<PAGE>
================================================================================
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, 1998
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.)
820 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 October 31, 1998 was 7,176,629
================================================================================
<PAGE>
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 8,399.7 $ 9,477.5
Short-term investments - 4,968.7
Accounts receivable, less allowance for doubtful accounts
of $491.0 in 1998 and $203.0 in 1997 4,773.5 3,459.5
Inventories, net 4,140.0 7,883.4
Prepaid expenses and other current assets 1,704.6 1,599.3
Deferred income taxes 245.5 248.0
--------------- ---------------
Total current assets 19,263.3 27,636.4
Property and equipment, net 5,258.0 4,560.1
Other assets 738.7 737.6
Deferred income taxes 1,583.9 223.0
--------------- ---------------
$ 26,843.9 $ 33,157.1
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,568.9 $ 1,446.4
Accrued expenses 1,942.0 1,472.7
Notes payable to bank, current portion 36.5 34.5
Income tax payable 228.2 252.8
--------------- ---------------
Total current liabilities 3,775.6 3,206.4
Notes payable to bank, less current portion 1,266.6 1,292.4
--------------- ---------------
Total liabilities 5,042.2 4,498.8
Stockholders' equity:
Common stock, $.001 par value. Authorized 20,000,000
shares: outstanding 7,176,629 shares at
September 30, 1998 and 8,431,015 shares at December 31, 1997 7.2 8.4
Additional paid-in capital 21,054.8 27,304.5
Retained earnings 1,463.1 2,506.5
Accumulated other comprehensive loss (723.4) (1,161.1)
--------------- ---------------
Total stockholders' equity 21,801.7 28,658.3
--------------- ---------------
$ 26,843.9 $ 33,157.1
=============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 5,714.3 $ 5,182.5 $ 16,339.0 $ 15,675.3
Cost of sales 6,689.5 1,869.9 10,422.3 5,639.7
-------------- -------------- ---------------- ---------------
Gross profit (975.2) 3,312.6 5,916.7 10,035.6
-------------- -------------- ---------------- ---------------
Operating expenses:
Research and development 679.1 477.5 1,919.7 1,525.8
Sales and marketing 1,133.8 943.1 2,957.7 3,017.0
General and administrative 1,004.9 890.2 2,808.9 2,593.9
-------------- -------------- ---------------- ---------------
Total operating expenses 2,817.8 2,310.8 7,686.3 7,136.7
-------------- -------------- ---------------- ---------------
-------------- -------------- ---------------- ---------------
Operating income (loss) (3,793.0) 1,001.8 (1,769.6) 2,898.9
Interest income, net 71.8 157.0 332.1 419.4
Other income (expense), net 96.4 28.0 (45.9) 245.7
-------------- -------------- ---------------- ---------------
Income (loss) before income taxes (3,624.8) 1,186.8 (1,483.4) 3,564.0
Provision (benefit) for income taxes (963.9) 331.4 (440.0) 1,074.0
-------------- -------------- ---------------- ---------------
Net income (loss) $ (2,660.9) $ 855.4 $ (1,043.4) $ 2,490.0
============== ============== ================ ===============
Net income (loss) per share:
Basic $ (0.37) $ 0.10 $ (0.14) $ 0.30
-------------- -------------- ---------------- ---------------
Diluted $ (0.37) $ 0.10 $ (0.14) $ 0.28
-------------- -------------- ---------------- ---------------
Shares used to compute net income (loss) per share:
Basic 7,254.7 8,305.6 7,620.0 8,353.3
-------------- -------------- ---------------- ---------------
Diluted 7,254.7 8,889.5 7,620.0 9,005.0
-------------- -------------- ---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,043.4) $ 2,490.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 700.3 544.6
Loss on sale of fixed assets -- (7.6)
Unrealized exchange loss 1.9 41.1
Changes in assets and liabilities:
Accounts receivable (1,314.0) (621.4)
Inventories, net 3,743.4 (620.9)
Prepaid expenses and other current assets (102.7) (449.4)
Deferred income taxes (1,360.9) (45.8)
Other assets (62.1) 64.0
Accounts payable 122.5 (222.8)
Accrued expenses 469.4 (543.4)
Income tax payable (24.6) 2.6
--------------- --------------
Net cash provided by operating activities 1,129.8 631.0
--------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (1,342.5) (508.8)
Proceeds from sale of property and equipment 3.1 21.5
Purchase of investments (7,614.8) (16,226.3)
Proceeds from sale of investments 12,583.5 17,553.8
--------------- --------------
Net cash provided by investing activities 3,629.3 840.2
--------------- --------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 59.0 134.6
Proceeds from the exercise of warrants -- 64.8
Payments to acquire treasury stock (6,309.9) (725.7)
