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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 6, 2001 was 10,446,731.
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BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2001
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30,
2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and 2000
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 (unaudited) 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
Page 2
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,846 10,633
Accounts receivable, less allowance for doubtful accounts
of $214 at September 30, 2001 and $143 at December 31, 2000 5,963 5,611
Inventories, net (See Note 3) 6,790 6,693
Prepaid expenses and other current assets 1,242 1,261
Deferred income taxes 2,317 2,222
----------- ----------
Total current assets 27,158 26,420
Property and equipment, net (See Note 4) 4,848 4,353
Intangible assets net of accumulated amortization of $3,103 at
September 30, 2001 and $2,279 at December 31, 2000 11,928 12,752
Other assets 432 382
Deferred tax assets 6,457 6,457
----------- ----------
$ 50,823 50,364
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,286 3,316
Accrued expenses 2,559 2,688
Deferred income 253 314
Income tax payable - -
----------- ----------
Total current liabilities 6,098 6,318
Commitments and contingencies (See Note 8)
Stockholders' equity:
Common stock, $.001 par value. Authorized 20,000,000 shares:
issued outstanding 10,443,607 shares at
September 30, 2001; issued 10,616,889 shares and
outstanding 10,326,458 shares at December 31, 2000 10 10
Additional paid-in capital 49,308 49,304
Accumulated deficit (2,281) (3,071)
Accumulated other comprehensive loss (2,312) (2,197)
----------- ----------
Net stockholders' equity 44,725 44,046
----------- ----------
$ 50,823 50,364
=========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements
Page 3
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2001 and 2000
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDEDD
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
----------- --------- ---------- ---------
Net sales $ 8,587 8,150 26,004 24,490
Cost of sales 3,761 3,395 11,397 9,710
--------- --------- ---------- ---------
Gross profit 4,826 4,755 14,607 14,780
Operating expenses:
Research and development 1,051 872 2,930 2,593
Sales and marketing 1,806 1,325 5,552 4,065
General and administrative 1,751 3,420 4,918 6,184
Amortization of intangibles 275 275 824 818
--------- --------- ---------- ---------
Total operating expenses 4,883 5,892 14,224 13,660
--------- --------- ---------- ---------
Operating income (loss) (57) (1,137) 383 1,120
Interest income (expense), net 85 13 330 (180)
Other income (expense), net (28) (47) 47 47
--------- --------- ---------- ---------
Income (loss) before income taxes - (1,171) 760 987
Provision for (benefit from) income taxes (266) (609) (30) 60
--------- --------- ---------- ---------
Net income (loss) 266 (562) 790 927
Redeemable preferred stock dividend and accretion
of beneficial conversion - (2,384) - (3,853)
--------- --------- ---------- ---------
Net income (loss) available to common stockholders $ 266 (2,946) 790 (2,926)
========= ========= ========== =========
Net income (loss) per share available to common stockholders
Basic $ 0.03 (0.35) 0.08 (0.37)
========= ========= ========== =========
Diluted $ 0.02 (0.35) 0.07 (0.37)
========= ========= ========== =========
Shares used to compute net income (loss) available to
common shareholders
Basic 10,443 8,362 10,400 7,997
========= ========= ========== =========
Diluted 10,868 8,362 11,003 7,997
========= ========= ========== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 4
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
2001 2000
----------- ----------
Cash flows from operating activities:
Net income $ 790 927
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,662 1,588
Stock compensation (388) -
Changes in assets and liabilities:
Accounts receivable (476) (1,296)
Inventories (102) (1,104)
Prepaid expenses and other current assets 19 (761)
Deferred taxes (94) 347
Other assets 305 466
Accounts payable 355 652
Accrued expenses (151) 1,052
Deferred income (61) (22)
Income tax payable 101 (200)
----------- ----------
Net cash provided by operating activities 1,960 1,649
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,625) (1,084)
----------- ----------
Net cash used in investing activities (1,625) (1,084)
----------- ----------
Cash flows from financing activities:
Proceeds from the exercise of options 295 2,909
Proceeds from the exercise of warrants - 750
Proceeds from the issuance of common stock 5,350
Proceeds from the issuance of preferred stock - 8,414
Repayments to bank - (12,991)
Payments on capital lease obligations - (13)
----------- ----------
Net cash provided by financing activities 295 4,419
----------- ----------
Net increase in cash and cash equivalents 630 4,984
Effect of exchange rates on cash and cash equivalents (417) (402)
Cash and cash equivalents at beginning of period 10,633 4,645
----------- ----------
Cash and cash equivalents at end of period $ 10,846 9,227
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1 325
=========== ==========
Income taxes - 473
=========== ==========
Supplemental disclosure of non-cash information
Preferred stock accretion - 2,426
=========== ==========
Income tax benefit from exercise of stock options 94 2,472
=========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 5
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of BioSource
International, Inc. (the "Company") are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K, for the fiscal year ended December 31, 2000. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments that are necessary for a fair
presentation. The results of operations for the three and nine months ended
September 30, 2001 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("Statement") No. 141, BUSINESS COMBINATIONS,
and Statement No. 42,GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF.
The Company is required to adopt the provisions of Statement 141 and Statement
142 effective January 1, 2002. Furthermore, any goodwill and any intangible
asset determined to have an indefinite useful life that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition
apart from goodwill. Upon adoption of Statement 142, the Company will be
required to reassess the useful
Page 6
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to nine months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
Because of the extensive effort needed to comply with adopting Statements 141
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment of Long-Lived Assets"" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While Statement
No. 144 supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that statement. The standard is effective for
fiscal years beginning after December 15, 2001. The Company expects that the
adoption of Statement 144 will not have a material impact on its financial
statements or results of operations.
3. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPT. 30, 2001 DEC. 31, 2000
-------------- -------------
Raw materials..................... $ 2,037 1,921
Work in process................... 298 553
Finished goods.................... 4,455 4,219
-------------- --------------
$ 6,790 6,693
============== ==============
Page 7
4. PROPERTY AND EQUIPMENT (AMOUNTS IN THOUSANDS)
SEPT. 30, 2001 DEC. 31, 2000
-------------- -------------
Machinery and equipment............... $ 6,197 5,356
Office furniture and equipment........ 2,519 2,155
Leasehold improvements................ 884 779
-------------- --------------
9,600 8,290
Less accumulated depreciation and
amortization........................ 4,752 3,937
-------------- --------------
$ 4,848 4,353
============== ==============
5. EARNINGS PER SHARE
The reconciliation of basic to diluted weighted average shares is as
follows (amounts in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2001 2000 2001 2000
-------- ---------- ---------- ----------
Net income (loss) available to
common stockholders $ 266 $ (2,946) $ 790 $ (2,926)
======== ========== ========== ==========
Weighted average shares used in
basic computation 10,443 8,362 10,400 7,997
Dilutive stock options and warrants 425 - 603 -
-------- ---------- ---------- ----------
Weighted average shares used for
diluted computation 10,868 8,362 11,003 7,997
======== ========== ========== ==========
Options to purchase 1,039,613 and 1,750,942 shares were not included in the
computation of diluted net income (loss) available to common shareholders per
share for the three month periods ended September 30, 2001 and 2000,
respectively because their effect would be anti-dilutive. Options to purchase
822,443 and 1,750,942 shares were not included in the computation of diluted net
income (loss) available to common shareholders per share for the nine month
periods ended September 30, 2001 and 2000, respectively, because their effect
would be anti-dilutive.
Warrants to purchase 1,287,000 shares at a weighted average exercise price
of $7.07 per share were outstanding as of September 30, 2001 but were not
included in the computation of diluted net income available to common
shareholders per share for the three months ended September 30, 2001 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 conversion price of $6.06. These shares, for the period prior to
their conversion, were not included in the computation of diluted loss per share
for the three and nine-month periods ended September 30, 2000 because their
effect would be anti-dilutive.
Page 8
6. STOCKHOLDERS' EQUITY
Comprehensive income (loss) is determined as follows (amounts in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income (loss) available to common stockholders $ 266 (2,946) 790 (2,926)
Foreign currency translation adjustments 409 (406) (115) (747)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ 675 (3,352) 675 (3,673)
========== ========== ========== ==========
7. BUSINESS SEGMENTS
The Company is engaged in a single industry, the licensing, development,
manufacture, marketing and distribution of immunological reagents, test kits and
oligonucleotides used in biomedical research and human diagnostics. Our
customers are not concentrated in any specific geographic region and no single
customer accounts for a significant amount of our sales.
Management of the Company has determined its reportable segments are
strategic business units that offer both sales to external customers from
geographic company facilities and sales to external customers in certain
geographic regions. Significant reportable business segments are the United
States and European facilities, and sales to external customers are summarized
as those located in the United States, Europe, Japan and other. We evaluate
performance for the "Sales-from" segments on net revenue and profit and loss
from operations. Our reportable segments are strategic business units that offer
geographical product availability. They are managed separtely because each
business requires different marketing and distribution strategies. Business
information is summarized as follows:
SALES-FROM SEGMENTS (AMOUNTS IN THOUSANDS): THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ---------- ---------- ---------
Net sales to external customers from:
United States:
Domestic $ 5,241 4,933 15,348 14,301
Export 1,040 1,009 3,403 3,224
---------- ---------- ---------- ----------
Total United States 6,281 5,942 18,751 17,525
Europe 2,306 2,208 7,253 6,965
---------- ---------- ---------- ----------
Consolidated $ 8,587 8,150 26,004 24,490
========== ========== ========== ==========
Operating income (loss):
United States $ (483) (1,817) (1,359) (547)
Europe 426 680 1,742 1,667
---------- ---------- ---------- ----------
Consolidated $ (57) (1,137) 383 1,120
========== ========== ========== ==========
SALES-TO SEGMENTS:
Net sales to external customers in:
United States $ 5,241 4,933 15,348 14,301
Europe 2,093 1,880 6,706 6,360
Japan 721 762 2,276 2,358
Other 532 575 1,674 1,471
----------- ----------- ----------- -----------
Consolidated $ 8,587 8,150 26,004 24,490
=========== =========== =========== ===========
Page 9
8. COMMITMENTS AND CONTINGENCIES
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. The Court granted BioSource's motion as to both of
these causes of action. As a consequence, the only two remaining causes of
action in this litigation were (1) breach of contract and (2) fraud. In December
2000, BioSource answered the First Amended Complaint, and filed a counter-claim
against Jordan Fishman. Discovery has concluded. Trial is scheduled to commence
August 28, 2001. BioSource filed a motion for summary judgment against
plaintiff's case and that motion was heard on August 6, 2001. The Court granted
BioSource's motion as to the fraud claim. Therefore, only the breach of contract
claim and BioSource's counterclaim remain for trial. Trial is set to commence in
January 2002.
The Company has also commenced an arbitration proceeding against the former
shareholders of its QCB division, including Mr. Fishman, to recover damages
management believes it has 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 Company's claim to recover the $1,347,000 of Escrowed Funds is
based on QCB's breach of the representations and warranties made in the Stock
Purchase Agreement. The parties have selected a panel of three arbitrators who
will hear the dispute in March 2002. The Company has also asserted a claim for
punitive damages against Jordan Fishman in the arbitration.
