<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 March 31, 1999
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 April 30, 1999 was 7,182,925.
- --------------------------------------------------------------------------------
<PAGE>
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash & cash equivalents 4,877.1 7,076.9
Accounts receivable, less allowance for doubtful accounts of
$283.7 and $301.0 at March 31, 1999 and December 31, 1998, respectively 5,288.5 4,381.0
Inventories, net 4,873.6 4,970.6
Prepaid expenses and other current assets 816.3 726.2
Deferred income taxes $ 1,123.4 $ 1,123.4
--------------- ---------------
Total current assets 16,978.9 18,278.1
Property and equipment, net 5,274.5 5,513.6
Intangible assets, net of $374.8 and $125.8 of accumulated
amortization at March 31, 1999 and December 31, 1998, respectively 14,202.3 14,451.2
Other assets 1,353.4 1,318.0
Deferred income taxes 1,839.2 1,839.2
--------------- ---------------
$ 39,648.3 $ 41,400.1
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,714.7 $ 1,643.0
Accrued expenses 2,354.2 4,143.9
Notes payable to bank, current portion 3,014.6 3,024.2
Deferred income 513.0 625.9
Income tax payable 830.2 601.7
--------------- ---------------
Total current liabilities 8,426.7 10,038.7
Notes payable to bank, less current portion 13,103.6 13,665.6
--------------- ---------------
Total liabilities 21,530.3 23,704.3
=============== ===============
Stockholders' equity:
Common stock, $.001 par value. Authorized 20,000.0 shares: issued
7,472.9 shares and outstanding 7,181.9 shares at March 31, 1999 and
issued 7,469.9 shares and outstanding 7,178.9 shares at December 31, 1998 7.2 7.2
Additional paid-in capital 21,186.8 21,186.8
Accumulated deficit (1,809.5) (2,629.3)
Accumulated other comprehensive loss (1,266.5) (868.9)
--------------- ---------------
Total stockholders' equity 18,118.0 17,695.8
--------------- ---------------
$ 39,648.3 $ 41,400.1
=============== ===============
</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
March 31,
1999 1998
-------- --------
<S> <C> <C>
Net Sales $7,318.5 $5,301.0
Cost of Sales 2,849.1 1,780.9
-------- --------
Gross Profit 4,469.4 3,520.1
-------- --------
Operating expenses:
Research and development 794.4 562.3
Sales and marketing 1,071.3 831.3
General and administrative 1,035.6 1,042.5
Amortization of intangible assets 248.9 7.7
-------- --------
Total operating expenses 3,150.2 2,443.8
-------- --------
Operating income 1,319.2 1,076.3
Interest income (expense), net (239.2) 162.0
Other expense, net (14.2) (35.5)
-------- --------
Income before income taxes 1,065.8 1,202.8
Provision for income taxes 246.0 386.7
-------- --------
Net income $ 819.8 $ 816.1
======== ========
Net income per share:
Basic $ 0.11 $ 0.10
-------- --------
Diluted $ 0.11 $ 0.10
-------- --------
Shares used to compute net income per share:
Basic 7,179.1 8,011.4
-------- --------
Diluted 7,551.3 8,565.6
-------- --------
</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>
Three Months Ended
March 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 819.8 $ 816.1
Depreciation and amortization 240.2 192.2
Amortization of intangible assets 248.9 7.7
Unrealized exchange loss - 36.1
Cash provided by (used in):
Accounts receivable (1,161.3) (516.1)
Inventories, net (66.8) (101.8)
Prepaid expenses and other current assets (266.1) (148.9)
Other assets (36.5) (59.5)
Accounts payable 348.0 98.6
Accrued expenses (1,692.5) 395.7
Deferred income (112.8) -
Income tax payable 244.6 354.1
------------ ------------
Net cash provided by (used in) operating activities (1,434.5) 1,074.2
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (129.5) (432.6)
Proceeds from sale of property and equipment - 3.0
Purchase of investments - (4,931.3)
Proceeds from sale of investments - 6,455.6
------------ ------------
Net cash provided by (used in) investing activities (129.5) 1,094.7
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options - 34.9
Payments to repurchase and retire Company stock - (2,534.2)
Repayments to bank (587.8) (7.5)
Payments of capital lease obligations 13.5 (0.7)
------------ ------------
Net cash used in financing activities (574.3) (2,507.5)
------------ ------------
Net decrease in cash and
cash equivalents (2,138.3) (338.6)
Effect of exchange rate changes on cash (61.5) (27.3)
------------ ------------
Cash and cash equivalents at beginning
of period 7,076.9 9,477.5
------------ ------------
Cash and cash equivalents at end
of period $ 4,877.1 $ 9,111.6
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 289.8 $ 29.3
Income taxes $ - $ 100.0
</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 are unaudited
and have been prepared by our company pursuant to the rules and regulations of
the Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K, for the fiscal year
ended December 31, 1998. 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 month
period ended March 31, 1999 are not necessarily indicative of results to be
expected for the full fiscal year.