Repayments to bank (23.0) (21.2)
Payments of capital lease obligations (0.7) (1.6)
--------------- --------------
Net cash used in financing activities (6,274.6) (549.1)
--------------- --------------
Net increase (decrease) in cash and
cash equivalents (1,515.5) 922.1
Effect of exchange rate on cash 437.7 (150.0)
--------------- --------------
Cash and cash equivalents at beginning
of period 9,477.5 3,606.9
--------------- --------------
Cash and cash equivalents at end
of period $ 8,399.7 $ 4,379.0
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 89.9 $ 95.1
Income taxes $ 1,118.5 $ 709.8
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
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. are unaudited and have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the BioSource
International, Inc. Annual Report on Form 10-K, for the fiscal year ended
December 31, 1997. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments, which are necessary
for a fair presentation. The results of operations for the three and nine month
period ended September 30, 1998 are not necessarily indicative of results to be
expected for the full fiscal year.
2. GENERAL
BioSource International, Inc. ("BioSource" or the "Company") develops,
manufactures, markets and distributes products and services that are widely used
in biomedical research. The Company's products and services enable scientists
to better understand the biochemistry, immunology and cell biology of the human
body, aging and certain diseases such as cancer, arthritis and other
inflammatory diseases, AIDS and certain other infectious diseases. The Company
has a wide variety of products, including immunoassay and ELISA test kits;
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. The Company also manufactures and markets custom oligonucleotides
to the specifications of its customers. The Company uses recombinant DNA
technology to produce cytokines and other proteins. Because the Company's
products are currently sold in the U.S. only to the research market, the Company
is not subject to regulation by the FDA.
The principal offices of the Company are located at 820 Flynn Road, Camarillo,
California, 93012, telephone number (805) 987-0086.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of BioSource
International, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
Investments
The Company accounts for its investments using Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." At September 30, 1998, the Company had no investments
classified as short-term investments (mature in more than 91 days but less than
one year). As of December 31, 1997, the Company had investments in U.S. Treasury
securities that are classified in the consolidated balance sheet as short-term
(mature in more than 91 days but less than one year). These investments were
categorized as held to maturity when purchased and were carried at cost since
the Company had both the intent and the ability to hold these investments until
maturity.
Financial Instruments
The carrying value of financial instruments such as cash and cash
equivalents, short-term investments, trade receivables, payables and short-term
debt approximates their fair value due to the short-term nature of these
instruments. The recorded values of the Company's long-term debt instruments
approximate fair value as their rates are similar to those currently available
to the Company for debt with similar terms and remaining maturities.
6
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value) for raw materials and work in process and the
average-cost method for finished goods.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives which generally
range from three to ten years. Real property is depreciated over thirty nine
years. Leasehold improvements are amortized using the straight-line method over
their estimated useful lives or the lease term, whichever is shorter.
License Agreements
License agreements are recorded at cost and are amortized using the
straight-line method over the shorter of the estimated useful lives of the
license or the license term which is generally between five and ten years.
These costs are included in other assets in the accompanying consolidated
condensed balance sheet.
Sale Recognition
Sales and related cost of goods sold are recognized upon the shipment of
product.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enacted date.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in value based upon undiscounted future operating cash flows, and
appropriate losses are recognized whenever circumstances indicate that the
carrying amount of an asset may not be recoverable.
