non-owner
changes in equity. Except for net earnings and foreign currency translation
adjustments, we do not have any transactions and other economic events that
qualify as comprehensive income as defined under SFAS No. 130.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. This affects the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The assets and liabilities of our foreign subsidiaries are translated at the
rate of exchange at the balance sheet date, and related revenues and expenses
are translated at the average exchange rate in effect during the period.
Resulting translation adjustments are recorded as a component of accumulated
other comprehensive loss. Gains and losses from foreign currency transactions
are included in net income.
7
4. Inventories (amounts in thousands)
Sep. 30, 2000 Dec. 31, 1999
-------------- ---------------
Raw materials...................... $ 3,379.7 4,060.0
Work in process.................... 998.1 598.6
Finished goods..................... 5,866.4 5,040.7
------------ -------------
10,244.2 9,699.3
Less inventory reserve............. 3,492.6 3,684.0
------------ -------------
$ 6,751.6 6,015.3
============ =============
5. Property and Equipment (amounts in thousands)
Sep. 30, 2000 Dec. 31, 1999
------------- -------------
Land................................ $ 360.0 360.0
Building and improvements........... 2,207.4 2,255.0
Machinery and equipment............. 4,618.3 4,157.4
Office furniture and equipment...... 2,058.8 1,883.1
Leasehold improvements 415.7 107.9
------------- -------------
9,660.2 8,763.4
Less accumulated depreciation
and amortization.................. 3,953.8 3,370.8
------------- -------------
$ 5,706.4 5,392.6
============= =============
6. Notes Payable to Banks
As of May 2000, the Company had repaid all of its remaining notes payable
borrowed in December 1998 to finance the acquisitions of Quality Controlled
Biochemicals and Biofluids. In April 2000, the Company established a revolving
line of credit that provides for borrowings up to $3,400,000 and bears interest
at a rate of 2% per annum in excess of either the bank's adjusted treasury rate,
for a variable term, or the bank's LIBOR rate, also for a variable term. The
line of credit expires on February 26, 2001. The Company is required to comply
with certain financial and non-financial covenants. At September 30, 2000 the
Company was in compliance with these covenants and had no outstanding balance on
the line of credit.
In June 1996, the Company secured financing from Heller Financial Corp. in
order to partially finance the purchase of its previous corporate headquarters
located at 820 Flynn Road, Camarillo, CA 93012. The original loan principal was
$745,000 and is secured by a first trust deed on the property. The loan bears
interest at a rate of 9.4% and has a 20-year term. The principal balance
outstanding at September 30, 2000 was $674,710. In addition, in June 1996, we
obtained a loan from the Small Business Administration in order to partially
finance the purchase of the previous corporate headquarters building. The
original loan principal was $616,000 and is secured by a second trust deed on
the property. The loan bears interest at a rate of 7.6% and has a 20-year term.
The outstanding principal balance at September 30, 2000 was $548,178. Payments
to both Heller Financial Corp. and the Small Business Administration are
guaranteed by the previous chairman of the board of our Company.
On November 7, 2000 the company completed the sale of its previous corporate
headquarters located at 820 Flynn Road, Camarillo, California. In conjunction
with this sale, the Company paid the remaining $672,100 balance due on the
Heller Financial Corp. loan and on November 15, 2000 will pay the remaining
$543,600 due on the Small Business Administration loan. As of September 30,
2000, the Company classified these notes payable on the accompanying balance
sheet as short-term notes payable. As a result of the sale of the building,
the Company recognized a loss of $44,000, which is shown in the other income
(expense) section of the accompanying statement of operations for the three and
nine months ended September 30, 2000.
8
7. Earnings per Share
The Company accounts for earnings per share under the provisions of SFAS
No. 128, "Earnings per Share". SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS).
The reconciliation of basic to diluted weighted average shares is as
follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders $ (2,945.7) 901.6 (2,925.9) 2,726.6
=========== ======= ======== =======
Weighted average shares used in
basic computation 8,362.0 7,248.3 7,997.3 7,205.9
Dilutive stock options and warrants - 582.0 - 496.3
----------- ------- -------- -------
Weighted average shares used for
diluted computation 8,362.0 7,830.3 7,997.3 7,702.2
=========== ======= ======== =======
Options to purchase 1,750,942 shares at a weighted average exercise price of
$7.83 per share and 614,616 shares at a weighted average exercise price of $5.33
per share were outstanding as of September 30, 2000 and 1999, respectively, but
were not shown in the computation of diluted net income (loss) per share for the
three and nine month periods ended September 30, 2000 and 1999, respectively,
because their effect would be anti-dilutive.
On September 20, 2000 389,143 shares of the Series B Redeemable Preferred
stock were converted into 1,556,574 shares of common stock at a weighted average
common stock exercise price of $6.06. These shares, for the period prior to
their conversion, were not included in the computation of diluted net (loss)
per share for the three and nine-month periods ended September 30, 2000 because
their effect would be anti-dilutive.