2. General
Our company develops, manufactures, markets and distributes products and
services that are widely used in biomedical research. Our products and services
enable scientists to better understand the biochemistry, immunology and cell
biology of the human body, aging and certain diseases such as cancer, arthritis
and other inflammatory diseases, AIDS and certain other infectious diseases. We
have a wide variety of products, including immunoassay and ELISA test kits;
immunological reagents, including bioactive proteins (cytokines, growth factors
and adhesion molecules), oligonucleotides, and monoclonal and polyclonal
antibodies. We also manufacture and market custom oligonucleotides to the
specifications of our customers. We use recombinant DNA technology to produce
cytokines and other proteins.
Our principal offices are located at 820 Flynn Road, Camarillo, California,
93012, and our telephone number is (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.
Financial Instruments
The carrying value of financial instruments such as cash and cash
equivalents, accounts receivable, payables and short-term debt approximates
their fair value at March 31, 1999 and December 31, 1998 due to the short-term
nature of these instruments. Due to interest rate reductions during 1998, the
interest rate on the Heller Financial mortgage is approximately 2% higher than
the fair value of similar currently available debt instruments. Assuming
interest rates remain constant at the current level, this interest rate
differential would cost us approximately $114,000 in additional interest over
the remaining life of the loan. The carrying value of long-term debt, except for
the Heller Financial mortgage, approximates fair value as of March 31, 1999 and
December 31, 1998. See Note 6 of the Notes to Condensed Consolidated Unaudited
Financial Statements for further description of the Notes Payable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value) for raw materials and work in process and the average-
cost method for finished goods.
Depreciation and amortization
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment and goodwill is provided using the straight-line method
over the estimated useful lives of the related assets which
6
<PAGE>
generally range from three to fifteen years. Real property is depreciated over
thirty nine years. Leasehold improvements are amortized using the straight-line
method over their estimated useful lives or the lease term, whichever is
shorter.
License Agreements
License agreements are recorded at cost and are amortized using the
straight-line method over the shorter of the estimated useful lives of the
license or the license term which is generally between five and ten years. These
costs are included in other assets in the accompanying condensed consolidated
balance sheet.
Sale Recognition
Sales and related cost of goods sold are recognized upon the shipment of
product. Customer prepayments for sera, media and buffer, custom antibody or
custom peptide products are recorded as deferred revenue until the product is
shipped. Upon shipment, the sale and related cost of goods sold is recognized.
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
enactment date.
Long-Lived Assets
It is our policy to account for long-lived assets, including intangibles,
at amortized cost. As part of an ongoing review of the valuation and
amortization of long-lived assets, management assesses the carrying value of
such assets if facts and circumstances suggest that it may be impaired. If this
review indicates that the long-lived assets will not be recoverable, as
determined by a non-discounted cash flow analysis over the remaining
amortization period, the carrying value of our long-lived assets would be
reduced to the estimated fair market value based on discounted cash flows.
Stock Compensation
We account for stock-based compensation under the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Under the provisions of SFAS 123, the Company has
elected to continue to measure compensation cost under APB No. 25 and comply
with the pro forma disclosure requirements.
Comprehensive income
We adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. SFAS No.
130 establishes standards to measure all changes in equity that result from
transactions and other economic events other than transactions with owners.
Comprehensive income is the total of net earnings and all other non-owner
changes in equity. Except for net earnings and foreign currency translation
adjustments, we do not have any transactions and other economic events that
qualify as comprehensive income as defined under SFAS No. 130.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. This affects the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The assets and liabilities of our foreign 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 accumulated other comprehensive loss.
Gains and losses from foreign currency transactions are included in net income.
