- --------------------------------------------------------------------------------
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, 2002
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 8, 2002 was 9,644,916.
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BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2002
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 2002 (unaudited)
and December 31, 2001 (unaudited) ........................ 3
Condensed Consolidated Statements of
Operations for the three and nine months
ended September 30, 2002 and 2001 (unaudited) ............ 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 2002 and 2001 (unaudited) .................. 5
Notes to Condensed Consolidated Unaudited
Financial Statements ..................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...............................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .......................................................24
ITEM 4. CONTROLS AND PROCEDURES ...........................................24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .........................26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...................................26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............26
ITEM 5. OTHER INFORMATION .................................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..................................27
SIGNATURES .................................................................28
2
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 5,798 9,471
Accounts receivable, less allowance
for doubtful accounts of $347 at
September 30, 2002 and $261 at
December 31, 2001 ............................. 6,520 6,184
Inventories, net (note 3) ....................... 8,133 7,184
Prepaid expenses and other current
assets ........................................ 739 540
Deferred income taxes ........................... 1,584 1,584
-------- --------
Total current assets ............. 22,774 24,963
Property and equipment, net (note 4) ............... 6,949 5,408
Intangible assets net of accumulated
amortization of $2,318 at September
30, 2002 and $2,101 at December 31,
2001 (note 5) .................................... 6,259 6,912
Goodwill, net of accumulated
amortization of $176 at September 30,
2002 and $1,276 at December 31, 2001
(note 5) ......................................... 284 4,741
Other assets ....................................... 520 491
Deferred tax assets ................................ 8,826 7,326
-------- --------
$ 45,612 49,841
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 2,533 2,416
Accrued expenses ................................ 2,702 2,707
Deferred revenue ................................ 439 404
Income tax payable .............................. 815 436
-------- --------
Total current liabilities ........ 6,489 5,963
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value. Authorized
20,000,000 shares: issued
9,696,582 and outstanding
9,644,582 shares at September 30,
2002; issued 10,449,817 shares
and outstanding 10,353,817
shares at December 31, 2001 ............... 10 10
Additional paid-in capital ....................... 44,373 48,761
Accumulated deficit .............................. (3,427) (2,330)
Accumulated other comprehensive loss ............. (1,833) (2,563)
-------- --------
Net stockholders' equity ......... 39,123 43,878
-------- --------
$ 45,612 49,841
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales ...................... $ 10,101 8,587 30,175 26,004
Cost of sales .................. 4,365 3,761 13,109 11,397
-------- -------- -------- --------
Gross profit ............... 5,736 4,826 17,066 14,607
-------- -------- -------- --------
Operating expenses:
Research and development ... 1,557 1,051 4,362 2,930
Sales and marketing ........ 1,961 1,806 6,239 5,552
General and administrative . 1,394 1,751 4,325 4,918
Amortization of intangibles
assets and goodwill ...... 160 275 481 824
-------- -------- -------- --------
Total operating expenses 5,072 4,883 15,407 14,224
-------- -------- -------- --------
Operating income ............... 664 (57) 1,659 383
Interest income ................ 21 85 82 330
Other income (expense), net .... (8) (28) (10) 47
-------- -------- -------- --------
Income before income taxes
(benefit) .................... 677 0 1,731 760
Income tax expense (benefit) ... 149 (266) 381 (30)
-------- -------- -------- --------
Income before cumulative
effect of accounting
change ............... 528 266 1,350 790
Cumulative effect of accounting
change (net of applicable
income taxes (benefit) of
($259) and $1,500 for the
three and nine months ended
September 30, 2002,
respectively) ................ 423 -- (2,447) --
-------- -------- -------- --------
Net income (loss) .............. $ 951 266 (1,097) 790
======== ======== ======== ========
Net income per share before
accounting change:
Basic ...................... $ 0.05 0.03 0.14 0.08
======== ======== ======== ========
Diluted .................... $ 0.05 0.02 0.13 0.07
======== ======== ======== ========
Net income (loss) per share
after accounting change:
Basic ...................... $ 0.10 0.03 (0.11) 0.08
======== ======== ======== ========
Diluted .................... $ 0.09 0.02 (0.11) 0.07
======== ======== ======== ========
Shares used to compute net
income (loss):
Basic ...................... 9,651 10,443 9,830 10,400
======== ======== ======== ========
Diluted .................... 10,029 10,868 10,289 11,003
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Amounts in thousands)
(Unaudited)
2002 2001
------- -------
Cash flows from operating activities:
Net income (loss) ............................. $(1,097) 790
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ............ 1,686 1,662
Stock compensation ....................... -- (388)
Cumulative effect of accounting
change - goodwill write-off ............ 4,629 --
Income tax benefit from the
exercise of stock options .............. -- 94
Changes in assets and liabilities:
Accounts receivable ...................... (33) (476)
Inventories .............................. (516) (102)
Prepaid expenses and other
current assets ......................... (192) 19
Deferred taxes ........................... (1,500) (94)
Other assets ............................. (31) 305
Accounts payable ......................... 13 355
Accrued expenses ......................... (173) (151)
Deferred revenue ......................... 35 (61)
Income taxes payable ..................... 375 7
------- -------
Net cash provided from operating
activities .................................. 3,196 1,960
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............ (2,632) (1,625)
------- -------
Net cash used in investing
activities ............................. (2,632) (1,625)
------- -------
Cash flows from financing activities:
Proceeds from the exercise of options ......... 224 295
Purchase of treasury stock .................... (4,611) --
------- -------
Net cash provided by (used in) financing
activities ....................................... (4,387) 295
------- -------
Net decrease in cash and cash
equivalents ............................ (3,823) 630
Effect of exchange rates on cash and cash
equivalents ...................................... 150 (417)
Cash and cash equivalents at beginning of
period ........................................... 9,471 10,633
------- -------
Cash and cash equivalents at end of period ......... $ 5,798 10,846
======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the period
for:
Interest ................................. $ 1 1
======= =======
Income taxes ............................. $ 24 --
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of BioSource
International, Inc. (the "Company") 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, 2001. 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, 2002, are not necessarily indicative of results to be expected for
the full fiscal year.