Page 10
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 for the fiscal year ended December 31, 2000, 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, 2001
REVENUES: Net sales for the three months ended September 30, 2001 and 2000 were
$8,587,000 and $8,150,000, respectively, representing an increase of $437,000 or
5% (6% in local currency) in 2001 as compared to 2000. Geographically, our sales
for the three months ended September 30, 2001 to customers in North America
increased by 8% as compared to the comparable prior year period. European sales
increased 11% (15% in local currency) for the three months ended September 30,
2001 as compared to the three months ended September 30, 2000. Sales in the rest
of the world decreased 16% for the three months ended September 30, 2001 as
compared to the comparable prior year period.
GROSS PROFIT: Gross profit for the three months ended September 30, 2001 and
2000 was $4,826,000 and $4,755,000 respectively, representing a gross margin of
56% and 58% for three months ended September 30, 2001 and 2000, respectively.
The decrease in gross profit margin was due to the higher infrastructure cost
within manufacturing, increased depreciation expense, and increased raw material
costs.
RESEARCH AND DEVELOPMENT: Research and development expense for the three months
ended September 30, 2001 and 2000 amounted to $1,051,000 and $872,000,
respectively. As a percentage of net sales, research and development
expenditures remained constant at 12% and 11% for the quarters ended September
30, 2001 and 2000, respectively. This increase in expenses reflects the
Company's continued efforts on new product development.
Page 11
SALES AND MARKETING: Sales and marketing expense for the three months ended
September 30, 2001 and 2000 amounted to $1,806,000 and $1,325,000, respectively,
an increase of $481,000. This increase represents the Company's investment in
its infrastructure through increased personnel and marketing programs. As a
percentage of net sales, sales and marketing expenditures were 21% and 16% for
the quarter ended September 30, 2001 and 2000, respectively.
GENERAL AND ADMINISTRATIVE: General and administrative expense for the three
months ended September 30, 2001 and 2000 amounted to $1,751,000 and $3,420,000
respectively, a decrease of $1,669,000. In the three months ended September 30,
2001, we incurred additional increased costs of $429,000 related to an employee
severance package and legal fees related to an employee termination. These
increased costs were offset by higher increased costs of $2,098,000 in the third
quarter of 2000 including transition costs and non-cash stock compensation
charges from the hiring of a new CEO in September of 2000 and legal costs
related to an employee termination. As a percentage of sales, general and
administrative expense were 20% and 42% for the three months ended September 30,
2001 and 2000, respectively.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets for each of
the three months ended September 30, 2001 and 2000 amounted to $275,000 and is
related to the amortization of the intangible assets from the QCB and Biofluids
acquisitions.
INTEREST INCOME, NET: Interest income for the three months ended September 30,
2001 was $85,000 which was related to interest income on cash invested in
short-term securities during the quarter. Interest income for the three months
ended September 30, 2000 was $13,000. $42,000 is related to interest income on
cash invested in short-term securities during the quarter, offset by $29,000 of
interest expense related to a loan on the Company's previous headquarters.
PROVISION FOR (BENEFIT FROM) INCOME TAXES: The income tax benefit for the three
months ended September 30, 2001 and 2000 was $266,000 and $609,000,
respectively. Due to the Company's lower net income for each of the three months
ended September 30, 2001 and 2000, the Company re-evaluated and adjusted its
effective tax rates for those periods. 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 to record a benefit for each of
the three months ended September 30, 2001 and 2000 respectively.
In the third quarter of 2000, the Company recognized a $2,384,000 charge for
non-cash redeemable preferred stock dividends and accretion related to a
beneficial conversion feature associated with the issuance to Genstar Capital
Partners II, L.P. of Series B Redeemable Preferred Stock and detachable stock
purchase warrants in the first quarter of 2000. The redeemable preferred stock
involved in the transaction converted to common stock in September 2000 and
accordingly, all remaining non-cash charges were accounted for at such time.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES: Net sales for the nine months ended September 30, 2001 and 2000 were
$26,004,000 and $24,490,000, respectively, representing an increase of
$1,514,000 or 6% (8% in local currency) in 2001 as compared to 2000.
Geographically, our sales for the nine months ended September 30, 2001 to
customers in North America increased by 10% as compared to the comparable prior
year period. European sales increased 5% (11% in local currency) for the nine
months ended September 30, 2001 as compared to the nine months ended September
30, 2000. Sales in the rest of the world decreased 7% for the nine months ended
September 30, 2001, as compared to the comparable prior year period.
GROSS PROFIT: Gross profit for the nine months ended September 30, 2001 and 2000
was $14,607,000 and $14,780,000 respectively, representing a gross margin of 56%
and 60% for nine months ended September 30, 2001 and 2000, respectively. The
decrease in gross profit margin was due to the higher infrastructure cost within
manufacturing, increased depreciation expense, underabsorbed overhead costs in
our custom peptides, antibodies and signal transduction product lines due in
part to excess capacity and improvements in our production process, and
increased raw material costs.
Page 12
RESEARCH AND DEVELOPMENT: Research and development expense for the nine months
ended September 30, 2001 and 2000 amounted to $2,930,000 and $2,593,000,
respectively. As a percentage of net sales, research and development
expenditures were 11% of net sales for each of the nine months ended September
30, 2001 and 2000. This increase in expenses reflects the Company's continued
efforts on new product development.