Accounting for Stock Options
The Company measures stock-based compensation for employees using the
intrinsic-value method, which assumes that options granted at market price at
the date of grant have no intrinsic value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. This affects the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiary, whose
functional currency is Belgian francs, are translated at the rate of exchange at
the balance sheet date, and related revenues and expenses are translated at the
average exchange rate in effect during the period. Resulting translation
adjustments are recorded as a component of other comprehensive income. Gains
and losses from foreign currency transactions are included in net income.
7
<PAGE>
4. INVENTORIES (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPT 30, 1998 DEC 31, 1997
------------- ------------
<S> <C> <C>
Raw materials.................................................. $1,358.2 $1,305.8
Intermediates.................................................. 2,410.6 2,278.7
Work in process................................................ 1,492.5 1,013.0
Finished goods................................................. 3,315.4 3,660.6
------------- ------------
8,576.7 8,258.1
Less inventory reserve......................................... 4,436.7 374.7
------------- ------------
$4,140.0 $7,883.4
============= ============
</TABLE>
During the three months ended September 30, 1998, the Company recorded a
charge of approximately $4,300,000 related to (1) the establishment of a
valuation reserve for the Company's current antibody inventory and (2) the
downward revision of the Company's standard costs for ELISA test kits and
products manufactured in Europe. See "gross profit" in Management's Discussion
and Analysis of Financial Condition for further discussion of these charges.
5. PROPERTY AND EQUIPMENT (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPT 30, 1998 DEC 31, 1997
------------- ------------
<S> <C> <C>
Land........................................................... $ 360.0 $ 360.0
Building and improvements...................................... 2,296.3 1,933.2
Machinery and equipment........................................ 3,462.3 2,899.5
Office furniture and equipment................................. 1,526.7 1,115.0
------------- ------------
7,645.3 6,307.7
Less accumulated depreciation.................................. 2,387.3 1,747.6
------------- ------------
$5,258.0 $4,560.1
============= ============
</TABLE>
6. NOTES PAYABLE TO BANK (AMOUNTS IN THOUSANDS, EXCEPT PAYMENT INFORMATION)
<TABLE>
<CAPTION>
SEPT 30, 1998 DEC 31, 1997
------------- ------------
<S> <C> <C>
9.4% first mortgage note payable in monthly
installments of $6,900, including interest,
with final payment of $535,200 due April 2006.................. $ 709.3 $ 720.9
7.6% second mortgage note payable due
June 2016, payable in monthly installments of
$5,400 including interest...................................... 582.0 593.4
6.0% capital lease obligation payable in
monthly installments of $300, including interest,
with final payment due February 2001........................... 11.8 12.6
------------- ------------
1,303.1 1,326.9
Less current portion........................................... 36.5 34.5
------------- ------------
$1,266.6 $1,292.4
============= ============
</TABLE>
7. COMPUTATION OF NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 specifies new standards designed to
improve the earnings per share (EPS) information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, for which common stock equivalents are not considered, (b)
eliminating the modified treasury stock method and the three percent materiality
provision and (c) revising the contingent share provision and the supplemental
EPS data
8
<PAGE>
requirements. SFAS No. 128 also makes a number of changes to existing disclosure
statements. The Company adopted SFAS No. 128 for the quarter ended December
31,1997.
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) available to common
stockholders............................................$(2,660.9) $ 855.4 $(1,043.4) $2,490.0
========= ========== ========= ==========
Denominator:
Shares used for basic net income per share
calculation-weighted average shares outstanding......... 7,254.7 8,305.6 7,620.0 8,353.3
Common stock equivalents:
Stock options.......................................... - 583.9 - 651.7
--------- ---------- --------- ----------
Shares used for diluted net income per share
calculation............................................. 7,254.7 8,889.5 7,620.0 9,005.0
--------- ---------- --------- ----------
</TABLE>
Options to purchase 1,486,022 shares at a weighted average exercise
price of $3.65 per share and 777,300 shares at a weighted average exercise price
of $4.10 per share were outstanding as of September 30, 1998 and 1997,
respectively, but were not included in the computation of diluted net income per
share for either period because the effect would be anti-dilutive.