2. GENERAL
The Company develops, manufactures, markets and distributes products and
services that are widely used in biomedical research. Our products and services
enable scientists to better understand the biochemistry, immunology and cell
biology of the human body, aging and certain diseases such as cancer, arthritis
and other inflammatory diseases, AIDS and certain other infectious diseases. We
have a wide variety of products, including immunoassay and ELISA test kits;
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. We also manufacture and market custom oligonucleotides, peptides and
antibodies to the specifications of our customers. We use recombinant DNA
technology to produce cytokines and other proteins.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No.141, "Accounting For Business
Combinations," and FAS No. 142, "Accounting For Goodwill and Other Intangible
Assets." FAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. FAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized to earnings, but instead be reviewed for impairment in accordance with
FAS No. 142. The amortization of goodwill and intangible assets with indefinite
lives was approximately $160,000 and $275,000 for the quarters ended September
30, 2002 and 2001, respectively and $481,000 and $824,000 for the nine months
ended September 30, 2002 and 2001 respectively. Effective January 1, 2002, the
Company's goodwill and other intangible assets are accounted for under FAS No.
141 "Business Combinations" and FAS No. 142 "Goodwill and Other Intangible
Assets." In the first quarter of 2002, the Company recognized a non-cash charge,
net of applicable income taxes, of $2,870,000 representing the cumulative effect
of a change in accounting principle resulting from the implementation of FAS
142. The charge included the write off of goodwill related to the acquisition of
Quality Controlled Biochemicals ("QCB") in December 1998. In the third quarter
of 2002, the Company received cash proceeds of $800,000 in an arbitration
settlement related to its 1998 acquisition of QCB. This recovery, shown net of
legal fees and applicable income taxes, totals $423,000 and is shown as a
cumulative effect of a change in accounting principle for the three months ended
September 30, 2002. The net impairment charge for goodwill resulting from the
adoption of FAS 142 for the nine months ended September 30, 2002 is $2,447,000
and is shown in the accompanying condensed consolidated statement of operations
as a cumulative effect of an accounting change.
In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While FAS No. 144
supersedes FAS 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 implementation of FAS No. 144 has not had
a material impact on our financial position or results from operations.
6
On July 30, 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." FAS 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It
requires that a liability be recognized for those costs only when the liability
is incurred, that is, when it meets the definition of a liability in the FASB's
conceptual framework. FAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
FAS 146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with earlier adoption encouraged. The Company does not expect
that the adoption of FAS 146 will have a material impact on its financial
position or results from operations.
3. INVENTORIES (AMOUNTS IN THOUSANDS):
SEPT. 30, 2002 DEC. 31, 2001
-------------- -------------
Raw materials ...................... $ 2,484 2,367
Work in process .................... 534 304
Finished goods ..................... 5,115 4,513
---------- ----------
$ 8,133 7,184
========== ==========
4. PROPERTY AND EQUIPMENT (AMOUNTS IN THOUSANDS):
SEPT. 30, 2002 DEC. 31, 2001
-------------- -------------
Machinery and equipment ............ $ 8,485 6,919
Office furniture and equipment ..... 3,466 2,604
Leasehold improvements ............. 1,468 907
---------- ----------
13,419 10,430
Less accumulated depreciation
and amortization ................ 6,470 5,022
---------- ----------
$ 6,949 5,408
========== ==========
5. GOODWILL AND INTANGIBLE ASSETS - ADOPTION OF FINANCIAL ACCOUNTING STATEMENT
142
In July 2001, the FASB issued FAS No.141, "Accounting For Business
Combinations," and FAS No. 142, "Accounting For Goodwill and Other Intangible
Assets."
The pro forma effects of implementation of FAS 142 to prior periods would be as
follows (amounts in thousands, except per share data):
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
--------- --------
REPORTED INCOME (LOSS) ................... $ (1,097) 790
Add:
Impairment charge ........................ 2,447 --
Goodwill Amortization, net of tax ........ -- 213
--------- --------
Adjusted net income ...................... $ 1,350 1,003
========= ========
BASIC NET INCOME PER SHARE:
Reported income (loss) ............... $ (0.11) 0.08
Impairment charge .................... 0.25 0.00
Goodwill amortization ................ 0.00 0.02
--------- --------
Adjusted net income .................. $ 0.14 0.10
========= ========
DILUTED NET INCOME PER SHARE:
Reported income (loss) ............... $ (0.11) 0.07
Impairment charge .................... 0.24 0.00
Goodwill amortization ................ 0.00 0.02
--------- --------
Adjusted net income .................. $ 0.13 0.09
========= ========
7
6. EARNINGS PER SHARE
The reconciliation of basic to diluted weighted average shares is as follows
(amounts in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------ ------ ------ ------
Weighted average shares used in
basic computation ..................... 9,651 10,443 9,830 10,400
Dilutive stock options and warrants ........ 378 425 459 603
------ ------ ------ ------
Weighted average shares used for
diluted computation ................... 10,029 10,868 10,289 11,003
====== ====== ====== ======
Options to purchase 1,212,904 and 1,039,613 shares were not included in the
computation of diluted net income per share for the three month periods ended
September 30, 2002 and 2001, respectively because their effect would be
anti-dilutive.