SALES AND MARKETING: Sales and marketing expense for the nine months ended
September 30, 2001 and 2000 amounted to $5,552,000 and $4,065,000, respectively,
an increase of $1,487,000. This increase represents the Company's investment in
its infrastructure through increased personnel and marketing programs. As a
percentage of net sales, sales and marketing expenditures were 21% and 17% of
net sales for the nine months ended September 30, 2001 and 2000, respectively.
GENERAL AND ADMINISTRATIVE: General and administrative expense for the nine
months ended September 30, 2001 and 2000 amounted to $4,918,000 and $6,184,000
respectively, a decrease of $1,266,000. In the nine months ended September 30,
2001, in addition to increased costs related primarily to personnel and other
administrative costs of $657,000, we incurred additional increased costs of
$1,089,000 related to an employee severance package and legal fees related to an
employee termination as well as $388,000 of a net expense recovery from a
non-cash stock compensation adjustment. These increased costs were offset by
higher increased costs during the nine months ended September 30, 2000 including
a $523,000 charge related to a failed follow on offering in the second quarter
of 2000 and $2,100,000 in the third quarter of 2000 including transition costs
and non-cash stock compensation charges from the hiring of a new CEO in
September of 2000 and legal costs related to an employee termination. As a
percentage of sales, general and administrative expense were 19% and 25% for the
nine months ended September 30, 2001 and 2000, respectively.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets for the
nine months ended September 30, 2001 and 2000 amounted to $824,000 and $818,000,
respectively, and are related to the amortization of the intangible assets from
the QCB and Biofluids acquisitions.
INTEREST INCOME (EXPENSE), NET: Net interest income for the nine months ended
September 30, 2001 was $330,000 which was related to interest income on cash
invested in short-term securities during the quarter. Net interest expense was
$180,000 for the nine months ended September 30, 2000. $326,000 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 $146,000 of interest income on cash
invested in short-term securities during the nine months ended September 30,
2000.
PROVISION FOR (BENEFIT FROM) INCOME TAXES: Income tax benefit for the nine
months ended September 30, 2001 was $30,000 and the income tax expense for the
nine months ended September 30, 2000 was $60,000. Due to the Company's lower net
income for each of the nine months ended September 30, 2001 and 2000, the
Company re-evaluated and adjusted its effective tax rates for those periods.
This, along with the Company's current permanent tax benefits including an R & D
tax credit and the manufacturing investment tax credit, results in the Company's
effective tax rate to be -4% and 6% for the nine months ended September 30, 2001
and 2000 respectively.
In the first nine months of 2000, the Company recognized a $3,853,000 charge for
non-cash redeemable preferred stock dividends and accretion related to a
beneficial conversion feature associated with the issuance to Genstar Capital
Partners II L.P. of Series B Redeemable Preferred Stock and detachable stock
purchase warrants in the first quarter of 2000. The redeemable preferred stock
involved in the transaction converted to common stock in September 2000 and
accordingly, all remaining non-cash charges were accounted for at this time.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents as of September 30, 2001 of $10,846,000 increased
by $213,000 from $10,633,000 at December 31, 2000. The increase in cash was due
primarily from net cash provided from operating activities of $1,960,000 offset
by capital expenditures of $1,625,000. Working capital, which is
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the excess of current assets over current liabilities, was $21,060,000 at
September 30, 2001 as compared to $20,102,000 at December 31, 2000 representing
an increase of $958,000.
In the nine months ended September 30, 2001, the Company received $295,000
from the issuance of common stock related to the exercise of stock options.
In September of 2001, the Company announced that its Board of Directors had
approved a stock repurchase program. The Board has authorized the Company to
repurchase up to $5,000,000 of its common stock. The repurchases are to be made
at the discretion of management and can be made at any time, as market
conditions warrant. The stock repurchase program will end June 30, 2003.
The Company has never paid dividends on common stock and has no plans to do
so in fiscal 2001. Our earnings will be retained for reinvestment in the
business.
The Company expects to be able to meet its future cash and working capital
requirements for operations and capital additions through currently available
funds and cash generated from operations, if any. However, we may raise
additional capital or 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.
RISKS RELATED TO OUR BUSINESS
FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.
We historically have sought, and will continue to seek, to increase our
sales and profitability primarily through the acquisition or internal
development of new product lines, additional customers and new businesses. Our
historical revenue growth is primarily attributable to our acquisitions and new
product development and, to a lesser extent, to increased revenues from our
existing products. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income. Our ability to achieve our expansion objectives and to manage
our growth effectively and profitably depends upon a variety of factors,
including:
o our ability to internally develop new products;
o our ability to make profitable acquisitions;
o integration of new facilities into existing operations;
o hiring, training and retention of qualified personnel;
o establishment of new relationships or expansion of existing relationships
with customers and suppliers; and
o availability of capital.
Page 14
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 that this
trend will continue. Government funding of research and development is subject
to the political process, which is inherently fluid and unpredictable. Our
revenues may be adversely affected if our customers delay purchases as a result
of uncertainties surrounding the approval of government budget proposals. Also,
government proposals to reduce or eliminate budgetary deficits have sometimes
included reduced allocations to the NIH and other government agencies that fund
research and development activities. A reduction in government funding for the
NIH or other government research agencies could seriously damage our business.
Many of our customers receive funds from approved grants at particular
times of the year, as determined by the federal government. Grants have, in the
past, been frozen for extended periods or have otherwise become unavailable to
various institutions without advance notice. The timing of the receipt of grant
funds affects the timing of purchase decisions by our customers and, as a
result, can cause fluctuations in our sales and operating results.
WE RELY ON RAW MATERIALS AND SPECIALIZED EQUIPMENT FOR OUR MANUFACTURING, WHICH
WE MAY NOT ALWAYS BE ABLE TO OBTAIN ON FAVORABLE TERMS.