7
<PAGE>
4. Inventories (amounts in thousands)
<TABLE>
<CAPTION>
March 31, 1999 Dec 31, 1998
------------ ----------
<S> <C> <C>
Raw materials....................................................... $4,253.2 $4,115.0
Work in process..................................................... 242.8 750.4
Finished goods...................................................... 4,066.6 3,972.4
------------ ----------
8,562.6 8,837.8
Less inventory reserve.............................................. 3,689.0 3,867.2
------------ ----------
$4,873.6 $4,970.6
============ ==========
</TABLE>
5. Property and Equipment (amounts in thousands)
<TABLE>
<CAPTION>
March 31, 1999 Dec 31, 1998
------------ ----------
<S> <C> <C>
Land................................................................ $ 360.0 $ 360.0
Building and improvements........................................... 2,274.7 2,283.5
Machinery and equipment............................................. 3,750.6 3,749.1
Office furniture and equipment...................................... 1,516.9 1,596.8
Leasehold improvements 87.2 87.2
------------ ----------
7,989.4 8,076.6
Less accumulated depreciation and amortization...................... 2,714.9 2,563.0
------------ ----------
$5,274.5 $5,513.6
============ ==========
</TABLE>
6. Notes Payable to Banks
In December, 1998, we executed a loan agreement with Union Bank of
California, N.A. and borrowed $14,000,000 which was used to finance the
acquisitions of Quality Controlled Biochemicals and all of the assets and
selected liabilities of Biofluids. The principal amount outstanding as of March
31, 1999 was $13,500,000. Principal repayments are to be made at approximately
$166,700 per month for the seven year term of the loan. Interest is provided at
a rate which is 2% per annum in excess of either the bank's adjusted treasury
rate for a term which we may select, or the bank's LIBOR rate, also for a term
we may select. The actual interest rate at March 31, 1999 was 7.19%. The loan
matures on December 5, 2005. The terms of this loan require us to maintain a
minimum cash balance of $4,000,000. Additionally, we must maintain a minimum
ratio of total liabilities to tangible net assets, achieve minimum net profit
levels, and comply with specified ratios of earnings before interest, taxes,
depreciation and amortization to debt service costs. We are also required to
comply with certain non-financial covenants. At March 31, 1999, we were in
compliance or had obtained waivers with regard to these covenants.
In June, 1996, we secured financing from Heller Financial Corp. in order to
finance the purchase of our corporate headquarters. The loan principal was
$745,000 and is secured by a first trust deed on the property. The loan bears
interest at a rate of 9.4% and has a 20 year term. The principal balance
outstanding at March 31, 1999 was $702,500.
In June, 1996, we obtained a loan from the Small Business Administration to
finance the purchase of the corporate headquarters building. The original loan
principal was $616,000 and is secured by a first trust deed on the property. The
loan bears interest at a rate of 7.6% and has a 20 year term. The outstanding
principal balance at March 31, 1999 was $574,000.
Payments to both Heller Financial Corp. and the Small Business
Administration are guaranteed by the chairman of the board of our company.
Quality Controlled Biochemicals had six loans outstanding aggregating
$1,394,700 at December 31, 1998 with MetroWest Bank which we assumed upon
completion of the acquisition of QCB in December, 1998. At March 31, 1999 the
aggregate principal balance outstanding with respect to these loans was
approximately $1,312,400. Description of the loans follow:
8
<PAGE>
<TABLE>
<CAPTION>
Amount
Outstanding at
Type of loan Maturity Date Interest Rate December 31, 1998
------------ ------------- ------------- -----------------
<S> <C> <C> <C>
Term loan January 31, 2002 8.75% $ 113,300
Term loan April 17, 1999 8.75% $ 13,500
Term loan April 17, 2003 8.75% $ 363,400
Term loan August 22, 2000 9.00% $ 56,700
Line of credit December 31, 1999 8.75% $ 562,000
Line of credit April 17, 1999 8.75% $ 203,500
--------
$1,312,400
==========
</TABLE>
Under the terms of the MetroWest Bank loan agreement, we must meet certain
financial covenants which include, a minimum tangible net worth covenant, debt
to tangible net worth, current ratio covenant, and other non financial
covenants. We were in compliance or had obtained temporary forbearance relating
to these covenants through July 1, 1999.
7. Earnings per Share
The Company accounts for earnings per share under the provisions of SFAS
No. 128, "Earnings per Share". SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings (loss) per share (EPS).