Warrants to purchase 100,000 shares at a weighted average exercise price
of $7.50 per share were outstanding as of September 30, 1998 and 1997,
respectively, but were not included in the computation of diluted net income per
share because the effect would be anti-dilutive.
Warrants to purchase 118,100 shares at a weighted average exercise price
of $11.10 per share were outstanding as of September 30, 1998 and 1997,
respectively, but were not included in the computation of diluted net income per
share because the effect would be anti-dilutive.
8. OTHER COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Boards issued SFAS No. 130,
"Reporting Comprehensive Income," which became effective for fiscal years
beginning after December 31, 1997. SFAS 130 requires that the components of
comprehensive income be disclosed. Such amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Foreign currency translation
adjustments $ 444.5 $ (103.2) $ 437.7 $ (929.2)
-------------- -------------- -------------- --------------
Other comprehensive income (loss) $ 444.5 $ (103.2) $ 437.7 $ (929.2)
============== ============== ============== ==============
</TABLE>
9. LEGAL PROCEEDINGS
The Company is not a party to nor is any of its property subject to any
material pending legal proceedings.
9
<PAGE>
10. STOCK REPURCHASE ACTIVITY
In April 1997, the Board of Directors of the Company authorized the
repurchase of 200,000 shares of its outstanding common stock at market price. In
December 1997, the Board of Directors authorized the Company to repurchase up to
1,000,000 additional shares of its outstanding common stock at market price and
during the three months ended September 30, 1998, the Company was authorized to
extend the repurchase program up to 1,500,000 shares of the Company's common
stock.
For the three and nine months ended September 30, 1998, the Company
repurchased 163,000 and 996,200 shares, respectively, for average purchase
prices of $4.57 and $6.33 per share, respectively.
11. SUBSEQUENT EVENTS
On October 13, 1998, BioSource signed a letter of intent to purchase the
common stock of Quality Controlled Biochemicals (QCB). QCB, founded in 1992, is
a manufacturer of phosphopeptides, phosphorylation state-specific antibodies,
custom peptides and antibodies for academic, biotechnology, and pharmaceutical
research. BioSource will acquire all of the outstanding stock of QCB for
approximately $13,500,000 in cash. The acquisition will be accounted for as a
purchase transaction.
On October 26, 1998, the Company signed a letter of intent to acquire all
of the assets of Biofluids, Inc. Biofluids manufactures and sells serum, media
and buffers. Biofluids serves academic, biotechnology, and pharmaceutical
researchers primarily in the Washington, D.C. area. BioSource will acquire
Biofluids' assets for approximately $2,700,000 in cash. The acquisition will be
accounted for as a purchase transaction.
Both of the above acquisitions are subject to a number of significant
conditions and contingencies, including due diligence investigations of both QCB
and Biofluids, the negotiation and execution of definitive purchase agreements
and the obtaining of any necessary governmental and third party consents. Both
acquisitions are scheduled to be completed by the end of this year. See "Trends
and Uncertainties" for further discussion of risks associated with acquisitions.
10
<PAGE>
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 the Company's 10-K for the fiscal year ended December 31, 1997, and all
other recent filings BioSource has 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 products and
technologies and other factors described throughout this Form 10-Q and in the
Company's other filings with the Securities and Exchange Commission. The actual
results that the Company achieves may differ from any forward-looking statements
due to such risks and uncertainties. The Company undertakes no obligations to
revise or update any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
OVERVIEW
BioSource International, Inc. develops, manufactures, markets and
distributes products and services that are widely used in biomedical research.
The Company's products and services enable scientists to better understand the
biochemistry, immunology and cell biology of the human body, aging and certain
diseases such as cancer, arthritis and other inflammatory diseases, AIDS and
certain other infectious diseases. The Company has a wide variety of products,
including immunoassay and ELISA test kits; immunological reagents, including
bioactive proteins (cytokines, growth factors and adhesion molecules),
oligonucleotides, and monoclonal and polyclonal antibodies. The Company also
manufactures and markets custom oligonucleotides to the specifications of its
customers. The Company uses recombinant DNA technology to produce cytokines and
other proteins. Because the Company's products are currently sold in the U.S.
only to the research market, the Company is not subject to regulation by the
FDA.