Our manufacturing process relies on the continued availability of
high-quality raw materials and specialized equipment. It is possible that a
change in vendors, or in the quality of the raw materials supplied to us, could
have an adverse impact on our manufacturing process and, ultimately, on the sale
of our finished products. We have from time to time experienced a disruption in
the quality or availability of key raw materials, which has created minor delays
in our ability to fill orders for specific test kits. This could occur again in
the future, resulting in significant delays, and could have a detrimental impact
on the sale of
Page 15
our products and our results of operations. In addition, we rely on highly
specialized manufacturing equipment that if damaged or disabled could adversely
affect our ability to manufacture our products and therefore negatively impact
our business.
OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO EXPAND OUR BUSINESS IS UNCERTAIN.
In the future, in order to expand our business through internal
development or acquisitions, we may need to raise substantial additional funds
through equity or debt financings, research and development financings or
collaborative relationships. However, this additional funding may not be
available or, if available, it may not be available on economically reasonable
terms. In addition, any additional funding may result in significant dilution to
existing stockholders. If adequate funds are not available, we may be required
to curtail our operations or obtain funds through collaborative partners that
may require us to release material rights to our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS FOR NEW PRODUCTS MAY BE UNSUCCESSFUL.
We incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed, will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and technologies. Any failure to translate research and
development expenditures into successful new product introductions could have an
adverse effect on our business.
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT.
Our business model of providing products to researchers working on a
variety of genetic projects requires us to develop a wide spectrum of products.
To generate broad product lines it is advantageous to sometimes license
technologies from others rather than depending exclusively on our own employees.
As a result, we believe our ability to license new technologies from third
parties is and will continue to be important to our ability to offer new
products.
In addition, from time to time we are notified or become aware of patents
held by third parties that are related to technologies we are selling or may
sell in the future. After a review of these patents, we may decide to obtain a
license for these technologies from these third parties or discontinue the
products. There can be no assurance that we will be able to continue to
successfully identify new technologies developed by others. Even if we are able
to identify new technologies of interest, we may not be able to negotiate a
license on favorable terms, or at all. If we lose the rights to patented
technology, we may need to discontinue selling certain products or redesign our
products, and we may lose a competitive advantage. Potential competitors could
in-license technologies that we fail to license and potentially erode our market
share for certain products. Our licenses typically subject us to various
commercialization, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons out of our control. For example, the licensor could lose patent
protection for a number of reasons, including invalidity of the licensed patent.
We do not always receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
We are currently in the process of negotiating several of these licenses
and expect that we will also negotiate these types of licenses in the future.
There can be no assurances that we will be able to negotiate these licenses on
favorable terms, or at all.
OUR FUTURE SUCCESS DEPENDS ON THE TIMELY INTRODUCTION OF NEW PRODUCTS AND THE
ACCEPTANCE OF THESE NEW PRODUCTS IN THE MARKETPLACE.
Our ability to gain access to technologies needed for new products and
services also depends in part on our ability to convince licensors that we can
successfully commercialize their inventions. We cannot assure
Page 16
that we will be able to continue to identify new technologies developed by
others. Even if we are able to identify new technologies of interest, we may not
be able to negotiate a license on favorable terms, or at all.
IF WE FAIL TO INTRODUCE NEW PRODUCTS, OR OUR NEW PRODUCTS ARE NOT ACCEPTED BY
POTENTIAL CUSTOMERS, WE MAY LOSE MARKET SHARE.
Rapid technological change and frequent new product introductions are
typical for the markets we serve. Our future success will depend in part on
continuous, timely development and introduction of new products that address
evolving market requirements. We believe successful new product introductions
provide a significant competitive advantage because customers make an investment
of time in selecting and learning to use a new product, and then are reluctant
to switch. To the extent we fail to introduce new and innovative products, we
may lose market share to our competitors, which will be difficult or impossible
to regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
In the past we have experienced, and are likely to experience in the
future, delays in the development and introduction of products. We cannot assure
that we will keep pace with the rapid rate of change in life sciences research,
or that our new products will adequately meet the requirements of the
marketplace or achieve market acceptance. Some of the factors affecting market
acceptance of new products include:
o availability, quality and price relative to competitive products;
o the timing of introduction of the product relative to competitive products;
o customers' opinion of the products utility;
o ease of use;
o consistency with prior practices;
o scientists' opinion of the product's usefulness;
o citation of the product in published research; and
o general trends in life sciences research.
The expenses or losses associated with unsuccessful product development
activities or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition.
The development, introduction and marketing of innovative products in our
rapidly evolving markets will require significant sustained investment. We
cannot assure their cash from operations or other sources will be sufficient to
meet these ongoing requirements.
FAILURE TO ATTRACT AND RETAIN QUALIFIED SCIENTIFIC OR PRODUCTION PERSONNEL OR
LOSS OF KEY MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing 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
Page 17
personnel and the development of additional expertise by existing management
personnel. The failure to attract and retain these personnel or, alternatively,
to develop this expertise internally would adversely affect our business. We
generally do not enter into employment agreements requiring these employees to
continue in our employment for any period of time.
Our success also will continue to depend, to a significant extent on the
members of our management team. We do not maintain any "key man" insurance
policies regarding any of these individuals. We may not be able to retain the
services of our executive officers and key personnel or attract additional
qualified members to management in the future. The loss of services any of our
other key management or employees, could have a material adverse effect upon our
business.