Warrants to purchase 118,100 shares at a weighted average exercise price of
$11.10 per share were outstanding as of September 30, 1999 but were not included
in the computation of diluted net income per share for the three and nine month
periods ended September 30, 1999 because the effect would be anti-dilutive.
Warrants to purchase 100,000 shares at a weighted average exercise price of
$7.50 per share were outstanding as of September 30, 1999 but were not included
in the computation of diluted net income per share because their effect would be
anti-dilutive.
9
9. Stockholders Equity
a) Comprehensive income is determined as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income (loss) $ (561.6) 901.6 927.5 2,726.6
Foreign currency translation
adjustments (406.4) 91.0 (747.4) (502.4)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ (968.0) 992.6 180.1 2,224.2
========== ========== ========== ==========
b) Redeemable Preferred Stock
On February 15, 2000, the Company issued 371,300 shares of $0.001 par value
Series B Redeemable Preferred Stock with an initial aggregate liquidation value
of $9,000,300. The Series B Preferred Stock is initially convertible into
1,485,200 shares of the Company's Common Stock at an effective price of $6.06
per share of Common Stock. The Series B Preferred Stock shares are entitled to
receive dividends at an annual rate of 8% of the original issue price. Unless
all dividends on the outstanding Series B Preferred Stock shares have been paid,
no dividends or other distributions shall be paid to Common Stock shareholders.
The Series B Preferred Stock shareholders have liquidation preference to the
Common Stock shareholders. On September 20, 2000, the Series B Preferred Stock
automatically converted to common stock as the last reported sales price of the
Company's common stock had been above $20 for 20 consecutive days. The 389,143
shares of Series B Redeemable Preferred Stock were converted into 1,556,574
common shares. Of the 389,143, 371,300 shares represented originally issued
preferred stock and 17,843 shares represented convertible preferred dividends.
As a result of the conversion, the Company recognized the remaining $2,384,100
of non-cash preferred stock dividends. Total non-cash preferred stock dividends
and effects of beneficial conversion related to the preferred stock totaled
$3,853,400.
In connection with the issuance of Series B Preferred Stock the holders
received detachable stock purchase warrants. The warrants are exchangeable for
1,287,000 shares of Common Stock at an exercise price of $7.77 per share. The
Company allocated the net proceeds of $8,385,000 based on the relative fair
value of the warrants and the Series B Preferred Stock. The book value of the
Series B Preferred Stock of $5,581,600 accreted to its liquidation value by
$995,100 related to the beneficial conversion feature then the remainder upon
conversion. Such accretion has no effect on net income, but will reduce the
income available to common shareholders used to calculate basic earnings per
share.
c) Common Stock
On September 18, 2000, two new executives of the Company invested a total
of $850,000 in the Company, representing 41,428 shares of common stock. In
connection with this investment, the Company incurred a one-time non-cash
compensation charge of $600,000. Additionally, on September 18, 2000, a major
shareholder invested an additional $4.5 million dollars into the Company
representing 300,000 shares of common stock.
10
10. 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.
Our accounting policies of the segments below are the same as those
described in the summary of significant accounting policies, except that we are
only able to track net sales for the geographic "Sales-to" segments. We evaluate
performance for the "Sales-from" segments on net revenues and profit or loss
from operations. Our reportable segments are strategic business units that offer
geographic product availability. They are managed separately because each
business requires different marketing and distribution strategies. Business
information is summarized as follows:
Sales-from Segments:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net sales to external customers from:
United States:
Domestic $ 4,933.4 4,212.2 14,301.3 11,937.9
Export 1,008.6 1,194.1 3,223.3 3,578.8
Total United States 5,942.0 5,406.3 17,524.6 15,516.7
Europe 2,208.4 2,063.9 6,965.7 6,897.8
---------- ---------- ---------- ----------
Consolidated $ 8,150.4 7,470.2 24,490.3 22,414.5
========== ========== ========== ==========
Operating income (loss):
United States $ (1,816.9) 1,051.3 (547.3) 2,856.8
Europe 680.0 259.9 1,667.3 1,169.1
---------- ---------- ---------- ----------
Consolidated $ (1,136.9) 1,311.2 1,120.0 4,025.9
========== ========== ========== ==========
Sales-to Segments:
Net sales to external customers:
United States $ 4,933.4 4,212.2 14,301.3 11,937.9
Europe 1,879.6 2,347.4 6,360.6 7,736.2
Japan 761.7 733.8 2,357.6 2,213.7
Other 575.7 176.8 1,470.8 526.7
---------- ---------- ---------- ----------
Consolidated $ 8,150.4 7,470.2 24,490.3 22,414.5
========== ========== ========== ==========
11. Commitments and Contingencies
On May 1, 2000, the Company began leasing a new facility located at 542 Flynn
Road, Camarillo, CA 93021, approximately two blocks from its old facility. The
new building occupies approximately 52,000 square feet of space and became the
Company's primary operating facility in July 2000. The term of the lease is 5
years and 2 months, beginning May 1, 2000 and expiring on June 30, 2005, with an
additional 5 year option to extend the term to June 30, 2010. Rents for the
first year are $27,551 per month and are adjusted annually based on certain
criteria, including normal cost of living and consumer price index activity.