RESULTS OF OPERATIONS
Net Sales: Net sales for the three and nine months ended September 30,
1998 of $5,714,300 and $16,339,000 increased 10.3% and 4.2% or $531,800 and
$663,700, respectively, from net sales of $5,182,500 and $15,675,300 for the
three and nine months ended September 30, 1997.
U.S domestic net sales for the three and nine months ended September 30,
1998 of $2,396,800 and $6,524,100, respectively, increased 21.4% and 13.6% or
$422,100 and $780,100, respectively, from $1,974,700 and $5,744,000, for the
three and nine month periods ended September 30, 1997, respectively. The
increase for the three month period is primarily due to strong sales of custom
oligonucleotides and ELISA test kits. For the nine month period, U.S. sales
increased 13.6% as compared to the prior year primarily due to strong sales of
ELISA test kits, oligonucleotides, and antibody products.
International net sales for the three and nine months ended September 30,
1998 of $3,317,500 and $9,814,900, respectively, increased 3.4% and decreased
1.2% or $109,700 and $116,400, respectively, from $3,207,800 and $9,931,300 for
the three and nine month periods ended September 30, 1997, respectively. The
increase for the three month period is primarily due to a 21% increase in sales
to Japanese customers as compared to the prior year. European sales for the
three months were approximately the same as the prior year. European sales of
ELISA test kits and other research products were strong, however, these
increases were offset by expected declines in sales of radioimmunoassay (RIA)
diagnostics. The decrease for the nine months ended September 30, 1998 was due
to a 4.7% decline in sales in Europe offset by an increase in sales to Japanese
customers of 21%. European sales of other research products were approximately
the same as the prior year, however, sales of the RIA products have been in
decline for several quarters due to heavy competition from diagnostic tests
formatted for automated equipment.
Gross Profit: Gross profit (loss) for the three and nine months ended
September 30, 1998 of $(975,200) and $5,916,700, respectively, decreased 129.4%
and 41.0% or $4,287,800 and $4,118,900, respectively, from gross profit of
$3,312,600 and $10,035,600 for the three and nine months ended September 30,
1997, respectively. The
11
<PAGE>
decline in gross profit is primarily due to increased charges to cost of sales
of approximately $4,300,000 related to (1) the establishment of a valuation
reserve for the Company's current antibody inventory and (2) the downward
revision of the Company's standard costs for ELISA test kits and products
manufactured in Europe. The Company's strategy is to maintain a broad base of
products available for sale to its customers. With regard to the antibody
inventory, the Company offers over 1,000 antibodies for sale and finds it to be
more cost efficient to produce large quantities of the antibody product during
each production run, however, the inventory turns slowly. Attempts have been
made to reduce the quantity of antibody inventory maintained in stock in order
to increase the inventory turnover, however, this approach did not allow the
Company to maintain the proper strategic levels of inventory necessary to
properly service the customer needs. As a result, in order to reduce the risk of
excess or slow moving inventory resulting from the large production runs, the
proper financial management policy with regard to the antibody inventory was
determined to be one of expensing the cost of production as incurred as a
component of cost of sales.
Research and Development: For the three and nine months ended September 30,
1998, research and development expenses of $679,100 and $1,919,700,
respectively, increased 42.2% and 25.8 % or $201,600 and $393,900, respectively,
from research and development expenses of $477,500 and $1,525,800 for the three
and nine months ended September 30, 1997, respectively, while increasing as a
percent of net sales to 11.9% and 11.7% for the three and nine months ended
September 30, 1998, respectively, from 9.2% and 9.7% for the three and nine
months ended September 30, 1997, respectively. Research and development expenses
increased due to the addition of personnel, expenditures related to the
development of new product lines and additions to current product lines, and a
reduction in grant funds received in the current fiscal year as compared to the
prior year.