The reconciliations of basic to diluted weighted average shares are as
follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net earnings used for basic and
diluted earnings per share $ 819.8 $ 816.1
============ ============
Weighted average shares used in
basic computation 7,179.1 8,011.4
Dilutive stock options and warrants 372.2 554.2
Weighted average shares used for ------------ ------------
diluted computation 7,551.3 8,565.6
============ ============
</TABLE>
Options to purchase 580,690 shares at a weighted average exercise price of
$5.08 per share and 426,499 shares at a weighted average exercise price of $7.54
per share were outstanding as of March 31, 1999 and 1998, 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 March 31, 1999 and 1998, 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 March 31, 1999 and 1998, 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
9
<PAGE>
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
March 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income $ 819.8 $ 816.1
Foreign currency translation
adjustments (397.6) (162.3)
---------- ----------
Total comprehensive income $ 422.2 $ 653.8
========== ==========
</TABLE>
9. Legal Proceedings
We are not a party to nor is any of our property subject to any material
pending legal proceedings.
10. Stock Repurchase Activity
In April 1997, our Board of Directors authorized the repurchase of up to
200,000 shares of our outstanding common stock at market prices. In December
1997, the Board of Directors authorized us to repurchase up to 1,000,000
additional shares of our outstanding common stock at market prices and in 1998
we were authorized to extend the repurchase program up to 1,500,000 shares of
our common stock. No shares were repurchased during the three months ended March
31, 1999. As of March 31, 1999, we have repurchased and are retiring a total of
1,279,500 shares of our common stock for $8,054,300, an average price of $6.29
per share since the inception of the repurchase program in April 1997.
11. Stockholder Rights Plan
On February 16, 1999, we adopted a stockholders' rights plan to protect our
company and its stockholders from unsolicited attempts or inequitable offers to
acquire our stock. The rights plan has no immediate dilutive effect and does
not diminish our ability to accept an offer to purchase our company that is
approved by the Board. The stockholder rights plan was implemented through a
dividend of one preferred share purchase right on each outstanding share of our
common stock outstanding on March 2, 1999. Each right will entitle stockholders
to buy preferred stock at an exercise price of $24.50 which will have a value of
approximately two times the exercise price at the time of exercise. The rights
will become exercisable (with certain limited exceptions provided in the rights
agreement) following the 10th day after: (a) a person or group announces
acquisition of 15 percent or more of our common stock, (b) a person or group
announces commencement of a tender offer the consummation of which would result
in ownership by the person or group of 15 percent or more of our common stock,
(c) the filing of a registration statement for any such exchange offer under the
Securities Act of 1933, or (d) our board determining that a person is an
"adverse person," as defined in the rights plan. The buyer or any "adverse
person" would not be entitled to exercise rights under the rights plan. The
effect of the rights plan is to discourage acquisitions of more than 15 percent
of our common stock without negotiations with our board. We can redeem the
rights for $.001 per right at certain times as provided in the rights agreement.
The rights expire on January 31, 2009.
12. Business Segments
We are 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.
10
<PAGE>
Our accounting policies of the segments below are the same as those
described in the summary of significant accounting policies, except that we are
only able to track net sales for the geographic "Sales-to" segments. We evaluate
performance for the "Sales-from" segments on net revenues and profit or loss
from operations. Our reportable segments are strategic business units that offer
geographic product availability. They are managed separately because each
business requires different marketing and distribution strategies. Business
information is summarized as follows:
<TABLE>
<CAPTION>
Sales-from Segments:
1999 1998
----------------------------------
<S> <C> <C>
Net sales to external customers from:
United States:
Domestic $3,842.6 $2,734.5
Export 1,028.2 436.6
----------------------------------
Total United States 4,870.8 3,171.1
Europe 2,447.7 2,129.9
----------------------------------
Consolidated $7,318.5 $5,301.0
==================================
Operating income (loss):
United States $ 840.7 $1,050.6
Europe 478.5 25.7
----------------------------------
Consolidated $1,319.2 $1,076.3
==================================
Sales-to Segments:
Net sales to external customers:
United States $3,842.6 $2,734.5
Europe 2,688.5 2,209.9
Japan 642.7 258.5
Other 144.7 98.1
----------------------------------
Consolidated $7,318.5 $5,301.0
==================================
</TABLE>
11
<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 our 10-K for the fiscal year ended December 31, 1998, 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 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 will market these products to in vitro diagnostic
manufacturers and clinical reference laboratories as "active ingredients" in the
tests they produce to identify various specific diseases or conditions. In order
to market these products as medical devices, we are required to be in compliance
with the FDA's Current Good Manufacturing Practices and Regulations.