MANY OF OUR CUSTOMERS ARE OBTAINING OUR PRODUCTS THROUGH NEW DISTRIBUTION
CHANNELS AND METHODS THAT MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
A number of our customers have developed purchasing initiatives to reduce
the number of vendors they purchase from in order to lower their supply costs.
In some cases, these customers have established agreements with large
distributors which include discounts and the distributors' direct involvement
with the purchasing process. For similar reasons, many larger customers,
including the federal government, have special pricing arrangements, including
blanket purchase agreements. These agreements may limit our pricing flexibility
with respect to our products, which could adversely impact our business,
financial condition and results of operations. In addition, although we accept
and process some orders through our Internet website, we also implement sales
through a third party Internet vendor. Internet sales through third parties will
negatively impact our gross margins because we pay commission on these Internet
sales. On the other hand, if we do not enter into arrangements with third-party
e-commerce providers, we may lose customers who prefer to purchase products
using these Web sites. Our business may be harmed as a result of these Web sites
or other sales methods which may be developed in the future.
WE RELY ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL RISKS.
International sales accounted for approximately 41% and 42% of our
revenues in the first nine months of 2001 and 2000, respectively. International
sales can be subject to many inherent risks that are difficult or impossible for
us to predict or control, including:
o unexpected changes in regulatory requirements and tariffs;
o difficulties and costs associated within staffing and managing foreign
operations, including foreign distributor relationships;
o longer accounts receivable collection cycles in certain foreign countries;
o adverse economic or political changes;
o unexpected changes in regulatory requirements;
o more limited protection for intellectual property in some countries;
o changes in our international distribution network and direct sales force;
o potential trade restrictions, exchange controls and import and export
licensing requirements;
o problems in collecting accounts receivable; and
o potentially adverse tax consequences of overlapping tax structure.
Page 18
We intend to continue to generate revenues from sales outside North America
in the future. Future distribution of our products outside North America also
may be subject to greater governmental regulation. These regulations, which
include requirements for approvals or clearance to market, additional time
required for regulatory review and sanctions imposed for violations, as well as
the other risks indicated in the bullets listed above, vary by country. We may
not be able to obtain regulatory approvals in the countries in which we
currently sell our products or in countries where we may sell our products in
the future. In addition, we may be required to incur significant costs in
obtaining necessary regulatory approvals. Failure to obtain necessary regulatory
approvals or any other failure to comply with regulatory requirements could
result in a material reduction in our revenues and earnings.
We also depend on third-party distributors for a material portion of our
international sales. If we lose or suffer any significant reduction in sales to
any material distributor, our business could be materially adversely affected.
In addition, approximately 20% of our sales 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 may in the future 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 collection of our accounts receivable arising from international
operations have contributed to negative fluctuations in our results of
operations. In general, increases in the exchange rate of the United States
dollar to foreign currencies cause our products to become relatively more
expensive to customers in those countries, leading to a reduction in sales or
profitability in some cases. We historically have not, and currently are not,
using hedging transactions or other means to reduce our exposure to fluctuations
in the value of the United States dollar as compared to the foreign currencies
in which many of our sales are made.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our operating results may vary significantly quarter to quarter and from
year to year as a result of a variety of factors. These factors include:
o level of demand for our products;
o changes in our customer and product mix;
o timing of acquisitions and investments in infrastructure;
o competitive conditions;
o timing and extent of intellectual property litigation;
o exchange rate fluctuations; and
o general economic conditions.
We believe that quarterly comparisons of our financial results may not
necessarily be meaningful and should not be relied upon as an indication of
future performance. Additionally, if our operating results in one or more
quarters do not meet the expectations of security analysts or others, the price
of our common stock could be materially adversely affected.
Our continued investment in product development and sales and marketing are
significantly ongoing expenses. If revenue in a particular period falls short of
expectations, we may not be able to reduce significantly our expenditures for
that period, which would materially adversely affect the operating results for
that period.
Page 19
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL
PROPERTY RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS.
We regard our trademarks, trade secrets and other intellectual property as
a component of our success. We rely on trademark law and trade secret protection
and confidentiality and/or license agreements with employees, customers,
partners and others to protect our intellectual property. Effective trademark
and trade secret protection may not be available in every country in which our
products are available. We cannot be certain that we have taken adequate steps
to protect our intellectual property, especially in countries where the laws may
not protect our rights as fully as in the United States. In addition, our
third-party confidentiality agreements can be breached and, if they are, there
may not be an adequate remedy available to us. If our trade secrets become
known, we may lose our competitive position.
INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS.
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. We are aware that patents have been
applied for, and in some cases issued to others, claiming technologies that are
closely related to ours. As a result, and in part due to the ambiguities and
evolving nature of intellectual property law, we periodically receive notices of
potential infringement of patents held by others. Although to date we have
successfully resolved these types of claims, we may not be able to do so in the
future.
In the event of an intellectual property dispute, we may be forced to
litigate. This litigation could involve proceedings declared by the U.S. Patent
and Trademark Office or the International Trade Commission, as well as
proceedings brought directly by affected third parties. Intellectual property
litigation can be extremely expensive, and these expenses, as well as the
consequences should we not prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology we
use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all.
In addition to intellectual property litigation, other substantial, complex
or extended litigation could result in large expenditures by us and distraction
of our management. For example, lawsuits by employees, stockholders,
collaborators or distributors could be very costly and substantially disrupt our
business. Disputes from time to time with companies or individuals are not
uncommon in our industry, and we cannot assure you that we will always be able
to resolve them out of court.
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous and
radioactive materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state, local and foreign regulations, the risk
of accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of an accident, we could
be liable for any damages that result, which could seriously damage our business
and results of operations.