On June 14, 2000, one of our former employees, Jordan Fishman, Ph.D., filed a
legal action against us in the United States Central District Court of
California. Mr. Fishman's complaint asserts a number of claims for relief
against BioSource and alleges that BioSource breached Mr. Fishman's employment
agreement by failing to register his stock options on a Form S-8 Registration
Statement by December 8, 1999. Second, Fishman claims that this breach,
11
coupled with BioSource's representations regarding a planned public offering
(which prevented Company insiders from trading in the Company's common stock)
and BioSource's subsequent termination of Fishman's employment, were each part
of a larger scheme to interfere with, and ultimately prevent, the sale of his
common stock. On August 11, 2000, we filed a motion to dismiss five of Mr.
Fishman's six causes of action, and on September 29, 2000, the court dismissed
three of the causes. On October 4, 2000, Mr. Fishman filed a first amended
complaint. BioSource moved to dismiss two of the remaining causes of action, one
based on new California Supreme Court precedent, and the other based on
deficiencies in Mr. Fishman's allegations. That motion is set to be heard on
November 27, 2000. No substantive adjudication of Mr. Fishman's claims has yet
occurred, however, the Company believes that it has substantial defenses to
Fishman's remaining causes of action. We have also commenced an arbitration
proceeding against the former shareholders of our QCB division, including Mr.
Fishman, to recover damages we believe we have suffered in connection with
misrepresentations and omissions made by those shareholders in the
representations and warranties contained in the original Stock Purchase
Agreement for QCB executed on December 9 , 1998. The arbitration proceedings are
in a preliminary stage.
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 10-K/A for the fiscal year ended December 31, 1999, and all other
recent filings we have made with the Securities and Exchange Commission.
This Form 10-Q contains forward-looking statements, which are made pursuant
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. Within this Form 10-Q, words such as "believes", "designed",
"anticipates", and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
These forward-looking statements involve a number of risks and uncertainties,
including the timely development and market acceptance of our products and
technologies and other factors described throughout this Form 10-Q and in our
other filings with the Securities and Exchange Commission. The actual results
that we achieve may differ from any forward-looking statements due to such risks
and uncertainties. We do not undertake any obligation to revise or update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
Overview
Our company develops, manufactures, markets and distributes products and
services that are widely used in biomedical research. Our products and services
enable scientists to better understand the biochemistry, immunology and cell
biology of the human body, aging and certain diseases such as cancer, arthritis
and other inflammatory diseases, AIDS and certain other infectious diseases. We
have a wide variety of products, including immunoassay and ELISA test kits;
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. We also manufacture and market custom oligonucleotides, peptides and
antibodies to the specifications of our customers. We use recombinant DNA
technology to produce cytokines and other proteins. We have registered our
analyte specific reagents with the FDA and have received a license to sell these
products as Class I Medical Devices. We market these products to in vitro
diagnostic manufacturers and clinical reference laboratories as "active
ingredients" in the tests they produce to identify various specific diseases or
conditions. In order to market these products as medical devices, we are
required to be in compliance with the FDA's Current Good Manufacturing Practices
and Regulations.
Results of operations for the three months ended September 30, 2000
Revenues: Net sales for the three months ended September 30, 2000 and 1999 were
$8,150,400 and $7,470,200, respectively, representing an increase of $680,200 or
9.1% in 2000 as compared to 1999. Net sales for the three months ended September
30, 2000 would have increased by $911,000 or 12.2% over the three months ended
September 30, 1999, representing an additional $231,000, before giving effect to
the impact of negative foreign exchange. Geographically, our sales for the
three months ended September 30, 2000 to customers in the North America
increased by 17.5% due primarily to increased sales of existing products such as
oligonucleotides, proteins, and products related to signal transduction. Sales
in the rest of the world increased 12.1% as compared to the three months ended
September 30, 1999 due primarily to higher sales of clinical products and sales
to customers in Europe decreased by 9.9% as compared to the three months ended
September 30, 1999 due to foreign currency fluctuations and declining sales in
clinical products.
12
Gross profit: Gross profit for the three months ended September 30, 2000 and
1999 was $4,755,300 and $4,556,700 respectively, representing a gross margin of
58.3% and 61.0% for three months ended September 30, 2000 and 1999. Gross
profit for the quarter ended September 30, 2000 was negatively affected by the
costs associated with the July 2000 move to a new facility and raw material cost
increases in the serum and media product lines. Gross profit for the quarter
ended September 30, 2000 increased 4.4 % over the comparable prior year period
due primarily to increased sales volume.