Results of Operations
Our sales for the three months ended March 31, 1999 and 1998 amounted to
$7,318,500 and $5,301,000, respectively, representing an increase of $2,017,500
or 38.1% in 1999 as compared to 1998. Included in the 38.1% increase is a 24%
increase due to sales of products from two companies which we acquired in
December 1998 - Quality Controlled Biochemicals (QCB) and Biofluids.
Additionally, the growth of ongoing products such as Oligonucleotides, ELISA
assay test kits, and Proteins contributed to internal growth of 14% during the
quarter ended March 31, 1999. Sales to Japan remain below prior levels due to
the current economic climate in Asia and are expected to continue to adversely
affect our sales during the balance of 1999.
Gross profit: Gross profit for the three months ended March 31, 1999 and 1998
was $4,469,400 and $3,520,100 or 61.1% and 66.4%, respectively. The increased
gross profit dollars resulted from the increased sales volume while the reduced
gross profit percentage is the result of the acquired custom peptide and custom
antibody product lines providing a lower gross profit percentage than our other
lines of business. Also, gross profit was affected by favorable manufacturing
variances of approximately $250,000 which were included in the 1998 results but
have not reoccurred in 1999. If 1998 had not benefited from these favorable
manufacturing variances our gross profit in 1998 would have been approximately
the same as 1999.
Research and development: Research and development expense for the three months
ended March 31, 1999 and 1998 amounted to $794,400 and $562,300, respectively.
The increased research and development expense of $232,100 or 41.3% is primarily
due to the acquisition of QCB.
Sales and marketing: Sales and marketing expense for the three months ended
March 31, 1999 and 1998 amounted to $1,071,300 and $831,300, respectively. The
increased sales and marketing expense of $240,000 or 28.9% is primarily due to
increased staffing costs resulting from an increase in the size of the field
sales force, increased
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advertising and promotional efforts, initiated originally in the third quarter
of 1998, and increased promotional efforts focused on products acquired from QCB
and Biofluids.
General and administrative: General and administrative expense for the three
months ended March 31, 1999 and 1998 amounted to $1,035,400 and $1,042,500,
respectively. The reduction of $7,100 reflects non-recurring costs of
approximately $158,000 in 1998 relating to a relocation of our facility in
Belgium offset by increased 1999 staffing and administrative costs in the United
States and costs related to both QCB and Biofluids. Excluding the impact of the
relocation of our facility in 1998, our general and administrative expense
increased 17% in 1999 as compared to 1998.
Amortization of intangible assets: Amortization of intangible assets for the
three months ended March 31, 1999 and 1998 amounted to $249,100 and $7,700,
respectively. The increased amortization of intangible assets of $241,400
relates to the amortization of the intangible assets from the QCB and Biofluids
acquisitions. The intangible assets acquired during these acquisitions are
currently being amortized over a 15 year period. Management believes this useful
life to be appropriate, however, the useful lives may be modified as we complete
our assessment of the useful lives of these assets.
Interest income (expense), net: Net interest expense for the three months ended
March 31, 1999 of $239,200 increased by $401,200 from net interest income of
$162,000 for the three months ended March 31, 1998 primarily due to the lower
cash balances we maintained during the period, and increased interest expense
related to the debt acquired to fund the acquisitions of QCB and Biofluids.
Provision for income taxes: The provision for income taxes for the three months
ended March 31, 1999 and 1998 was $246,000 and $386,700, respectively. The 1999
effective tax rate reflects a higher percentage of product sales from the United
States being shipped to foreign customers which provides us with tax benefits
through our foreign sales corporation. A 1999 benefit was also obtained from the
utilization of a portion of the 1998 net operating losses generated by our
European operations.
Trends and Uncertainties:
We consummated two acquisitions in December 1998. These acquisitions are
primarily intended to broaden our 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 has resulted in
an adverse effect on our financial results for the year ended December 31, 1998.
In addition, there are business risks associated with acquisitions, including
the successful integration of the acquired 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.
Our 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. We expect 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 our desktop
computer and telephone systems. Additionally, we have assessed our accounting
systems. To date, we have identified that one of our accounting systems is not
currently Year 2000 compliant. During phase II, a normal conversion and upgrade
path is in progress which will provide us with the Year 2000 compliant current
release of the accounting system. We expect to complete this conversion during
the first half of 1999.