Options to purchase 1,122,276 and 822,443 shares were not included in the
computation of diluted net income (loss) per share for the nine month periods
ended September 30, 2002 and 2001, respectively because their effect would be
anti-dilutive.
Warrants to purchase 1,287,000 shares at a weighted average exercise price of
$7.77 per share were outstanding as of September 30, 2002 and 2001 but were not
included in the computation of diluted net income per share for the three and
nine months ended September 30, 2002 and 2001 because their effect would be
anti-dilutive.
7. STOCKHOLDERS' EQUITY
Comprehensive income (loss) is determined as follows (amounts in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------ ------ ------ ------
Net income (loss) ........................ $ 951 266 (1,097) 790
Foreign currency translation adjustments . 30 409 730 (115)
------ ------ ------ ------
Total comprehensive income (loss) ........ $ 981 675 (367) 675
====== ====== ====== ======
8
8. BUSINESS SEGMENTS
The Company is engaged in a single industry, the licensing, development,
manufacture, marketing and distribution of immunological reagents, test kits and
oligonucleotides used in biomedical research and human diagnostics. Our
customers are not concentrated in any specific geographic region and no single
customer accounts for a significant amount of our sales.
Management of the Company has determined its reportable segments are strategic
business units that offer both sales to external customers from geographic
company facilities and sales to external customers in certain geographic
regions. 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 separately because each
business requires different marketing and distribution strategies. Business
information is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
SALES - FROM SEGMENTS (IN THOUSANDS):
Net sales to external customers from:
United States:
Domestic ................... $ 5,951 $ 5,241 $ 17,952 $ 15,348
Export ..................... 1,055 1,040 3,164 3,403
-------- -------- -------- --------
Total United States . 7,006 6,281 21,116 18,751
Europe ......................... 3,095 2,306 9,059 7,253
-------- -------- -------- --------
Consolidated ........ $ 10,101 $ 8,587 $ 30,175 $ 26,004
======== ======== ======== ========
Operating income (loss):
United States .................. $ (20) $ (483) $ (340) $ (1,359)
Europe ......................... 684 426 1,999 1,742
-------- -------- -------- --------
Consolidated ........ $ 664 $ (57) $ 1,659 $ 383
======== ======== ======== ========
SALES - TO SEGMENTS (IN THOUSANDS):
Net sales to external customers in:
United States .................. $ 5,951 $ 5,241 $ 17,952 $ 15,348
Europe ......................... 2,725 2,093 7,984 6,706
Japan .......................... 842 721 2,601 2,276
Other .......................... 583 532 1,638 1,674
-------- -------- -------- --------
Consolidated ........ $ 10,101 $ 8,587 $ 30,175 $ 26,004
======== ======== ======== ========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the consolidated financial statements, the
notes thereto and other information, including information set forth in our 10-K
for the fiscal year ended December 31, 2001, 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.
CRITICAL ACCOUNTING POLICIES
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Specifically,
management must make estimates in the following areas:
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company has $6,867,000 in gross
trade accounts receivable and $347,000 in allowance for doubtful
accounts at September 30, 2002. The Company has procedures in place to
review the credit worthiness of new customers and also to properly
review orders from existing customers to determine if a change in
credit terms is warranted. A review of our allowance for doubtful
accounts is done timely and consistently throughout the year. As of
September 30, 2002, we believe our allowance for doubtful accounts is
fairly stated. We do have accounts receivable amounts from certain
customers as of September 30, 2002 that if their financial condition
changed and a significant allowance needed to be created, the Company's
financial results for 2002 could be materially and adversely affected.
10
INVENTORY ADJUSTMENTS. We review the components of our inventory on a
regular basis for excess, obsolete and impaired inventory based on
estimated future usage and sales. The Company has written down its
entire antibody inventory at 100% of its value because the ability to
sell the antibody inventory is uncertain. As of September 30, 2002, the
Company had $3,972,000 of antibodies in its inventory and a write down
for these antibodies totaling $3,972,000. The Company will continue to
monitor its antibody inventory. Additionally, material inventory
write-downs in our inventory can occur if competitive conditions or new
product introductions by our customers or us vary from our current
expectations.
DEFERRED TAX ASSETS AND DEFERRED INCOME TAXES. The Company has
$10,410,000 in deferred tax assets on its consolidated balance sheet as
of September 30, 2002. As of September 30, 2002, no valuation allowance
has been set up to offset any of the deferred tax assets. The ability
to realize these deferred tax assets depends entirely on the Company
generating taxable income in the future. The Company has used
historical information as well as a projected financial outlook to
project taxable income amounts. The Company believes it is more likely
than not that they will be able to realize these benefits in the
future. A material change in our expected realization of these assets
would occur if the ability to deduct tax loss carryforwards against
future taxable income is altered. If our projections involving tax
planning and operating strategies do not materialize or if significant
changes in tax laws occur within the various tax jurisdictions in which
we operate, we would have to set up a valuation allowance against our
deferred tax assets that could materially affect our tax expense and
our financial results.