Research and development: Research and development expense for the three months
ended September 30, 2000 and 1999 amounted to $871,800 and $802,400,
respectively. As a percentage of net sales, research and development
expenditures were 10.7% of net sales for the each of the quarters ended
September 30, 2000 and 1999.
Sales and marketing: Sales and marketing expense for the three months ended
September 30, 2000 and 1999 amounted to $1,325,400 and $1,123,600 respectively.
The increased sales and marketing expense of $201,800 or 18.0% is attributable
to increased advertising and promotional expenses, and to the effects of a
direct sales force in the United Kingdom which began operations in January 2000.
As a percentage of net sales, sales and marketing expenditures were 16.3% of net
sales for the quarter ended September 30, 2000 and 15.0% of net sales for the
quarter ended September 30, 1999.
General and administrative: General and administrative expense for the three
months ended September 30, 2000 and 1999 amounted to $3,420,400 and $1,052,500
respectively, an increase of $2,367,900. $1,700,000 of the increase is
attributable to the transition to a new management team including: 1) a non-cash
charge associated with a stock purchase of $600,000 2) professional fees of
$200,000, and 3) $900,000 related to severance cost for the retirement of the
previous President and Chief Operating Officer of the Company. Approximately
$200,000 of the increase is attributable to an accrual for a middle management
bonus program, $150,000 of the increase is related to legal costs in connection
with the termination of Mr. Fishman's employment and subsequent litigation with
Mr. Fishman and $35,000 is related to relocation costs.
Amortization of intangible assets: Amortization of intangible assets for the
three months ended September 30, 2000 and 1999 amounted to $274,600 and
$267,000, respectively and is related to the amortization of the intangible
assets from the QCB and Biofluids acquisitions.
Interest income (expense), net: Net interest income for the three months ended
September 30, 2000 was $13,100. $41,800 is related to interest income on cash
invested in short-term securities during the quarter offset by $28,700 of
interest expense related to the loan on the Company's old building. Net
interest expense was $253,300 for the three months ended September 30, 1999.
$325,100 was related to interest expense on the loans associated with the
acquisitions of QCB and Bioluids in December 1998, offset by $71,800 of interest
income from cash invested in short term investments. The decrease in interest
expense from the third quarter of 2000 compared to the third quarter of 1999 was
due to the early paydown of the notes payable related to the acquisitions of QCB
and Biofluids.
Income tax expense (benefit): The income tax benefit for the three months ended
September 30, 2000 was $609,000 and the provision for income tax expense was
$223,400 for the three months ended September 30, 1999. Due to the one-time
charges and other increases in expenses incurred in the third quarter of 2000,
the Company re-evaluated and adjusted its effective tax rate. This, along with
the Company's current permanent tax benefits including an R & D tax credit and
the manufacturing investment tax credit, have caused the Company's effective tax
rate to be adjusted from it's previous 31% rate to 6%. The 1999 effective
income tax rate reflects a benefit that was obtained from the utilization of a
portion of the prior years net operating losses generated by our European
operations. All of the European net operating losses were recognized in 1999.
Results of operations for the nine months ended September 30, 2000
Revenues: Net sales for the nine months ended September 30, 2000 and 1999 were
$24,490,300 and $22,414,500, respectively, representing an increase of
$2,075,800 or 9.3% in 2000 as compared to 1999. Net sales for the nine months
ended September 30, 2000 would have increased by $2,761,800 or 12.3% over the
nine months ended September 30, 1999, representing an additional $686,000,
before giving effect to the impact of negative foreign exchange.
Geographically, our sales for the nine months ended September 30, 2000 to
customers in the North America increased by 20.2% due primarily to increased
sales of existing products such as oligonucleotides, proteins, and products
related to signal transduction. Sales in the rest of the world increased 5.6%
as compared to the nine months ended September 30, 1999 due primarily to higher
sales of clinical products and sales to customers in Europe decreased by 8.4% as
compared to the nine months ended September 30, 1999 due to foreign currency
fluctuations and declining sales in clinical products.
13
Gross profit: Gross profit for the nine months ended June 30, 2000 and 1999 was
$14,779,700 and $13,723,400, respectively, representing a gross margin of 60.3%
and 61.2%, respectively. Gross profit for the nine months ended September 30,
2000 increased 7.7% over the comparable prior year period due primarily to
increased sales volume.
Research and development: Research and development expense for the nine months
ended September 30, 2000 and 1999 amounted to $2,593,300 and $2,361,200
respectively. As a percentage of net sales, research and development
expenditures were 10.6% and 10.5% of net sales for the nine months ended
September 30, 2000 and 1999, respectively.
Sales and marketing: Sales and marketing expense for the nine months ended
September 30, 2000 and 1999 amounted to $4,065,300 and $3,358,400 respectively.
The increased sales and marketing expense of $706,900 or 21% is attributable to
increased advertising and promotional expense, new catalog and other brochure
expenditures, increased trade show participation, and to the creation of a
direct sales force in the United Kingdom.