OUR SALES ARE SUBJECT TO SEASONALITY, WHICH MEANS THAT WE HAVE LESS REVENUE IN
SOME MONTHS.
We experience a slowing of sales in Europe during the summer months and
worldwide during the Christmas holidays. Generally, our fourth quarter revenues
are lower than our revenues in each of the first three quarters of the year. We
believe that period to period comparisons of our operating results may not
necessarily be reliable indicators of our future performance. It is likely that
in some future period our operating results will not meet expectations or those
of public market analysts, which could result in reductions in the market price
of our common stock.
Page 20
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
We face a potential risk of liability claims based on our products and
services, and we have faced such claims in the past. We carry product liability
insurance coverage which is limited in scope and amount but which we believe to
be adequate. We cannot assure you, however, that we will be able to maintain
this insurance at reasonable cost and on reasonable terms. We also cannot assure
that this insurance will be adequate to protect us against a product liability
claim, should one arise.
THE LABOR LAWS APPLICABLE TO OUR EMPLOYEES IN EUROPE MAY RESTRICT THE
FLEXIBILITY OF OUR MANAGEMENT.
As of September 30, 2001, 62 of our 240 employees worked for our BioSource
Europe subsidiary, which is located in Nivelles, Belgium. As a result of Belgian
labor laws, we are required to make specified severance payments in the event we
terminate a European employee. Accordingly, our management may be limited by the
application of the Belgian labor laws in the determination of staffing levels,
and may have less flexibility in making such determinations than our competitors
whose employees are not subject to similar labor laws.
RISKS ASSOCIATED WITH OUR INDUSTRY
THE BIOMEDICAL RESEARCH PRODUCTS INDUSTRY IS VERY COMPETITIVE, AND WE MAY BE
UNABLE TO CONTINUE TO COMPETE EFFECTIVELY IN THIS INDUSTRY IN THE FUTURE.
We are engaged in a segment of the biomedical research products industry
that is highly competitive. We compete with many other suppliers and new
competitors continue to enter the markets. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and
biotechnology companies, and many of them have substantially greater capital
resources, marketing experience, research and development staffs, and facilities
than we do. Any of these companies could succeed in developing products that are
more effective than the products that we have or may develop and may also be
more successful than us in producing and marketing their products. We expect
this competition to continue and intensify in the future. Competition in our
markets is primarily driven by:
o product performance, features and liability;
o price;
o timing of product introductions;
o ability to develop, maintain and protect proprietary products and
technologies;
o sales and distribution capabilities;
o technical support and service;
o brand royalty;
o applications support; and
o breadth of product line.
If a competitor develops superior technology or cost-effective alternatives
to our products, our business, financial condition and results of operations
could be materially adversely affected.
Our competitors have in the past and may in the future compete by lowering
prices. We may respond by lowering our prices, which could reduce revenues and
profits. Conversely, failure to anticipate and respond to price competition may
damage our market share.
Page 21
Our industry has also seen substantial consolidation in recent years, which
has led to the creation of competitors with greater financial and intellectual
property resources than us. In addition, we believe that the success that others
have had in our industry will attract new competitors. Some of our current and
future competitors also may cooperate to better compete against us. We may not
be able to compete effectively against these current or future competitors.
Increased competition could result in price reductions for our products, reduced
margins and loss of market share, any of which could adversely impact our
business, financial condition and results of operations.
AS A RESULT OF CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY, WE MAY LOSE
EXISTING CUSTOMERS OR HAVE GREATER DIFFICULTY OBTAINING NEW CUSTOMERS.
In recent years, the United States pharmaceutical industry has undergone
substantial consolidation. As part of many business combinations, companies
frequently reduce the number of suppliers used and we may not be selected as a
supplier after any business combination. Further, mergers or corporate
consolidations in the pharmaceutical industry could cause us to lose existing
customers and potential future customers, which could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE CURRENTLY SUBJECT TO GOVERNMENT REGULATION.
Our business is currently subject to regulation, supervision and licensing
by federal, state and local governmental authorities. Also, from time to time we
must expend resources to comply with newly adopted regulations, as well as
changes in existing regulations. If we fail to comply with these regulations, we
could be subject to disciplinary actions or administrative enforcement actions.
These actions could result in penalties, including fines.
RISKS ASSOCIATED WITH OUR COMMON STOCK
OUR STOCK PRICE HAS BEEN VOLATILE.
Our common stock is quoted on the Nasdaq National Market, and there has
been substantial volatility in the market price of our common stock. The trading
price of our common stock has been, and is likely to continue to be, subject to
significant fluctuations due to a variety of factors, including:
o fluctuations in our quarterly operating and earnings per share results;
o the gain or loss of significant contracts;
o loss of key personnel;
o announcements of technological innovations or new products by us or our
competitors;
o delays in the development and introduction of new products;
o legislative or regulatory changes;
o general trends in the industry;
o recommendations and/or changes in estimates by equity and market research
analysts;
o biological or medical discoveries;
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o disputes and/or developments concerning intellectual property, including
patents and litigation matters;
o public concern as to the safety of new technologies;
o sales of common stock of existing holders;
o securities class action or other litigation
o developments in our relationships with current or future customers and
suppliers; and
o general economic conditions, both in the United States and abroad.
As a result of these factors, and potentially others, the sales price of
our common stock has ranged from $2.41 to $32.00 per share from January 1, 1998
through November 9, 2001 and from $5.00 to $13.38 per share from January 1, 2001
through November 9, 2001.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have affected the market price of our common stock, as
well as the stock of many biotechnology companies. Often, price fluctuations are
unrelated to operating performance of the specific companies whose stock is
affected.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has occurred against the
issuing company. If we were subject to this type of litigation in the future, we
could incur substantial costs and a diversion of our management's attention and
resources, each of which could have a material adverse effect on our revenue and
earnings. Any adverse determination in this type of litigation could also
subject us to significant liabilities.
