<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, 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 October 31, 1999 was 7,282,700.
===============================================================================
<PAGE>
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 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
Item 3. Quantitative and Qualitative Disclosures of Market Risk 15
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, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,517.9 $ 7,076.9
Accounts receivable, less allowance for doubtful
accounts of $206.8 and $301.0 at September 30, 1999
and December 31, 1998, respectively 5,859.4 4,381.0
Inventories, net 5,201.5 4,970.6
Prepaid expenses and other current assets 365.4 726.2
Deferred income taxes 1,094.1 1,123.4
--------- ---------
Total current assets 17,038.3 18,278.1
Property and equipment, net 5,419.9 5,513.6
Intangible assets, net of $883.7 and $125.8 of accumulated amortization
at September 30, 1999 and December 31, 1998, respectively 13,693.3 14,451.2
Other assets 1,337.9 1,318.0
Deferred income taxes 1,868.4 1,839.2
--------- ---------
$39,357.8 $41,400.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,514.8 $ 1,643.0
Accrued expenses 2,220.4 4,143.9
Notes payable to bank, current portion 2,768.0 3,024.2
Deferred income 400.5 625.9
Income tax payable 324.6 601.7
--------- ---------
Total current liabilities 7,228.3 10,038.7
Notes payable to bank, less current portion 12,020.8 13,665.6
--------- ---------
Total liabilities 19,249.1 23,704.3
--------- ---------
Stockholders' equity:
Common stock, $.001 par value. Authorized 20,000,000 shares
Issued 7,558,700 shares; outstanding 7,267,700 shares at
September 30, 1999 and issued 7,469,925 shares;
outstanding 7,178,925 shares at December 31, 1998 7.2 7.2
Additional paid-in capital 21,375.3 21,186.8
Retained earnings (accumulated deficit) 97.5 (2,629.3)
Accumulated other comprehensive loss (1,371.3) (868.9)
--------- ---------
Total stockholders' equity 20,108.7 17,695.8
--------- ---------
$39,357.8 $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 Nine months ended
September 30, September 30,
1999 1998 1999 1998
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 7,470.2 $ 5,714.3 $ 22,414.5 $ 16,339.0
Cost of sales 2,913.5 6,689.5 8,691.1 10,422.3
--------- ---------- ---------- -----------
Gross profit (loss) 4,556.7 (975.2) 13,723.4 5,916.7
--------- ---------- ---------- -----------
Operating expenses:
Research and development 802.4 679.1 2,361.2 1,919.7
Sales and marketing 1,123.6 1,133.8 3,358.4 2,957.7
General and administrative 1,052.5 997.2 3,220.0 2,944.0
Amortization of intangible assets 267.0 7.7 757.9 23.1
--------- ---------- ---------- -----------
Total operating expenses 3,245.5 2,817.8 9,697.5 7,844.5
--------- ---------- ---------- -----------
Operating income (loss) 1,311.2 (3,793.0) 4,025.9 (1,927.8)
Interest income (expense), net (253.3) 71.8 (739.9) 332.1
Other income, net 67.1 96.4 94.4 112.3
--------- ---------- ---------- -----------
Income (loss) before income taxes 1,125.0 (3,624.8) 3,380.4 (1,483.4)
Provision for (benefit from) income taxes 223.4 (963.9) 653.8 (440.0)
--------- ---------- ---------- -----------
Net income (loss) $ 901.6 $ (2,660.9) $ 2,726.6 $ (1,043.4)
========= ========== ========== ===========
Net income (loss) per share:
Basic $ 0.12 $ (0.37) $ 0.38 $ (0.14)
--------- ---------- ---------- -----------
Diluted $ 0.12 $ (0.37) $ 0.35 $ (0.14)
--------- ---------- ---------- -----------
Shares used to compute net income (loss) per share:
Basic 7,248.3 7,254.7 7,205.9 7,620.0
--------- ---------- ---------- -----------
Diluted 7,830.3 7,254.7 7,702.2 7,620.0
--------- ---------- ---------- -----------
</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,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,726.6 $ (1,043.4)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation 701.8 700.3
Amortization of intangible assets 819.7 -
Unrealized exchange loss - 1.9
Changes in assets and liabilities:
Accounts receivable (1,763.0) (1,314.0)
Inventories, net (195.8) 3,743.4
Prepaid expenses and other current assets 336.6 (102.7)
Other assets (18.6) (62.1)
Deferred income taxes - (1,360.9)
Accounts payable (205.0) 122.5
Accrued expenses (1,828.8) 469.4
Deferred income (225.4) -
Income tax payable (292.4) (24.6)
----------- -----------
Net cash provided by operating activities 55.7 1,129.8
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (824.8) (1,342.5)
Proceeds from sale of property and equipment 14.0 3.1