REVENUE RECOGNITION. Our revenue is generated from the sale of products
primarily manufactured by us. We do have a small amount of products we
sell on an outside equipment manufactured ("OEM") basis. We recognize
revenue from all of our product sales upon transfer of title to the
customer, which occurs upon shipment. We typically ship to our
customers FOB shipping point. We do have customers who order and pay
for certain cell culture products and request that we store a portion
of the batch for them. In these instances, we record all payments as
deferred revenue in the consolidated balance sheets and recognize
revenue upon shipment of the product to the customer. The Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition," ("SAB 101") provides guidance on the application of
generally accepted accounting principles to selected revenue
recognition issues. We believe that our revenue recognition policy is
consistent with this guidance and in accordance with generally accepted
accounting principles. We do not anticipate any changes to our revenue
recognition and shipping policies in the future.
LONG-LIVED ASSETS. In October, 2001 the Financial Accounting Standards
Board ("FASB") issued Statement on Financial Accounting Standards
("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. While FAS No. 144
supersedes FAS 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. It is our policy,
and in accordance with FAS No. 144, to account for long-lived assets,
including intangibles, at amortized cost. As part of an ongoing review
of the valuation and amortization of long-lived assets, management
assesses the carrying value of such assets if facts and circumstances
suggest that they may be impaired. If this review indicates that
long-lived assets will not be recoverable, as determined by a
non-discounted cash flow analysis over the remaining amortization
period, the carrying value of the Company's long-lived assets would be
reduced to its estimated fair value based on discounted cash flows. As
a result, we have determined that our long-lived assets are not
impaired as of September 30, 2002 and 2001, respectively.
GOODWILL. In July 2001, the FASB issued FAS No.141, "Accounting For
Business Combinations," and FAS No. 142, "Accounting For Goodwill and
Other Intangible Assets." FAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after
June 30, 2001. FAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized to earnings, but
instead be reviewed for impairment in accordance with FAS No. 142. The
amortization of goodwill and intangible assets with indefinite lives
was approximately $160,000 and $275,000 for the
11
quarters ended September 30, 2002 and 2001, respectively and $481,000
and $824,000 for the nine months ended September 30, 2002 and 2001
respectively. Effective January 1, 2002, the Company's goodwill and
other intangible assets are accounted for under FAS No. 141 "Business
Combinations" and FAS No. 142 "Goodwill and Other Intangible Assets."
In the first quarter of 2002, the Company recognized a non-cash charge,
net of applicable income taxes, of $2,870,000 representing the
cumulative effect of a change in accounting principle resulting from
the implementation of FAS 142. The charge included the write off of
goodwill related to the acquisition of Quality Controlled Biochemicals
("QCB") in December 1998. In the third quarter of 2002, the Company
received cash proceeds of $800,000 in an arbitration settlement related
to its 1998 acquisition of QCB. This recovery, shown net of legal fees
and applicable income taxes, totals $423,000 and is shown as a
cumulative effect of a change in accounting principle for the three
months ended September 30, 2002. The net impairment charge for goodwill
resulting from the adoption of FAS 142 for the nine months ended
September 30, 2002 is $2,447,000 and is shown in the accompanying
condensed consolidated statement of operations as a cumulative effect
of an accounting change.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES: Net sales for the quarter ended September 30, 2002 were $10.1 million,
an increase of $1.5 million, or 18% (15% after eliminating the $254,000 positive
impact of foreign exchange), compared to net sales for the quarter ended
September 30, 2001. The Company's increased sales and marketing expenditures,
including increased sales personnel and marketing programs, and its continued
investment in research and development activities resulting in new products for
sale, have been primary drivers for sales growth in North America and Europe.
For the three months ended September 30, 2002, the Company achieved net sales
growth in North America of 12% as compared to the three months ended September
30, 2001. European sales for the three months ended September 30, 2002 increased
30% (18% in local currency), as compared to the comparable prior year period.
Sales in Japan and the rest of the world increased 23%, for the three months
ended September 30, 2002 as compared to the three months ended September 30,
2001. Solidifying our relationship with our Japanese distributor through a new
distributor agreement in 2001 and expanding our customer base in the rest of the
world have contributed to our 23% growth in Japan and the rest of the world.
GROSS PROFIT: Gross profit margin for the three months ended September 30, 2002
was 57%, compared to 56% for the three months ended September 30, 2001. The
gross profit margin was 1% higher for the quarter ended September 30, 2002
primarily due to the selling mix of products.
RESEARCH AND DEVELOPMENT: Research and development expenses for the quarter
ended September 30, 2002 and 2001 were $1,557,000 and $1,051,000 and represented
15% and 12% of sales respectively. The increase in research and development
expenses for the three months ended September 30, 2002 when compared to the
comparable prior year period reflects the Company's investment in additional
personnel and materials in the cytokine and signal transduction research areas
with the goal of producing additional novel and proprietary products.
SALES AND MARKETING: Selling and marketing expenses were $2.0 million for the
three months ended September 30, 2002 and $1.8 million for the three months
ended September 30, 2001, representing 19% and 21% of sales, respectively. In
the quarter ended September 30, 2002, our sales and marketing expenses in
personnel and marketing programs increased $155,000 from the comparable prior
year period.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $1.4
million for the three months ended September 30, 2002, and $1.8 million for the
three months ended September 30, 2001, a decrease of approximately $400,000. As
a percentage of sales, general and administrative expenses represented 14% and
20% for the three months ended September 30, 2002 and 2001, respectively.
Excluding $429,000 of general and administrative charges in the third quarter of
2001 related to severance and termination matters, the Company reduced its G&A
expenses, as a percentage of sales, from 15% to 14%.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL: Amortization of intangible
assets for each of the three months ended September 30, 2002 and 2001 amounted
to $160,000 and $275,000, respectively and is related primarily to the
amortization of the identifiable intangible assets from the QCB and Biofluids
acquisitions. The reduction in amortization in the current quarter compared to
the quarter ended September 30, 2001, is related to the implementation of FAS
142 which eliminated a significant amount of goodwill amortization.