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND UNDER APPLICABLE LAW
COULD IMPAIR THE ABILITY OF A THIRD PARTY TO TAKE OVER OUR COMPANY.
We are subject to various legal and contractual provisions that may impede
a change in our control, including the following:
o our adoption of a stockholders' rights plan, which could result in the
significant dilution of the proportionate ownership of any person that
engages in an unsolicited attempt to take over our company; and
o the ability of our board of directors to issue additional shares of our
preferred stock, which shares may be given superior voting, liquidation,
distribution and other rights as compared to our common stock.
These provisions, as well as other provisions in our certificate of
incorporation and bylaws and under the Delaware General Corporations Law, may
make it more difficult for a third party to acquire our company, even if the
acquisition attempt was at a premium over the market value of our common stock
at that time.
Our principal stockholders and management own a significant percentage of
our capital stock and will be able to exercise significant influence over our
affairs. Our executive officers, directors and principal stockholders will
continue to beneficially own 20.4% of our outstanding common stock, based upon
the beneficial ownership of our common stock as of November 1, 2001. In
addition, these same persons also hold options to acquire additional shares of
our common stock, which may increase their percentage ownership of the common
stock further in the future. Accordingly, these stockholders:
o will be able to significantly influence the composition of our board of
directors;
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o will significantly influence all matters requiring stockholder approval,
including change of control transactions; and
o will continue to have significant influence over our business.
This concentration of ownership of our common stock could have the effect
of delaying or preventing a change of control of us or otherwise discouraging a
potential acquirer from attempting to obtain control of us. This in turn could
have a negative effect on the market price of our common stock. It could also
prevent our stockholders from realizing a premium over the market prices for
their shares of common stock.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
AFFAIRS.
Our executive officers, directors and principal stockholders beneficially
own approximately 20.4% of our outstanding common stock, based upon the
beneficial ownership of our common stock as of November 1, 2001. As a result,
these stockholders, if they act together, could exert substantial influence over
matters requiring stockholder approval, including the election of directors and
approval of mergers and other significant corporate transactions. The voting
power of such persons may have the effect of delaying, preventing or deterring a
change in control, and could affect the market price of our common stock.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.
Some investors favor companies that pay dividends, particularly in general
downturns in the stock market. We have never declared or paid any cash dividends
on our common stock. We currently intend to retain any future earnings for
funding growth and we do not currently anticipate paying cash dividends on our
common stock in the foreseeable future. Because we may not pay dividends, the
return on this investment likely depends on selling this stock at a profit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK:
We conduct business in various foreign currencies and are therefore subject
to the transaction exposures that arise from foreign exchange rate movements
between the dates that foreign currency transactions are initiated and the date
that they are converted. We are also subject to certain exposures arising from
the translation and consolidation of the financial results of our foreign
subsidiaries. There can be no assurance that actions taken to manage such
exposures will continue to be successful or that future changes in currency
exchange rates will not have a material impact on our future cash collections
and operating results. We do not currently hedge either our transaction risk or
our economic risk.
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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. The Court granted BioSource's motion as to both of
these causes of action. As a consequence, the only two remaining causes of
action in this litigation were (1) breach of contract and (2) fraud. In December
2000, BioSource answered the First Amended Complaint, and filed a counter-claim
against Jordan Fishman. Discovery has concluded. Trial is scheduled to commence
in November 2001. BioSource filed a motion for summary judgment against
plaintiff's case and that motion was heard on August 6, 2001. The Court granted
BioSource's motion as to the fraud claim. Therefore, only the breach of contract
claim and BioSource's counterclaim remain for trial. Trial is scheduled to
commence in January 2002.
The Company has also commenced an arbitration proceeding against the former
shareholders of its QCB division, including Mr. Fishman, to recover damages
management believes it has 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 Company's claim to recover the $1,347,000 of Escrowed Funds is
based on QCB's breach of the representations and warranties made in the Stock
Purchase Agreement. The parties have selected a panel of three arbitrators who
will hear the dispute in March 2002. The Company has also asserted a claim for
punitive damages against Jordan Fishman in the arbitration.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 26, 2001, the Company held its Annual Meeting of Stockholders. The
following sets forth the identity of directors elected for one year and until
their respective successors have been elected. In addition, the results of the
voting on the ratification of appointment of the company's auditors are included
FOR WITHHELD
--------- ---------
1. Election of directors
Jean-Pierre L. Conte 9,403,360 35,142
Leonard M. Hendrickson 9,423,125 15,377
David J. Moffa 9,422,770 15,732
John R. Overturf, Jr. 9,422,866 15,636
Robert D. Weist 9,422,770 15,732
Robert J. Weltman 9,403,324 35,178
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FOR AGAINST ABSTAIN
--------- ------- -------
2. Ratification of Auditors 9,426,972 8,601 2,929
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 24, 2001, reporting Item 5
and filed with the Securities and Exchange Commission on August
3, 2001.
Current Report on Form 8-K dated September 26, 2001, reporting
Item 5 and filed with the Securities and Exchange Commission on
October 4, 2001.
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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 7, 2001 /S/ LEONARD M. HENDRICKSON
----------------------------------
Leonard M. Hendrickson
President and
Chief Executive Officer
Date: November 7, 2001 /S/ CHARLES C. BEST
----------------------------------
Charles C. Best
Executive Vice President and
Chief Financial Officer
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