Sales and Marketing: For the three and nine months ended September 30,
1998, sales and marketing expenses of $1,133,800 and $2,957,700 increased 20.2%
and decreased 2.0% or $190,700 and $59,300 respectively, from sales and
marketing expenses of $943,100 and $3,017,000 for the three and nine months
ended September 30, 1997, respectively, while increasing and decreasing as a
percent of net sales to 19.8% and 18.1% for the three and nine months ended
September 30, 1998, respectively, from 18.2% and 19.2% for the three and nine
months ended September 30, 1998 respectively. The increase for the three month
period is largely due to increases in headcount in the field sales force and to
advertising. The decrease for the nine month period is largely due to reduced
advertising and promotional expenses for the period and to expense reductions
achieved through the closure of certain European operations during 1997.
General and administrative: For the three and nine months ended September
30, 1998, general and administrative expenses of $1,004,900 and $2,808,900
increased 12.9% and 8.3% or $114,700 and $215,000, respectively, from general
and administrative expenses of $890,200 and $2,593,900 for the three and nine
months ended September 30, 1997, while increasing as a percent of net sales to
17.6% and 17.2% for the three and nine months ended September 30, 1998,
respectively, from 17.2% and 16.5% for the three and nine months ended September
30, 1997, respectively. General and administrative expenses for the three and
nine month periods increased largely due to increases in staffing costs related
to adjusting salary levels of key staff members to levels consistent with
industry norms, partially offset by a reduction in costs related to the closure
of certain European operations.
Interest income, net: For the three and nine months ended September 30,
1998, net interest income of $71,800 and $332,100 decreased 54.3% and 20.8% or
$85,200 and $87,300, respectively, from net interest income of $157,000 and
$419,400 for the three and nine months ended September 30, 1997, respectively.
Net interest income decreased primarily due to the reduction in cash resulting
from the purchase of treasury stock.
Other income (expense), net: For the three and nine months ended September
30, 1998, other income (expense), net of $96,400 and $(45,900), respectively,
primarily represents the effect of foreign currency adjustments during the three
and nine month periods ending September 30, 1998. Also affecting the nine month
period were moving costs associated with the relocation of the Company's offices
from Fleurus, Belgium to Nivelles, Belgium. During the nine months ended
September 30, 1997, other income included a one-time $200,000 signing payment
received from a distributor pursuant to a distribution agreement with such
distributor.
Income Taxes: For the three and nine months ended September 30, 1998, the
benefit for income taxes of $(963,900) and $(440,000) reflects the tax benefit
recorded primarily due to operating losses incurredduring the three and nine
months ended September 30, 1998. Management expects future pretax income to be
taxed at an effective rate ranging between 29% and 31%. In addition, the
Company realizes U.S. corporate tax benefits
12
<PAGE>
associated with a foreign sales corporation, credits for increased research and
development expenditures and the California manufacturers tax credit.
TRENDS AND UNCERTAINTIES:
The Company intends to consummate two acquisitions which are primarily
intended to broaden the Company's product portfolio, increase sales to current
and new customers, and provide new strategic locations for the manufacture and
sale of products. Implementation of these strategic transactions could result in
charges and write-downs having an adverse effect on the Company's financial
results. In addition, there are business risks associated with acquisitions,
including the successful integration of the companies in an efficient and timely
manner, the coordination of research and development and sales efforts, the
retention of key personnel, and the integration of acquired products. There can
be no assurance that these efforts will be successful, or if successful, will
produce the desired results.
YEAR 2000:
The following statements constitute a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act.
BioSources' review of accounting and business systems in order to ensure
Year 2000 compliance is proceeding on schedule. Phase I of this project is the
assessment and identification phase. Phase II is the completion of necessary
modifications and upgrades identified during phase I. The Company expects to
complete both phase I and phase II during the first half of 1999. As part of
phase I, the Company has engaged an outside consulting firm to assess issues
surrounding its desktop computer and telephone systems. Additionally, the
Company has assessed its accounting systems. To date, the Company has identified
that one of its accounting systems is not currently Year 2000 compliant and,
during phase II, a normal conversion and upgrade path is planned which will
provide the Company with the Year 2000 compliant current release of the
accounting system. The Company expects to complete this conversion during the
first half of 1999.