12
INTEREST INCOME: Interest income for the three months ended September 30, 2002,
and September 30, 2001, was $21,000 and $85,000 which was related to interest
income on cash invested in short-term securities during each of the respective
quarters.
INCOME TAX EXPENSE: The effective income tax rate and income tax amount for the
three months ending September 30, 2002 was 22% or $149,000. In the quarter ended
September 30, 2001, the Company adjusted its annualized effective tax rate to
- -4%. As a result, the Company recorded a ($266,000) tax benefit for the three
month period ended September 30, 2001. The Company has benefited from R & D and
other tax credits which when applied to the lower income for the periods
presented results in a lower effective tax rate for the three months ended
September 30, 2001, compared to the three months ended September 30, 2002.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES: Net sales for the nine months ended September 30, 2002 were a record
$30.2 million, an increase of $4.2 million, or 16%, (15% after eliminating the
$204,000 positive impact of foreign exchange) compared to net sales for the nine
months ended September 30, 2001. The Company's increased sales and marketing
expenditures, including increased sales personnel and marketing programs, and
its continued investment in research and development activities resulting in new
products for sale, have been primary drivers for sales growth in North America
and Europe. For the nine months ended September 30, 2002, the Company achieved
net sales growth in North America of 15% as compared to the nine months ended
September 30, 2001. European sales for the nine months ended September 30, 2002
increased 19% (16% in local currency), as compared to the comparable prior year
period. Sales in Japan and the rest of the world increased 15%, for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001. Solidifying our relationship with our Japanese distributor through a
new distributor agreement in 2001 and expanding our customer base in the rest of
the world have contributed to our 15% growth in Japan and the rest of the world.
GROSS PROFIT: Gross profit margin for the nine months ended September 30, 2002
was 57%, compared to 56% for the nine months ended September 30, 2001. The gross
profit margin was 1% higher for the nine months ended September 30, 2002
primarily due to the selling mix of products.
RESEARCH AND DEVELOPMENT: Research and development expense for the nine months
ended September 30, 2002 and 2001 were $4,362,000 and $2,930,000 and represented
14% and 11% of sales respectively. The increase in research and development
expenses for the nine months ended September 30, 2002 when compared to the
comparable prior year period reflects the Company's investment in additional
personnel and materials in the cytokine and signal transduction research areas
with the goal of producing additional novel and proprietary products. Through
September 30, 2002, the Company has increased its research and development
capabilities by adding approximately 20 new research and development positions.
SALES AND MARKETING: Selling and marketing expenses were $6.2 million for the
nine months ended September 30, 2002 and $5.6 million for the nine months ended
September 30, 2001, respectively. As a percentage of sales, sales and marketing
expenses represented 21% for each of the nine months ended September 30, 2002
and 2001. In the nine months ended September 30, 2002, our sales and marketing
expenses in personnel and marketing programs increased $687,000 from the
comparable prior year period.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $4.3
million for the nine months ended September 30, 2002, and $4.9 million for the
nine months ended September 30, 2001, a decrease of approximately $600,000. As a
percentage of sales, general and administrative expenses represented 14% and 19%
for the nine months ended September 30, 2002 and 2001, respectively. Excluding
$701,000 of net general and administrative charges which occurred during the
nine months ended September 30 2001 and were related to non-recurring employee
and legal matters, the Company reduced its general and administrative expenses
as a percentage of sales from 16% to 14%.
AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL: Amortization of intangible
assets for each of the nine months ended September 30, 2002 and 2001 amounted to
$481,000 and $824,000, respectively and is primarily related to the amortization
of the intangible assets from the QCB and Biofluids acquisitions. The reduction
in amortization in the
13
current nine months ended compared to the nine months ended September 30, 2001,
is related to the implementation of FAS 142 which eliminated a significant
amount of goodwill amortization.
INTEREST INCOME, NET: Interest income for the nine months ended September 30,
2002 and September 30, 2001, was $82,000 and $330,000 respectively, which was
related to interest income on cash invested in short-term securities during each
of the respective nine month periods.
INCOME TAX EXPENSE: The effective income tax rate and income tax amount for the
nine months ended September 30, 2002 was 22% or $381,000, and -4% or ($30,000)
for the nine months ended September 30, 2001. The Company has benefited from R &
D and other tax credits which when applied to the lower income for the periods
presented results in a lower effective tax rate for the nine months ended
September 30, 2002, and an income tax benefit for the nine months ended
September 30, 2001.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE: In the first quarter of 2002, the
Company recognized a non-cash charge, net of applicable income taxes, of
$2,870,000 representing the cumulative effect of a change in accounting
principle resulting from the implementation of FAS 142. The charge included the
write off of goodwill related to the acquisition of Quality Controlled
Biochemicals ("QCB") in December 1998. In the third quarter of 2002, the Company
received cash proceeds of $800,000 in an arbitration settlement related to its
1998 acquisition of QCB. This recovery, shown net of legal fees and applicable
income taxes, totals $423,000 and is shown as a cumulative effect of a change in
accounting principle for the three months ended September 30, 2002. The net
impairment charge for goodwill resulting from the adoption of FAS 142 for the
nine months ended September 30, 2002 is $2,447,000 and is shown in the
accompanying condensed consolidated statement of operations as a cumulative
effect of an accounting change. The effect of the implementation of FAS 142
reduced amortization of intangibles for the nine months ended September from
$824,000 to $481,000. With these net charges, the Company has recorded a net
income for the three months ended September 30, 2002 of $ 951,000 or $.09 per
diluted share and a net loss for the nine months ended September 30, 2002 of
($1,097,000) or ($.11) per diluted share.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents as of September 30, 2002, of $5,798,000 decreased by
$3,673,000 from $9,471,000 at December 31, 2001. The decrease in cash was due
primarily from a cash outlay of $4,611,000 for the repurchase of 782,000 shares
of the Company's common stock through its stock repurchase program initiated in
October 2001. Net cash provided from operating activities of $3,196,000 was
offset by capital expenditures of $2,632,000 and financing activities of
$4,387,000. Working capital, which is the excess of current assets over current
liabilities, was $16,285,000 at September 30, 2002, as compared to $19,000,000
at December 31, 2001, representing a decrease of $3,175,000.