Also as part of phase I, we are assessing other business and operational
systems and contacting suppliers and customers in an effort to identify
additional Year 2000 issues. We expect to complete modifications identified as
part of this effort during the first half of 1999.
To date, we have spent an immaterial amount on the compliance program, and
we do not expect the cost associated with required modifications and capital
expenditures to become Year 2000 compliant to exceed $100,000.
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The foregoing costs do not include our internal costs (principally the payroll
costs for those person's working on the project), which costs we do not track.
The reasonably likely "worst case" scenario of our failure to correct a
material Year 2000 problem would likely be an interruption in, or a failure of,
certain normal business activities or operations. These failures could adversely
affect our results of operations, liquidity, and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers (which we have not fully assessed), we are unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on our results of operations, liquidity, or financial condition. The Year 2000
project is expected to reduce our level of uncertainty about the Year 2000
problems. We do not anticipate material problems with our power supply or
telecommunications. We believe that, with the implementation of the new business
systems and completion as scheduled, the possibility of significant
interruptions of normal operations should be reduced. Subsequent to the
completion of our upgrade efforts and the determination of our customer and
vendor compliance with Year 2000, we will ascertain the need for a formal Year
2000 contingency plan.
Stockholder Rights Plan:
On February 16, 1999, our Board of Directors declared a dividend of one
preferred share purchase right for each share of common stock outstanding on
March 2, 1999. The purchase rights are subject to the terms and conditions of
the Right Agreement dated February 25, 1999, and filed with the Securities and
Exchange Commission on March 1, 1999, on Form 8-A. The purchase rights are not
represented by separate certificates, but, instead, initially will be evidenced
by the certificates representing our outstanding common stock.
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. We are evaluating the
Statement's provisions to determine the effect on our financial statements. In
addition, the impact of SFAS No. 133 will depend on the terms of future
transactions.
Liquidity and Capital Resources:
Cash and cash equivalents and short term investments as of March 31, 1999
of $4,877,100 decreased by $2,199,800 or 31.1% from $7,076,900 at December 31,
1998. The reduction in cash was primarily due to payments relating to the
purchases of QCB and Biofluids which were accrued at December 31, 1998 and
interest and principal payments relating the debt incurred to acquire QCB and
Biofluids. Working capital, which is the excess of current assets over current
liabilities, at March 31, 1999 was $8,552,200 as compared to $8,239,400 at
December 31, 1998 representing an increase of $312,800 or 3.8%.
Capital expenditures of $129,500 were primarily for the purchases of
laboratory, manufacturing and computer equipment.
In April 1997, our Board of Directors authorized the repurchase of up to
200,000 shares of our outstanding common stock at market prices. In December
1997, our Board of Directors authorized us to repurchase up to 1,000,000
additional shares of our outstanding common stock at market prices and in 1998
we were authorized to extend the repurchase program up to 1,500,000 shares of
our common stock. No shares were repurchased during the three months ended March
31, 1999. As of March 31, 1999, we have repurchased a total of 1,279,500 shares
of our common stock for $8,054,300, an average price of $6.29 per share since
the inception of the repurchase program in April 1997.
We have never paid dividends and have no plans to do so in fiscal 1999. Our
earnings will be retained for reinvestment in the business.
We expect to be able to meet our future cash and working capital
requirements for operations and capital additions through currently available
funds and cash generated from operations, if any. However, we may raise
14
<PAGE>
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.
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 recorded and the date
that they are consummated. 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 translation risk or
our economic risk.
15
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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/A with respect to the Company's acquisition of
Quality Controlled Biochemicals, Inc. was filed with the
Securities and Exchange Commission on January 26, 1999.
A Form 8-K/A with respect to the Company's acquisition of
Quality Controlled Biochemicals, Inc. was filed with the
Securities and Exchange Commission on February 22, 1999.
A Form 8-K with respect to the Company's adoption of a
Stockholder Rights Plan was filed with the Securities and
Exchange Commission on March 1, 1999.
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BIOSOURCE INTERNATIONAL, INC.
(Registrant)
Date: May 13, 1999 /s/ JAMES H. CHAMBERLAIN
--------------------
James H. Chamberlain
President and Chief Executive Officer
Date: May 13, 1999 /s/ LARRY A. MAY
------------
Larry A. May
Executive Vice President and
Chief Financial Officer
17
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