Also as part of phase I, the Company is assessing other business and
operational systems and contacting suppliers and customer in an effort to
identify additional Year 2000 issues. BioSource expects to complete
modifications identified as part of this effort during the first half of 1999.
To date, the Company has spent an immaterial amount on its compliance
program, and does not expect the cost associated with required modifications and
capital expenditures to become Year 2000 compliant to exceed $100,000. The
foregoing costs do not include the Company's internal costs (principally the
payroll costs for those person's working on the project), which costs the
Company does not track.
The reasonably likely "worse case" scenario of the Company's failure to
correct a material Year 2000 problem would likely be an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could adversely affect the Company's results of operations, liquidity, and
financial condition. The Year 2000 project is expected to reduce the Company's
level of uncertainty about the Year 2000 problem. The Company does not generally
rely on sole source suppliers, and consequently believes that it will have
alternative sources of supply available to it as a contingency in the event any
of its suppliers suffer material Year 2000 problems. The Company does not
anticipate material problems with its power supply or telecommunications. The
Company believes that, with the implementation of the new business systems and
completion as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. The Company is evaluating
the Statement's provisions to determine the effect on its financial statements.
In addition, the impact of SFAS No. 133 will depend on the terms of future
transactions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short term investments as of September 30,
1998 of $8,399,700 decreased by 41.9% or $6,046,500 from $14,446,200 at December
31, 1997. The Company's policy is to maintain liquidity in its investments to
provide working capital and have the ability to react to future potential long
term investment opportunities in complementary businesses, products or
technologies. Working capital, which is the excess of current assets over
current liabilities, at September 30, 1998 was $15,487,700 as compared to
$24,430,000 at December 31, 1997 representing a decrease of 36.6% or $8,942,300.
The reduction in cash and working capital
13
<PAGE>
resulted primarily from the purchase of the Company's stock under the stock
repurchase program and the charges associated with the reduction of the
inventory valuation during 1998. Also affecting the Company's working capital
during 1998 is an accounts receivable increase of approximately $975,000 in the
Company's European operation. This increase resulted from a slowdown in
collections activities during the June 1998 quarter due to both the Company's
simultaneous move to new facilities in Belgium and the conversion to a new
computer system. Increased efforts are currently being undertaken to return
these receivables to prior levels. The Company does not anticipate any increase
in bad debts as a result of this issue.
Capital expenditures of $1,342,500 were primarily for the purchases of
laboratory, manufacturing and computer equipment.
In April 1997, the Board of Directors authorized the Company to repurchase
up to 200,000 shares of its outstanding common stock at market price. In
December 1997, the Board of Directors authorized the Company to repurchase up to
1,000,000 additional shares of its outstanding common stock at market price and
during the three months ended September 30, 1998, the Company was authorized to
extend the repurchase program up to 1,500,000 shares of the Company's stock.
For the nine months ended September 30, 1998, the Company has repurchased
996,200 shares of the Company's common stock for $6,309,900, an average price of
$6.33. As of September 30, 1998, the Company has repurchased a total of
1,279,500 shares of the Company's common stock for $8,054,300, an average price
of $6.29 per share since the inception of the repurchase program in April 1997.
The Company has never paid dividends and has no plans to do so in fiscal
1998. The Company's 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. However, the Company 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 the Company's
corporate development activities.
The Company conducts business in various foreign currencies and is
therefore subject to the transaction exposures that arise from foreign exchange
rate movements between the dates that foreign currency transactions are recorded
and the date that they are consummated. The Company is also subject to certain
exposures arising from the translation and consolidation of the financial
results of its 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 the
Company's future cash collections and operating results. The Company does not
currently hedge either its translation risk or its economic risk.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A Form 8-K with respect to the Company's stock repurchase
program was filed with the Securities and Exchange Commission
on August 17, 1998.
15
<PAGE>
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 13, 1998 /s/ JAMES H. CHAMBERLAIN
--------------------
James H. Chamberlain
President and Chief Executive Officer
Date: November 13, 1998 /s/ LARRY A. MAY
------------
Larry A. May
Executive Vice President and
Chief Financial Officer
16
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