Purchase of investments - (7,614.8)
Proceeds from sale of investments - 12,583.5
----------- -----------
Net cash provided by (used in) investing activities (810.8) 3,629.3
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options 188.6 59.0
Payments to repurchase and retire Company stock - (6,309.9)
Repayments of notes payable (1,889.8) (23.0)
Payments of capital lease obligations - (0.7)
----------- -----------
Net cash used in financing activities (1,701.2) (6,274.6)
----------- -----------
Net decrease in cash and cash equivalents (2,456.3) (1,515.5)
Effect of exchange rate changes on cash (102.7) 437.7
----------- -----------
Cash and cash equivalents at beginning
of period 7,076.9 9,477.5
----------- -----------
Cash and cash equivalents at end
of period $ 4,517.9 $ 8,399.7
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 880.1 $ 89.9
Income taxes $ 327.6 $ 1,118.5
</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/A, for the fiscal year
ended December 31, 1998. In the opinion of management, the accompanying
condensed consolidated unaudited financial statements include all adjustments,
which are necessary for a fair presentation. The results of operations for the
three and nine month periods ended September 30, 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 September 30, 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 September 30, 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 generally range from
three to fifteen years. Real property is depreciated over thirty nine years.
6
<PAGE>
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.
We also earn royalties on certain products licensed to others and classify those
royalties in Net Sales.
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>
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
4. Inventories (amounts in thousands)
<TABLE>
<CAPTION>
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
<S> <C> <C>
Raw materials........................................ $4,138.5 $4,115.0
Work in process..................................... 394.1 750.4
Finished goods....................................... 4,292.6 3,972.4
------------- -------------
8,825.2 8,837.8
Less inventory reserve............................... 3,623.7 3,867.2
------------- -------------
$5,201.5 $4,970.6
============= =============
</TABLE>
5. Property and Equipment (amounts in thousands)
<TABLE>
<CAPTION>
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
<S> <C> <C>
Land............................................... $ 360.0 $ 360.0
Building and improvements.......................... 2,397.0 2,283.5
Machinery and equipment............................ 4,085.9 3,749.1
Office furniture and equipment..................... 1,720.2 1,596.8
Leasehold improvements............................. - 87.2
-------------- -------------
8,563.1 8,076.6
Less accumulated depreciation and amortization..... 3,143.2 2,563.0
-------------- -------------
$5,419.9 $5,513.6
============== =============
</TABLE>
6. Notes Payable to Banks
In December, 1998, we executed a loan agreement with Union Bank of
California, NA and borrowed $14,000,000 which was used to finance the
acquisition of all of the outstanding stock of Quality Controlled Biochemicals
and the acquisition of substantially all of the assets and selected liabilities
of Biofluids. The principal amount outstanding as of September 30, 1999 was
$12,500,000. 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 that
is 2% per annum in excess of either the bank's adjusted treasury rate for a term
that we may select, or the bank's LIBOR rate, also for a term we may select. The
actual interest rate at September 30, 1999 was 7.52%. The loan matures on
December 5, 2005. The terms of this loan require us to maintain a minimum cash
balance of $3,500,000. Additionally, we must maintain specified ratios of
annualized earnings before interest, taxes, depreciation and amortization
(EBITDA) to debt service, term debt to EBITDA, and maintain capital expenditures
within specified levels. We are also required to comply with certain non-
financial covenants. At September 30, 1999, we were in compliance with regard to
these covenants.
In June, 1996, we secured financing from Heller Financial Corp. in order to
partially finance the purchase of our corporate headquarters. The original loan
principal was $745,000 and is secured by a first trust deed on the property. The
loan bears interest at a rate of 9.4% and has a 20 year term. The principal
balance outstanding at September 30, 1999 was $692,500.