General and administrative: General and administrative expense for the nine
months ended September 30, 2000 and 1999 amounted to $6,183,100 and $3,220,000
respectively, an increase of $2,963,100. $523,000 of the increase is due to the
one time charge associated with the withdrawal of the Company's follow-on common
stock offering in the second quarter of 2000. $1,700,000 of the increase is
attributable the transition to a new management team including: 1) a non-cash
charge associated with a stock purchase of $600,000 2) professional fees of
$200,000 and 3) $900,000 related to severance charges for the retirement of the
previous President and Chief Operating Officer of the Company. Approximately
$200,000 of the increase is attributable to an accrual for a middle management
bonus program, $190,000 of the increase is related to legal costs in connection
with the termination of Mr. Fishman's employment and subsequent litigation with
Mr. Fishman and $35,000 is related to relocation costs.
Amortization of intangible assets: Amortization of intangible assets for the
nine months ended September 30, 2000 and 1999 amounted to $818,000 and $757,900,
respectively. The amortization of intangible assets relates to the amortization
of the intangible assets from the QCB and Biofluids acquisitions.
Interest income (expense), net: Net interest expense for the nine months ended
September 30, 2000 was $180,100. $325,500 is related to interest expense
associated with the loan on the Company's old building and interest expense on
the loans associated with the acquisitions of QCB and Bioluids in December 1998.
This is offset by $145,400 of interest income on cash invested in short-term
securities during the nine months ended September 30, 2000. Net interest
expense was $739,900 for the nine months ended September 30, 1999. $1,072,000
was related to interest expense associated with the loan on the Company's old
building to the loans associated with the acquisitions of QCB and Bioluids in
December 1998. This was offset by $332,100 of interest income from cash
invested in short-term investments.
Provision for income taxes: Income tax expense for the nine months ended
September 30, 2000 and 1999 was $59,900 and $653,800, respectively. Due to the
one-time charges incurred and other increases in expenses incurred in the
quarter ended September 30, 2000, the Company re-evaluated and adjusted its
effective tax rate. The Company's current availability of tax benefits from
utilizing R & D and manufacturing investment tax credits and other tax
incentives, have caused the Company's effective tax rate to be adjusted
downward from it's previous 31% rate to 6%. The 1999 effective income tax rate
reflects a benefit that was obtained from the utilization of a portion of the
prior years net operating losses generated by our European operations. All of
the European net operating losses were recognized in 1999 and accordingly, the
income tax rate for 2000 does not reflect the use of any net operating losses.
Recently Issued Accounting Standards:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. We are evaluating the
Statement's provisions to determine the effect on our financial statements. In
addition, the impact of SFAS No. 133 will depend on the terms of future
transactions.
14
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on recognition, presentation, and
disclosure of revenues in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from implementation
of SAB 101 would be reported as a change in accounting principle. In June 2000,
the SEC issued SAB 101B which delays the implementation date of SAB 101 until
the fourth quarter of fiscal years beginning after December 15, 1999.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
Application of FIN 44 did not have an affect on the Company's financial
reporting.
While the Company has not fully assessed the impact of the adoption of
these recently issued accounting pronouncements, the Company believes that
adoption of these accounting pronouncements will not have a significant impact
on the Company.
Liquidity and Capital Resources:
Cash and cash equivalents as of September 30, 2000 of $9,226,700 increased
by $4,582,200 or 100% from $4,644,500 at December 31, 1999. The increase in cash
was due in part to equity investments made by a major shareholder group
($12,914,200) in February and September of 2000 and two new executives
($850,000) in September 2000. Also, proceeds of $2,909,100 were received from
the exercise of employee stock options and warrants. The Company also generated
cash from operations of $1,648,600 for the nine months ended September 30, 2000.
This was offset by $12,990,900 of accelerated principal payments relating to the
extinguishment of debt incurred to acquire QCB and Biofluids in December 1998
and by capital expenditures of $1,083,900 which were primarily for the purchases
of laboratory, manufacturing and computer equipment.. Working capital, which is
the excess of current assets over current liabilities was $20,889,200 at
September 30, 2000 as compared to $10,984,900 at December 31, 1999 representing
an increase of $9,904,300 or 90%, principally due to the increase in cash and
deferred income taxes related to the income tax benefit from the exercise of
stock options.
On February 15, 2000, the Company issued 371,300 shares of $0.001 par value
Series B Redeemable Preferred Stock and received net proceeds of $8,414,200.
These funds were used to reduce the Company's notes payable related to the
acquisitions of QCB and Biofluids in December 1998.
On September 18, 2000, two new executives of the Company invested a total
of $850,000 in the Company, representing 41,428 shares of common stock.
Additionally, on September 18, 2000, a major shareholder invested an additional
$4,500,000 million dollars into the Company representing 300,000 shares of
common stock.
