ITEM 1. DESCRIPTION OF BUSINESS
The following discussion should be read in conjunction with our consolidated financial statements provided under Part II, Item 8 of this annual report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein.
The forward-looking information set forth in this annual report on Form 10-K is as of March 15, 2004, and we undertake no duty to update this information. Should events occur subsequent to March 15, 2004 that make it necessary to update the forward-looking information contained in this Form 10-K, the updated forward-looking information will be filed with the Securities and Exchange Commission in a quarterly report on Form 10-Q or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the Securities and Exchange Commission's website at www.sec.gov. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" beginning on page 26 of this Form 10-K.
OVERVIEW
The Company manufactures markets and distributes products used worldwide in biomedical research that are instrumental in the development of new drug therapies and medical diagnostic methods. Our products enable scientists and biomedical researchers to better understand the biochemistry, immunology and cell biology of the human body, as well as disease processes. The Company offers over 3,600 products that are grouped into the following product lines: Assays; Biologicals (Antibodies, Bioactive Proteins and Peptides and Oligonucleotides) and Serum & Media. We believe we offer a unique combination of skills resulting in a focused range of products and services for the worldwide academic and government research, pharmaceutical and biotechnology industries.
The Company believes it has a strong scientific research staff, a broad product line and an established trade name, giving it a solid presence in the biomedical research market. We intend to continue our focus on new product development, particularly assay kits, as the driver of growth for the Company. We may also seek to acquire businesses, products and technologies complementary to our current business through acquisitions, licensing or joint ventures.
The Company was originally incorporated as a California corporation in October 1989, and was reincorporated as a Delaware corporation in May 1993. The Company's executive offices are located at 542 Flynn Road, Camarillo, California 93012, and its telephone number is (805) 987-0086. The Company's common stock is traded on the NASDAQ National Market under the ticker symbol "BIOI." Information on the Company's website, www.biosource.com, does not constitute part of this annual report.
INDUSTRY OVERVIEW
The biomedical research industry has seen significant advances in the understanding of physiological processes at the cellular and molecular level. The sequencing of the human genome has accelerated the need for methods and products to research and identify thousands of previously unknown proteins that potentially play key roles in cell function, normal and diseased. These proteins are of significant interest to the pharmaceutical industry, since they can be used as the basis of new therapeutic discovery and development. The core competencies the company has developed in molecular and cellular biology, immunology and custom biological services address this need. Biomedical researchers around the world are constantly in search of specialty research products and services, which are necessary to conduct both basic and clinical research. This research is conducted in settings that range from university and medical school laboratories to pharmaceutical and biotechnology research and development groups. The success of this type of research depends upon the availability of high quality biological reagents and custom services, including the serum & media, assay kits and the related biologicals that the Company develops, manufactures and sells.
STRATEGY
The Company's basic strategy is to increase its organic growth rate through focused research and development and sales and marketing investments in cellular communication pathway markets with high growth potential. Cellular communication pathway markets include both extracellular signaling products (such as cytokines) and intracellular signaling products (such as signal transduction). BioSource will exploit unique corporate and product capabilities to drive product growth in these select markets with particular emphasis on developing and selling assay kits. In addition, strong emphasis is placed on developing the network and systems to provide uncompromising customer support. As a complement to the core organic growth strategy, we may also seek to acquire businesses, products and technologies complementary to our current business through acquisitions, licensing or joint ventures. In order to facilitate the core strategy, the Company is:
o Applying a focused investment strategy in research and development. In 2003 the Company spent 16% of net sales on research and development. In previous years, internal research and development spending was directed towards creating a high volume of new products with emphasis on building a broad range or menu of key biologicals for the study of cellular pathways. Now that the broad menu has been developed, research and development spending in 2004 is being focused upon the development of new, high volume and greater profit assay kits and their directly related biologicals. As a result, the Company is not necessarily focused on a high number of new products as a goal, but on the specific type of new product, and their complementary biologicals that provide greater sales potential in the marketplace. Research and Development spending for the next few years is projected to stay in the range of 14-16% of sales. We expect this more focused investment to result in a higher rate of return on our research and development spending.
o Continuing to invest in a customer support infrastructure. The Company has made significant investments in its sales and marketing activities over the past few years and believes it must continue to do so in the future. This investment is necessary to access and to support the large, $1.5B cellular communication pathway research market. The company has its own sales force and sells direct in the United States and certain major markets in Europe. The remainder of the world is serviced through a network of local distributors comprising approximately 25% of the Company's 2003 revenues. A key strategy of the Company is to differentiate itself by providing personalized, uncompromising logistical and scientific support. Consequently, continued strong investments in sales and marketing are anticipated.
o Accelerating critical external business development efforts to support the Company's more focused assay kit strategy. We anticipate this focus will result in additional relationships in the areas of licensing, strategic partnerships, OEM relationships and, possibly, acquisitions as a complementary strategy to enable our assay development and manufacturing expertise to be more readily exploited in novel platforms and technologies. The Company feels that this business development strategy will complement its existing core competencies and further strengthen its position in the proteomics markets of cellular communication pathways.