In addition, in June, 1996, we obtained a loan from the Small Business
Administration in order to partially finance the purchase of the corporate
headquarters building. The original loan principal was $616,000 and is secured
8
<PAGE>
by a second trust deed on the property. The loan bears interest at a rate of
7.6% and has a 20 year term. The outstanding principal balance at September 30,
1999 was $563,700.
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 September 30, 1999
the aggregate principal balance outstanding with respect to these loans was
approximately $1,016,500. Description of the loans follow:
<TABLE>
<CAPTION>
Amount
Outstanding at
Type of loan Maturity Date Interest Rate September 30, 1999
------------ ------------- ------------- ------------------
<S> <C> <C> <C>
Term loan January 31, 2002 9.25% $ 93,300
Term loan April 17, 2003 9.25% $318,900
Term loan August 22, 2000 9.50% $ 42,300
Line of credit December 31, 1999 9.25% $562,000
--------
$1,016,500
==========
</TABLE>
Under the terms of the MetroWest Bank loan agreement, we must meet certain
financial covenants which include a minimum tangible net worth covenant, maximum
debt to tangible net worth, current ratio covenant, minimum cash balance and
other non financial covenants. At September 30, 1999, we were in compliance with
regard to these covenants.
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 reconciliation of basic to diluted weighted average shares is as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) used for basic and
diluted earnings per share $ 901.6 $(2,660.9) $2,726.6 $(1,043.4)
======== ========= ======== =========
Weighted average shares used in
basic computation 7,248.3 7,254.7 7,205.9 7,620.0
Dilutive stock options and warrants 582.0 - 496.3 -
-------- -------- -------- --------
Weighted average shares used for
diluted computation 7,830.3 7,254.7 7,702.2 7,620.0
======== ======== ======== ========
</TABLE>
Options to purchase 614,616 shares at a weighted average exercise price of
$5.33 per share and 1,486,022 shares at a weighted average exercise price of
$3.65 per share were outstanding as of September 30, 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 September 30, 1999 and 1998,
respectively, but were not included in the computation of diluted net income per
share because the effect would be anti-dilutive.
9
<PAGE>
Warrants to purchase 118,100 shares at a weighted average exercise price of
$11.10 per share were outstanding as of September 30, 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
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,
------------------ --------------------
1999 1998 1999 1998
------ --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $901.6 $(2,660.9) $2,726.6 $(1,043.4)
Foreign currency translation
adjustments 91.0 444.5 (502.4) 437.7
------ --------- -------- ---------
Total comprehensive income (loss) $992.6 $(2,216.4) $2,224.2 $ (605.7)
====== ========= ======== =========
</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, the 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 to up to 1,500,000 shares of
our common stock. No shares were repurchased during the three or nine months
ended September 30, 1999. As of September 30, 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. 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.
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:
10
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales to external customers from:
United States:
Domestic $4,212.2 $ 2,472.2 $11,937.9 $ 6,877.0
Export 1,194.1 1,015.5 3,578.8 3,008.8
-------------------------- --------------------------
Total United States 5,406.3 3,487.7 15,516.7 9,885.8
Europe 2,063.9 2,226.6 6,897.8 6,453.2
-------------------------- ---------------------------
Consolidated $7,470.2 $ 5,714.3 $22,414.5 $16,339.0
========================== ==========================
Operating income (loss):
United States $1,051.3 $(2,352.5) $ 2,856.8 $ (613.3)
Europe 259.9 (1,440.5) 1,169.1 (1,314.5)
-------------------------- ---------------------------
Consolidated $1,311.2 $(3,793.0) $ 4,025.9 $(1,927.8)
========================== ===========================
Sales-to Segments:
Net sales to external customers:
United States $4,212.2 $ 2,472.2 $11,937.9 $ 6,877.0
Europe 2,347.4 2,475.3 7,736.2 7,141.6
Japan 733.8 617.7 2,213.7 1,947.7
Other 176.8 149.1 526.7 372.7
-------------------------- ---------------------------
Consolidated $7,470.2 $ 5,714.3 $22,414.5 $16,339.0
========================== ===========================
</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/A 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, peptides and
antibodies to the specifications of our customers. We use recombinant DNA
technology to produce cytokines and other proteins. We have registered our
analyte specific reagents with the FDA and have received a license to sell these
products as Class I Medical Devices. We market these products to in vitro
diagnostic manufacturers and clinical reference laboratories as "active
ingredients" in the tests they produce to identify various specific diseases or
conditions. In order to market these products as medical devices, we are
required to be in compliance with the FDA's Current Good Manufacturing Practices
and Regulations.