In the nine months ended September 30, 2000, the Company received
$2,909,100 from the issuance of common stock related to the exercise of stock
options and $750,000 from the exercise of warrants.
The Company has never paid dividends on common stock and have no plans to
do so in fiscal 2000. Our earnings will be retained for reinvestment in the
business.
The Company expects to be able to meet our 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 secure debt financing from time to time to take advantage
of favorable conditions in the market or in connection with our corporate
development activities.
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this report before purchasing shares of our common
stock. Investing in our common stock involves a high degree of risk. If any of
the following events or outcomes actually occur, our business, operating results
and financial condition would likely suffer. As a result, the trading price of
our common stock could decline, and you may lose all or part of the money you
paid to purchase our common stock.
15
Risks Related to Our Business
Failure to manage our growth and expansion could impair our business.
We historically have sought, and will continue to seek, to increase our sales
and profitability primarily through the acquisition or internal development of
new product lines, additional customers and new businesses. Our historical
revenue growth is primarily attributable to our acquisitions and new product
development and, to a lesser extent, to increased revenues from our existing
products. We expect that future acquisitions, if successfully consummated, will
create increased working capital requirements, which will likely precede by
several months, any material contribution of an acquisition to our net income.
Our ability to achieve our expansion objectives and to manage our growth
effectively and profitably depends upon a variety of factors, including:
. our ability to internally develop new products;
. our ability to make profitable acquisitions;
. integration of new facilities into existing operations;
. hiring, training and retention of qualified personnel;
. establishment of new relationships or expansion of existing relationships with
customers and suppliers; and
. availability of capital.
In addition, the implementation of our growth strategy will place significant
strain on our administrative, operational and financial resources and increased
demands on our financial systems and controls. Our ability to manage our growth
successfully will require us to continue to improve and expand these resources,
systems and controls. If our management is unable to manage growth effectively,
our operating results could be adversely affected. Moreover, there can be no
assurance that our historic rate of growth will continue, that we will continue
to successfully expand or that growth or expansion will result in profitability.
We cannot guarantee that our future acquisitions will be successful.
We compete for acquisition and expansion opportunities with companies which
have significantly greater financial and management resources than us. There can
be no assurance that suitable acquisition or investment opportunities will be
identified, that any of these transactions can be consummated, or that, if
acquired, these new businesses can be integrated successfully and profitably
into our operations. These acquisitions and investments may also require a
significant allocation of resources, which will reduce our ability to focus on
the other portions of our business, including many of the factors listed in the
prior risk factor.
Reduction or delays in research and development budgets and in government
funding may negatively impact our sales.
Our customers include researchers at pharmaceutical and biotechnology
companies, academic institutions and government and private laboratories.
Fluctuations in the research and development budgets of these researchers and
their organizations could have a significant effect on the demand for our
products. Research and development budgets fluctuate due to numerous factors
that are outside our control and are difficult to predict, including changes in
available resources, spending priorities and institutional budgetary policies.
Our business could be seriously damaged by any significant decrease in life
sciences research and development expenditures by pharmaceutical and
biotechnology companies, academic institutions or government and private
laboratories.
A significant portion of our sales has been to researchers, universities,
government laboratories and private foundations whose funding is dependent upon
grants from government agencies such as the U.S. National Institutes of Health
and similar domestic and international agencies. Although the level of research
funding has increased during the past several years, we cannot assure you 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.
16
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 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. 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.
Our ability to raise the capital necessary to expand our business is uncertain.
In the future, in order to expand our business through internal development or
acquisitions, we may need to raise substantial additional funds through equity
or debt financings, research and development financings or collaborative
relationships. However, this additional funding may not be available or, if
available, it may not be available on economically reasonable terms. In
addition, any additional funding may result in significant dilution to existing
stockholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through collaborative partners that may require
us to release material rights to our products.
Our research and development efforts for new products may be unsuccessful.
We incur significant research and development expenses to develop new products
and technologies. There can be no assurance that any of these products or
technologies will be successfully developed or that if developed, will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment; we could lose our entire investment in
these new products and technologies.
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. 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 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 you 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 our market. 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. An 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 you
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:
. availability, quality and price relative to competitive products;
. the timing of introduction of the product relative to competitive products;
. scientists' opinion of the product's usefulness;
. citation of the product in published research; and
. 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.
Failure to attract and retain qualified scientific or production personnel or
loss of key management or key personnel could hurt our business.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining this qualified personnel
base. Although we believe we have been and will be able to attract and retain
these personnel, there can be no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production and marketing, will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business.
Our success also will continue to depend to a significant extent on the members
of our management team. Except for certain severance agreements with its Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer and Vice
President of Human Resources, the Company does not have employment agreements
with any of the executive officers or key personnel or maintain any "key man"
insurance policies regarding any of these individuals. We may not be able to
retain the services of our executive officers and key personnel or attract
additional qualified members to management in the future. The loss of services
of any of our key management or employees could have a material adverse effect
upon our business.