In the nine months ended September 30, 2002, the Company received $224,000 from
the issuance of common stock related to the exercise of stock options.
In October 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. On July
19, 2002, the Company amended the stock repurchase program and increased its
repurchase commitment by $5 million to a total of $10 million. As of September
30, 2002 and at November 8, 2002, the Company had repurchased 878,000 shares of
common stock and incurred a cash outlay totaling $5,279,000.
The Company has never paid dividends on common stock and has no plans to do so
in fiscal 2002. 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.
14
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this report before purchasing shares of our common
stock. Investing in our common stock involves a high degree of risk. If any of
the following events or outcomes actually 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.
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
15
budgets fluctuate due to numerous factors that are outside our control and are
difficult to predict, including changes in available resources, spending
priorities and institutional budgetary policies. Our business could be seriously
damaged by any significant decrease in life sciences research and development
expenditures by pharmaceutical and biotechnology companies, academic
institutions or government and private laboratories.
A significant portion of our sales has been to researchers, universities,
government laboratories and private foundations whose funding is dependent upon
grants from government agencies such as the U.S. National Institutes of Health
(the "NIH") and similar domestic and international agencies. Although the level
of research funding has increased during the past several years, we cannot
assure that this trend will continue. Government funding of research and
development is subject to the political process, which is inherently fluid and
unpredictable. Our revenues may be adversely affected if our customers delay
purchases as a result of uncertainties surrounding the approval of government
budget proposals. Also, government proposals to reduce or eliminate budgetary
deficits have sometimes included reduced allocations to the NIH and other
government agencies that fund research and development activities. A reduction
in government funding for the NIH or other government research agencies could
seriously damage our business.
Many of our customers receive funds from approved grants at particular times of
the year, as determined by the federal government. Grants have, in the past,
been frozen for extended periods or have otherwise become unavailable to various
institutions without advance notice. The timing of the receipt of grant funds
affects the timing of purchase decisions by our customers and, as a result, can
cause fluctuations in our sales and operating results.
WE RELY ON RAW MATERIALS AND SPECIALIZED EQUIPMENT FOR OUR MANUFACTURING, WHICH
WE MAY NOT ALWAYS BE ABLE TO OBTAIN ON FAVORABLE TERMS.
Our manufacturing process relies on the continued availability of high-quality
raw materials and specialized equipment. It is possible that a change in
vendors, or in the quality of the raw materials supplied to us, could have an
adverse impact on our manufacturing process and, ultimately, on the sale of our
finished products. We have from time to time experienced a disruption in the
quality or availability of key raw materials, which has created minor delays in
our ability to fill orders for specific test kits. This could occur again in the
future, resulting in significant delays, and could have a detrimental impact on
the sale of our products and our results of operations. In addition, we rely on
highly specialized manufacturing equipment that if damaged or disabled could
adversely affect our ability to manufacture our products and therefore
negatively impact our business.
OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO EXPAND OUR BUSINESS IS UNCERTAIN.
In the future, in order to expand our business through internal development or
acquisitions, we may need to raise substantial additional funds through equity
or debt financings, research and development financings or collaborative
relationships. However, this additional funding may not be available or, if
available, it may not be available on economically reasonable terms. In
addition, any additional funding may result in significant dilution to existing
stockholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through collaborative partners that may require
us to release material rights to our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS FOR NEW PRODUCTS MAY BE UNSUCCESSFUL.
We incur significant research and development expenses to develop new products
and technologies. There can be no assurance that any of these products or
technologies will be successfully developed or that if developed, will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and technologies. Any failure to translate research and
development expenditures into successful new product introductions could have an
adverse effect on our business.
16
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT.
Our business model of providing products to researchers working on a variety of
genetic projects requires us to develop a wide spectrum of products. To generate
broad product lines it is advantageous to sometimes license technologies from
others rather than depending exclusively on our own employees. As a result, we
believe our ability to license new technologies from third parties is and will
continue to be important to our ability to offer new products.
In addition, from time to time we are notified or become aware of patents held
by third parties that are related to technologies we are selling or may sell in
the future. After a review of these patents, we may decide to obtain a license
for these technologies from these third parties or discontinue the products.
There can be no assurance that we will be able to continue to successfully
identify new technologies developed by others. Even if we are able to identify
new technologies of interest, we may not be able to negotiate a license on
favorable terms, or at all. If we lose the rights to patented technology, we may
need to discontinue selling certain products or redesign our products, and we
may lose a competitive advantage. Potential competitors could in-license
technologies that we fail to license and potentially erode our market share for
certain products. Our licenses typically subject us to various
commercialization, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons out of our control. For example, the licensor could lose patent
protection for a number of reasons, including invalidity of the licensed patent.