Results of Operations
Revenues: Our sales for the three months ended September 30, 1999 and 1998 were
$7,470,200 and $5,714,300, respectively, representing an increase of $1,755,900
or 30.7% in 1999 as compared to 1998. Sales for the nine months ended September
30, 1999 and 1998 were $22,414,500 and $16,339,000, respectively, representing
an increase of $6,075,500 or 37.2% in 1999 as compared to 1998. The increase for
both the three and nine month periods is due in part to sales of products from
two companies which we acquired in December 1998 - Quality Controlled
Biochemicals (QCB) and Biofluids and to increased sales of existing products
such as ELISA assay test kits, Antibodies, and Proteins. Geographically, our
sales for the three months ended September 30, 1999 to customers in the United
States increased by 70.4%, sales to customers in Japan increased by 18.8%, and
sales to customers in Europe decreased by 5.2% as compared to the three month
period ended September 30, 1998. For the nine months ended September 30, 1999
our sales to customers in the United States increased 73.6%, sales to customers
in Japan increased by 13.7%, and sales to customers in Europe increased 8.3% as
compared to the nine-month period ended September 30, 1998.
Gross profit: Gross profit (loss) for the three months ended September 30, 1999
and 1998 was $4,556,700 and $(975,200) representing a gross margin (loss) of
61.0% and (17.1)%, respectively. Gross profit for the nine months ended
September 30, 1999 and 1998 was $13,723,400 and $5,916,700 representing a gross
margin of 61.2% and 36.2%, respectively. The gross profit for the three and nine
months ended September 30, 1998 includes the effect of a $4,500,000 charge taken
during 1998 that was primarily related to the establishment of a valuation
reserve for the Company's antibody inventory and standard cost revisions. For
comparison purposes, if we exclude the impact of the $4,500,000 charge from
gross profit for the three and nine months ended September 30, 1998, gross
profit for the three and nine months ended September 30, 1998 would have been
$3,524,800 and $10,416,700, respectively. Additionally, gross margin for the
three and nine months ended September 30, 1998 would have been 61.7% and
12
<PAGE>
63.8%, respectively. The increase in gross profit in both the three and nine
month periods ended September 30, 1999 results from the increased current year
sales volume while the reduced gross profit percentage (excluding the effect of
the prior year write down) is the result of the custom peptide and custom
antibody product lines of QCB which we acquired at the end of 1998, which
products generally have lower gross profit percentages than our other lines of
business. Also, gross profit for the nine months ended September 30, 1998 was
affected by favorable manufacturing variances of approximately $250,000 that
have not reoccurred in 1999.
Research and development: Research and development expense for the three months
ended September 30, 1999 and 1998 amounted to $802,400 and $679,100,
respectively. Research and development expense for the nine months ended
September 30, 1999 and 1998 amounted to $2,361,200 and $1,919,700, respectively.
The increased research and development expense of $123,300 or 18.2% for the
three month period, and $441,500 or 23.0% for the nine month period is primarily
due to the increased expenditures associated with the acquisition of QCB, which
were partially offset by reduced research and development expense of $51,600 and
$175,000 for the three and nine months, respectively, in Europe achieved as a
result of staffing reductions and other cost saving measures implemented in
November 1998.
Sales and marketing: Sales and marketing expense for the three months ended
September 30, 1999 and 1998 amounted to $1,123,600 and $ 1,133,800,
respectively. The reduced sales and marketing expense of $10,200 or 0.9% is due
to reduced advertising and promotional expense in our business (other than in
our QCB and Biofluids business), lower personnel costs during the period and
reductions in European operating costs, partially offset by increased sales and
marketing expenditures for QCB and Biofluids. Sales and marketing expense for
the nine months ended September 30, 1999 and 1998 amounted to $3,358,400 and
$2,957,700, respectively. Notwithstanding the overall reduction in the three
month period, the increased sales and marketing expense of $400,700 or 13.5% for
the nine month period is primarily due to the impact of our increased marketing
efforts focused on the new products we acquired from QCB and Biofluids, higher
personnel costs over the full nine month period, and an overall increase in
advertising and promotional efforts.