Many of our customers are obtaining our products through new distribution
channels and methods that may adversely impact our results of operations and
financial condition.
Many of our customers have developed purchasing initiatives to reduce the
number of vendors they purchase from in order to lower their supply costs.
These activities force us to supply the large distributors with our products at
a discount to reach those customers. For similar reasons, many larger customers,
including the federal government, have special pricing arrangements, including
blanket purchase agreements. These agreements may limit our pricing flexibility
with respect to our products, which could adversely impact our business,
financial condition and results of operations. In addition, although we accept
and process some orders through our Internet website, we also implement sales
through third-party Internet vendors. Internet sales through third parties will
negatively impact our gross margins because we pay commission on these Internet
sales.
We rely on international sales, which are subject to additional risks.
International sales accounted for approximately 41.6% of our revenues in the
first nine months of 2000 and 46.7% of our revenues in the first nine months of
1999. International sales can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:
. unexpected changes in regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations, including foreign
distributor relationships;
18
. longer payment cycles;
. adverse economic or political changes;
. potential trade restrictions, exchange controls and import and export
licensing requirements;
. problems in collecting accounts receivable; and
. potentially adverse tax consequences.
We intend to continue to generate revenues from sales outside the United
States in the future. Future distribution of our products outside the United
States 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 19.0% of our sales for the nine months ended
September 30, 2000 are made in foreign currencies, primarily Belgian francs,
British pounds, and German marks. 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. In the past, gains and losses on
the conversion of our accounts receivable arising from international operations
have contributed to negative fluctuations in our results of operations. In
general, increases in the exchange rate of the United States dollar to foreign
currencies cause our products to become relatively more expensive to customers
in those countries, leading to a reduction in sales or profitability in some
cases. We historically have not, and currently are not, using hedging
transactions or other means to reduce our exposure to fluctuations in the value
of the United States dollar as compared to the foreign currencies in which many
of our sales are made.
We may be unable to protect our trademarks, trade secrets and other intellectual
property rights that are important to our business.
We regard our trademarks, trade secrets and other intellectual property as a
component of our success. We rely on trademark law and trade secret protection
and confidentiality and/or license agreements with employees, customers,
partners and others to protect our intellectual property. Effective trademark
and trade secret protection may not be available in every country in which our
products are available. We cannot be certain that we have taken adequate steps
to protect our intellectual property, especially in countries where the laws may
not protect our rights as fully as in the United States. In addition, our third-
party confidentiality agreements can be breached and, if they are, there may not
be an adequate remedy available to us. If our trade secrets become known, we may
lose our competitive position.
Intellectual property or other litigation could harm our business.
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. We are aware that patents have been
applied for, and in some cases issued to others, claiming technologies that are
closely related to ours. As a result, and in part due to the ambiguities and
evolving nature of intellectual property law, we periodically receive notices of
potential infringement of patents held by others. Although to date we have
successfully resolved these types of claims, we may not be able to do so in the
future.
In the event of an intellectual property dispute, we may be forced to
litigate. This litigation could involve proceedings declared by the U.S. Patent
and Trademark Office or the International Trade Commission, as well as
proceedings brought directly by affected third parties. Intellectual property
litigation can be extremely expensive, and these expenses, as well as the
consequences should we not prevail, could seriously harm our business.
19
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 significantly 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 your
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
you 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 September 30, 2000, 45 of our 213 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
reduce the number of our employees working at this facility. 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. Many of our competitors, both in the United States and
elsewhere, are major pharmaceutical, chemical and biotechnology companies, and
many of them have substantially greater capital resources, marketing experience,
research and development staffs, and facilities than we do. Any of these
companies could succeed in developing products that are more effective than the
products that we have or may develop and may also be more successful than us in
producing and marketing their products. We expect this competition to continue
and intensify in the future.
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Our industry has also seen substantial consolidation in recent years, which
has led to the creation of competitors with greater financial and intellectual
property resources than us. In addition, we believe that the success that others
have had in our industry will attract new competitors. Some of our current and
future competitors also may cooperate to better compete against us. We may not
be able to compete effectively against these current or future competitors.
Increased competition could result in price reductions for our products, reduced
margins and loss of market share, any of which could adversely impact our
business, financial condition and results of operations.
As a result of consolidation in the pharmaceutical industry, we may lose
existing customers or have greater difficulty obtaining new customers.
In recent years, the United States pharmaceutical industry has undergone
substantial consolidation. As part of many business combinations, companies
frequently reduce the number of suppliers used and we may not be selected as a
supplier after any business combination. Further, mergers or corporate
consolidations in the pharmaceutical industry could cause us to lose existing
customers and potential future customers, which could have a material adverse
effect on our business, financial condition and results of operations.
We are currently subject to government regulation.
Our business is currently subject to regulation, supervision and licensing by
federal, state and local governmental authorities. Also, from time to time we
must expend resources to comply with newly adopted regulations, as well as
changes in existing regulations. If we fail to comply with these regulations, we
could be subject to disciplinary actions or administrative enforcement actions.