We do not always receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
We are currently in the process of negotiating several of these licenses and
expect that we will also negotiate these types of licenses in the future. There
can be no assurances that we will be able to negotiate these licenses on
favorable terms, or at all.
OUR FUTURE SUCCESS DEPENDS ON THE TIMELY INTRODUCTION OF NEW PRODUCTS AND THE
ACCEPTANCE OF THESE NEW PRODUCTS IN THE MARKETPLACE.
Our ability to gain access to technologies needed for new products and services
also depends in part on our ability to convince licensors that we can
successfully commercialize their inventions. We cannot assure that we will be
able to continue to identify new technologies developed by others. Even if we
are able to identify new technologies of interest, we may not be able to
negotiate a license on favorable terms, or at all.
IF WE FAIL TO INTRODUCE NEW PRODUCTS, OR OUR NEW PRODUCTS ARE NOT ACCEPTED BY
POTENTIAL CUSTOMERS, WE MAY LOSE MARKET SHARE.
Rapid technological change and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers make an investment of time
in selecting and learning to use a new product, and then are reluctant to
switch. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
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;
17
o ease of use;
o consistency with prior practices;
o scientists' opinion of the product's usefulness;
o citation of the product in published research; and
o general trends in life sciences research.
The expenses or losses associated with unsuccessful product development
activities or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition. The
development, introduction and marketing of innovative products in our rapidly
evolving markets will require significant sustained investment. We cannot assure
that cash from operations or other sources will be sufficient to meet these
ongoing requirements.
FAILURE TO ATTRACT AND RETAIN QUALIFIED SCIENTIFIC OR PRODUCTION PERSONNEL OR
LOSS OF KEY MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining this qualified personnel
base. Although we believe we have been and will be able to attract and retain
these personnel, there can be no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production and marketing, will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business. We generally do not enter into employment
agreements requiring these employees to continue in our employment for any
period of time.
Our success also will continue to depend to a significant extent on the members
of our management team and, in particular, on our Chief Executive Officer and
President, Leonard M. Hendrickson. We do not maintain any "key man" insurance
policies regarding any of these individuals. We may not be able to retain the
services of our executive officers and key personnel or attract additional
qualified members to management in the future. The loss of services of Mr.
Hendrickson, or of 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.
18
WE RELY ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL RISKS.
International sales accounted for approximately 41% and 41% of our revenues in
the first nine months of 2002 and 2001, 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 with in staffing and managing foreign
operations, including foreign distributor relationships;
o longer accounts receivable collection cycles in certain foreign countries;
o adverse economic or political changes;
o 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.
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 26% of our sales in the nine months ended September
30, 2002, were made in foreign currencies, primarily the Euro. A significant
portion of the foreign currencies in which we conduct our business is currently,
or may in the future be, denominated in Euros. We are not certain about the
future effect of the Euro on our business, financial condition or results of
operations. In the past, gains and losses on the collection of our accounts
receivable arising from international operations have contributed to negative
fluctuations in our results of operations. In general, increases in the exchange
rate of the United States dollar to foreign currencies cause our products to
become relatively more expensive to customers in those countries, leading to a
reduction in sales or profitability in some cases. We historically have not, and
currently are not, using hedging transactions or other means to reduce our
exposure to fluctuations in the value of the United States dollar as compared to
the foreign currencies in which many of our sales are made.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our operating results may vary significantly 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;
19
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.
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.
20
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous and
radioactive materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state, local and foreign regulations, the risk
of accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of an accident, we could
be liable for any damages that result, which could seriously damage our business
and results of operations.
OUR SALES ARE SUBJECT TO SEASONALITY, WHICH MEANS THAT WE HAVE LESS REVENUE IN
SOME MONTHS.
We experience a slowing of sales in Europe during the summer months and
worldwide during the Christmas holidays. Generally, our fourth quarter revenues
are lower than our revenues in each of the first three quarters of the year. We
believe that period to period comparisons of our operating results may not
necessarily be reliable indicators of our future performance. It is likely that
in some future period our operating results will not meet expectations or those
of public market analysts, which could result in reductions in the market price
of our common stock.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
We face a potential risk of liability claims based on our products and services,
and we have faced such claims in the past. We carry product liability insurance
coverage which is limited in scope and amount but which we believe to be
adequate. We cannot assure you, however, that we will be able to maintain this
insurance at reasonable cost and on reasonable terms. We also cannot assure that
this insurance will be adequate to protect us against a product liability claim,
should one arise.
THE LABOR LAWS APPLICABLE TO OUR EMPLOYEES IN EUROPE MAY RESTRICT THE
FLEXIBILITY OF OUR MANAGEMENT.
As of October 31, 2002, 66 of our 288 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;
21
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 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;
22
o recommendations and/or changes in estimates by equity and market research
analysts;
o biological or medical discoveries;
o disputes and/or developments concerning intellectual property, including
patents and litigation matters;
o public concern as to the safety of new technologies;
o sales of common stock of existing holders;
o securities class action or other litigation;
o developments in our relationships with current or future customers and
suppliers; and
o general economic conditions, both in the United States and abroad.
As a result of these factors, and potentially others, the sales price of our
common stock has ranged from $2.41 to $32.00 per share from January 1, 1998,
through November 8, 2002, and from $4.89 to $8.20 per share from January 1,
2002, through November 8, 2002.