General and administrative: General and administrative expense for the three
months ended September 30, 1999 and 1998 amounted to $1,052,500 and $997,200,
respectively. The increase of $55,300 or 5.5% is primarily due to costs
associated with the acquisition of QCB and Biofluids. General and administrative
expense for the nine months ended September 30, 1999 and 1998 amounted to
$3,220,000 and $2,944,000, respectively. The increase of $276,000 or 9.4%
includes non-recurring costs of approximately $158,000 relating to a relocation
of our facility in Belgium and also in part reflects increased 1999 staffing and
administrative costs in the United States and costs related to both QCB and
Biofluids.
Amortization of intangible assets: Amortization of intangible assets for the
three months ended September 30, 1999 and 1998 amounted to $267,000 and $7,700,
respectively. The increased amortization of intangible assets of $259,300
relates to the amortization of the intangible assets from the QCB and Biofluids
acquisitions. Amortization of intangible assets for the nine months ended
September 30, 1999 and 1998 amounted to $757,900 and $23,100, respectively. The
increased amortization of intangible assets of $734,800 relates to the
amortization of the intangible assets from the QCB and Biofluids acquisitions.
Interest income (expense), net: Net interest expense for the three months ended
September 30, 1999 of $253,300 increased by $325,100 from net interest income of
$71,800 for the three months ended September 30, 1998. Net interest expense for
the nine months ended September 30, 1999 of $739,900 increased by $1,072,000
from net interest income of $332,100 for the nine months ended September 30,
1998. The increase resulted from the lower cash balances we maintained during
the period, and increased interest expense related to the debt acquired in
December 1998 to fund the acquisitions of QCB and Biofluids.
Provision for income taxes: The provision (benefit) for income taxes for the
three months ended September 30, 1999 and 1998 was $223,400 and $(963,900),
respectively. The provision (benefit) for income taxes for the nine months ended
September 30, 1999 and 1998 was $653,800 and $(440,000), 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:
13
<PAGE>
We consummated two acquisitions in December 1998. We believe these
acquisitions 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 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. As part of phase I, the Company engaged
an outside consulting firm to assess issues surrounding our desktop computer and
telephone systems. Additionally, we assessed our accounting systems. We
identified that one of our general ledger systems was not Year 2000 compliant.
We completed our systems assessment and installed the new version of our
business system software that is purported to be Year 2000 compliant by the
software vendor. We have implemented the software and are currently performing
internal testing to ensure year 2000 compliance.
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. Software for one piece of laboratory equipment has
been determined to require an upgrade in order to be year 2000 compliant. The
new software is on order and is expected to be implemented by November 30, 1999.
We are currently contacting suppliers and customers in an effort to identify
other year 2000 issues.
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. 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 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. In the event the upgrade of the business system does not
successfully remedy the Year 2000 issue, we will prepare a contingency plan
which would include the conversion of our general ledger system to an
alternative third party system and an implementation plan for the conversion.
Recently Issued Accounting Standards:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. We are evaluating the
Statement's provisions to determine the effect on our financial statements. In
addition, the impact of SFAS No. 133 will depend on the terms of future
transactions.
Liquidity and Capital Resources:
14
<PAGE>
Cash and cash equivalents as of September 30, 1999 of $4,517,900 decreased
by $2,559,000 or 36.2% 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 that were accrued at December 31, 1998, interest and principal
payments relating to the debt incurred to acquire QCB and Biofluids, and
increased accounts receivable due to the increased sales volume in the current
year. Working capital, which is the excess of current assets over current
liabilities was $9,810,000 at September 30, 1999 as compared to $8,239,400 at
December 31, 1998 representing an increase of $1,570,600 or 19.1%.
Capital expenditures of $824,800 were primarily for the purchases of
laboratory, manufacturing and computer equipment. We expect capital expenditures
for the fiscal year ended December 31, 1999 to be approximately $1,100,000.
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 or nine months
ended September 30, 1999. As of September 30, 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
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.
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 translation risk or
our economic risk.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<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 12, 1999 /s/ JAMES H. CHAMBERLAIN
------------------------------------
James H. Chamberlain
President and Chief Executive Officer
Date: November 12, 1999 /s/ LARRY A. MAY
------------------------------------
Larry A. May
Executive Vice President and
Chief Financial Officer
17
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