These actions could result in penalties, including fines.
Risks Associated With Our Common Stock
Our stock price has been volatile.
Our common stock is quoted on the NASDAQ National Market, and there has been
substantial volatility in the market price of our common stock. The trading
price of our common stock has been, and is likely to continue to be, subject to
significant fluctuations due to a variety of factors, including:
. variations in our quarterly operating results;
. the gain or loss of significant contracts;
. changes in management;
. announcements of technological innovations or new products by us or our
competitors;
. legislative or regulatory changes;
. general trends in the industry;
. recommendations by securities industry analysts;
. biological or medical discoveries;
. developments concerning intellectual property, including patents and
litigation matters;
. public concern as to the safety of new technologies;
. developments in our relationships with current or future customers and
suppliers; and
. general economic conditions, both in the United States and abroad.
As a result of these factors, and potentially others, the sales price of our
common stock has ranged from $2.41 to $32.00 per share from January 1, 1998
through September 30, 2000 and from $6.06 to $32.00 per share from January 1,
2000 through September 30, 2000.
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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 prices of many biotechnology companies. Often, price
fluctuations are unrelated to operating performance of the specific companies
whose stock is affected.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has occurred against the
issuing company. If we were subject to this type of litigation in the future, we
could incur substantial costs and a diversion of our management's attention and
resources, each of which could have a material adverse effect on our revenue and
earnings. Any adverse determination in this type of litigation could also
subject us to significant liabilities.
Anti-takeover provisions in our governing documents and under applicable law
could impair the ability of a third party to take over our company.
We are subject to various legal and contractual provisions that may impede a
change in our control, including the following:
. 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
. 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.
Item 3. Quantitative and Qualitative Disclosures of Market Risk:
We conduct business in various foreign currencies and are therefore subject to
the transaction exposures that arise from foreign exchange rate movements
between the dates that foreign currency transactions are initiated and the date
that they are converted. We are also subject to certain exposures arising from
the translation and consolidation of the financial results of our foreign
subsidiaries. There can be no assurance that actions taken to manage such
exposures will continue to be successful or that future changes in currency
exchange rates will not have a material impact on our future cash collections
and operating results. We do not currently hedge either our transaction risk or
our economic risk.
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Part II
Other Information
Item 1. Legal Proceedings
On June 14, 2000, one of our former employees, Jordan Fishman, Ph.D., filed a
legal action against us in the United States Central District Court of
California. Mr. Fishman's complaint asserts a number of claims for relief
against BioSource and alleges that BioSource breached Mr. Fishman's employment
agreement by failing to register his stock options on a Form S-8 Registration
Statement by December 8, 1999. Second, Fishman claims that this breach, coupled
with BioSource's representations regarding a planned public offering (which
prevented Company insiders from trading in the Company's common stock) and
BioSource's subsequent termination of Fishman's employment, were each part of a
larger scheme to interfere with, and ultimately prevent, the sale of his common
stock. On August 11, 2000, we filed a motion to dismiss five of Mr. Fishman's
six causes of action, and on September 29 , 2000, the court dismissed three of
the causes. On October 4, 2000, Mr. Fishman filed a first amended complaint.
BioSource moved to dismiss two of the remaining causes of action, one based on
new California Supreme Court precedent, and the other based on deficiencies in
Mr. Fishman's allegations. That motion is set to be heard on November 27, 2000.
No substantive adjudication of Mr. Fishman's claims has yet occurred, however,
the Company believes that it has substantial defenses to Fishman's remaining
causes of action. We have also commenced an arbitration proceeding against the
former shareholders of our QCB division, including Mr. Fishman, to recover
damages we believe we have suffered in connection with misrepresentations and
omissions made by those shareholders in the representations and warranties
contained in the original Stock Purchase Agreement for QCB executed on December
9 , 1998. The arbitration proceedings are in a preliminary stage.
Item 2. Change in Securities and Use of Proceeds
On September 20, 2000, the Company's Series B Redeemable Preferred Stock
automatically converted into shares of common stock as a result of the fact that
the last reported sales price of the Company's common stock had been above $20
for 20 consecutive days. 389,143 shares of Series B Redeemable Preferred Stock
were converted into 1,556,574 common shares. 371,300 of the 389,143 shares
represented originally issued preferred stock and 17,843 shares represented
convertible preferred dividends.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed July 21, 2000 and reporting
Item 5.
Current Report on From 8-K filed September 11, 2000 and
reporting Item 5.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BIOSOURCE INTERNATIONAL, INC.
(Registrant)
Date: November 14, 2000 /s/ RUSSELL D. HAYS
---------------
Russell D. Hays
Chairman of the Board, President and
Chief Executive Officer
Date: November 14, 2000 /s/ CHARLES C. BEST
---------------
Charles C. Best
Executive Vice President and
Chief Financial Officer
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