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 33.8% of our outstanding common stock, based upon
the beneficial ownership of our common stock as of November 8, 2002. 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;
23
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 33.8% of our outstanding common stock, based upon the beneficial
ownership of our common stock as of November 8, 2002. As a result, these
stockholders, if they act together, could exert substantial influence over
matters requiring stockholder approval, including the election of directors and
approval of mergers and other significant corporate transactions. The voting
power of such persons may have the effect of delaying, preventing or deterring a
change in control, and could affect the market price of our common stock.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.
Some investors favor companies that pay dividends, particularly in general
downturns in the stock market. We have never declared or paid any cash dividends
on our common stock. We currently intend to retain any future earnings for
funding growth and we do not currently anticipate paying cash dividends on our
common stock in the foreseeable future. Because we may not pay dividends, the
return on this investment likely depends on selling this stock at a profit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK:
We conduct business in various foreign currencies and are therefore subject to
the transaction exposures that arise from foreign exchange rate movements
between the dates that foreign currency transactions are initiated and the date
that they are converted. We are also subject to certain exposures arising from
the translation and consolidation of the financial results of our foreign
subsidiaries. There can be no assurance that actions taken to manage such
exposures will continue to be successful or that future changes in currency
exchange rates will not have a material impact on our future cash collections
and operating results. We do not currently hedge either our transaction risk or
our economic risk.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures which we have designed to ensure
that material information related to BioSource International, Inc., including
our consolidated subsidiaries, is disclosed in our public filings on a regular
basis. In response to recent legislation and proposed regulations, we reviewed
our internal control structure and our disclosure controls and procedures. We
believe our pre-existing disclosure controls and procedures are adequate to
enable us to comply with our disclosure obligations.
Within 90 days prior to the filing of this report, members of the Company's
management, including the Company's President and Chief Executive Officer, Len
Hendrickson, and Chief Financial Officer, Charles Best, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, Mr. Hendrickson and Mr. Best
concluded that the Company's disclosure controls and procedures are effective in
causing material information to be recorded, processed, summarized and reported
by management of the
24
Company on a timely basis and to ensure that the quality and timeliness of the
Company's public disclosures complies with its SEC disclosure obligations.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these internal controls after
the date of our most recent evaluation.
25
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June of 2000, the former shareholders of QCB commenced a AAA arbitration
proceeding against us seeking the recovery of escrowed funds from the purchase
of QCB that were withheld from the purchase price paid by us as security for
claims we might discover after closing. We filed a counterclaim against the
former shareholders of QCB, including Dr. Fishman, in the arbitration to recover
damages management believes we suffered in connection with inaccuracies in,
and/or breaches of the representations and warranties contained in, the original
Stock Purchase Agreement for QCB executed on December 9, 1998. In our
counterclaim, we sought to recover $1,347,000 of escrowed funds. On July 2,
2002, we settled the arbitration and all related claims against the former
shareholders of QCB and Dr. Fishman in consideration of the payment to us of
$800,000 from the escrowed funds. The remaining funds held in escrow were
released to the former shareholders of QCB. This settlement, net of attorney
fees and income taxes, is considered to be a reduction of the goodwill
originally recorded in the acquisition of QCB. That goodwill was written off as
a cumulative effect of accounting change in the adoption of FASB Statement No.
142 during the first quarter of 2002. The settlement was accounted for as an
adjustment to the cumulative effect of accounting change during the third
quarter of 2002.
The Company is involved in various other claims and lawsuits incidental to its
business. In the opinion of management, these claims and suits in the aggregate
will not materially affect the financial position, results of operations or
liquidity of the Company.
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 19, 2002, the Company held its Annual Meeting of
Stockholders. At the annual meeting, there were 9,638,863 shares
entitled to vote and 9,594,580 shares were represented at the meeting
in person or by proxy. The following sets forth the identity of
directors elected for one year and until their respective successors
have been elected. In addition, the results of the voting on the
ratification of appointment of the Company's auditors are included:
For Withheld
--- --------
1. Election of directors
Jean-Pierre L. Conte 9,552,740 41,840
Leonard M. Hendrickson 8,599,731 994,849
David J. Moffa 9,549,427 45,153
John R. Overturf, Jr. 9,548,227 46,353
Robert D. Weist 9,541,227 53,353
Robert J. Weltman 9,552,894 41,686
For Against Abstain
--- ------- -------
2. Ratification of Auditors 9,576,123 9,630 8,827
ITEM 5. OTHER INFORMATION
None.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certificates of our Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 24,
2002, reporting the issuance's of two press releases
announcing the Company's financial results for the second
quarter of fiscal year 2002, and announcing an amendment to
the Company's current stock repurchase program, respectively.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOSOURCE INTERNATIONAL, INC.
(Registrant)
Date: November 11, 2002 /s/ LEONARD M. HENDRICKSON
--------------------------
Leonard M. Hendrickson
President and
Chief Executive Officer
Date: November 11, 2002 /s/ CHARLES C. BEST
-------------------
Charles C. Best
Executive Vice President and
Chief Financial Officer
28
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Leonard M. Hendrickson certify that:
1. I have reviewed this quarterly report on Form 10-Q for the three
months ended September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/LEONARD M. HENDRICKSON
-------------------------------------
Leonard M. Hendrickson
President and Chief Executive Officer
29
Certification of CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Charles C. Best certify that:
1. I have reviewed this quarterly report on Form 10-Q for the three
months ended September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ CHARLES C. BEST
---------------------------
Charles C. Best
Chief Financial Officer
30
EXHIBIT INDEX
Exhibit Description
99.1 Certificate of our Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
31