PRODUCTS
BioSource currently offers over 3,600 products. Our strategy is to place a more focused effort on selling assays and their directly related biological and cell growth product lines. Assay kits are typically sold in higher volume and at a higher gross margin than our other product lines. In 2003, assay kits made up approximately 50% of our total sales. Our goal is to continue to increase this percentage in 2004 and beyond. We group our products into three categories: Assays or Assay Kits, Biologicals and Serum & Media.
ASSAYS
"Assays" or "Assay Kits" are a collection of reagents, buffers, calibrators and active biologicals that are standardized, validated and assembled into a ready to use package of products. Researchers use these assay kits to measure specific responses in animal disease models or humans. There are numerous hardware and software systems (not marketed by BioSource) used by a researcher to perform these tests. The majority of these test systems are "open platforms" in that they allow the use of third party providers of assay kits. BioSource has
targeted the open platform market. Below is described some of the more common BioSource assay technologies.
ENZYME-LINKED IMMUNOSORBENT ASSAY ("ELISA") TEST KITS. In a typical ELISA test kit, an antibody is immobilized or "bound" on a microtiter well of the kit's test plate. A sample containing the antigen that is to be measured is added by the researcher and allowed to react with the bound antibody. After the well is washed, a second antibody with a specific enzymatic tag is added and allowed to react with the bound antigen. After washing away any remaining free antibody, the researcher adds a substrate that produces a colored reaction. The amount of color is proportional and thereby indicates the amount of antigen present, which can be measured even in minute concentrations, using common laboratory instruments. This method of quantitation of these antigens has become an integral tool both in research and diagnostic applications as it provides a relatively inexpensive, accurate and rapid method for the evaluation of immune status.
BioSource ELISA test kits are a combination of cytokines, their antibodies and other chemical reagents, and are used to measure the presence or quantity of a particular bioactive protein in serum, plasma or other biological sample. The quantitation of these cytokines and chemokines has been shown to be an excellent way for scientists to determine the functional status of the immune system. Since many of the current targets of pharmaceutical intervention are designed to modulate the immune system, quantitation of these markers as a means for gauging the effectiveness of treatment is becoming increasingly necessary.
Our ELISA tests produce results in a few hours, compared to days or even weeks with bioassays. We offer kits for human, mouse, rat, monkey and swine proteins. The diversity of species is important to allow investigators to establish numerous measurements in pre-clinical animal model systems. We offer over 350 types of ELISA kits and we believe we are the leader in sales of rat, monkey and swine cytokine ELISA kits. Detection of fluctuations in cytokine levels by ELISA tests; whether in an invitro cell culture experiment of a new drug or in a patient's serum, provide researchers and scientists with valuable information in understanding disease progression, therapy and diagnosis.
An alternative method to our ELISA test kits are our Muliplex Antibody kits for use in instrument systems manufactured by Luminex Corporation, a third party, which allow measurement of several proteins simultaneously in a single sample, saving time and effort as well as the precious sample. Our menu for Luminex assays has rapidly expanded to include kits for the measurement of human, mouse and rat cytokines, chemokines, growth factors and cell biology markers. The multiplex kits allow for investigators to establish screens for drug targets and inhibitors in cell culture samples or to determine the diagnostic value of a panel of proteins in human patient serum or plasma samples.
Of the more than 350 assay kits we offer, the following table illustrates a few of the more common applications of our ELISA test kits:
TEST KIT CHARACTERISTICS/APPLICATION - ------------ --------------------------------------------------------------
Tau This kit detects and quantitates the presence and phosphorylation state of an important brain protein thought to be involved in the development of Alzheimer's disease. When this protein is modified in the cell by the addition of phosphate groups at specific amino acid sites, the biological activity of the protein changes. In certain disease states, abnormally high levels of phosphorylation occur, which cause the protein structures to destabilize, ultimately leading to neuronal degeneration. Deposition of filamentous tau is implicated in other neurodegenerative diseases including cortical basal degeneration (CBD), progressive supranuclear palsy (PSP), Pick's disease, and certain forms of Parkinson's disease. Pharmaceutical companies are keenly interested in developing drugs that can halt specific patterns of phosphorylation without hampering normal cell activity. The ability to quantitate the phosphorylation state at specific sites will assist this effort.
Rb This kit detects and quantitates the presence and phosphorylation state of an important cellular regulation protein associated with cell division. This protein, known as Retinoblastoma protein or Rb, is one focus of efforts to develop anti-cancer drugs. The activity of Rb is controlled by phosphorylation of the protein at specific amino acids by a select group of protein kinases called cdks. If too much phosphorylation of Rb occurs, its ability to halt cell division is hampered, as is the case in malignant cells. The ability to specifically quantitate the level of phosphorylation of this protein by kinases and the impact of kinase inhibitors on normal and abnormal phosphorylation is a key development in the drug development process.
IL-6 This kit detects and quantitates a cytokine that is extremely important in the study of inflammation. IL-6 is produced by a number of cells in the body and its actions regulate the growth and differentiation of various cells of the immune system. IL-6 induces a variety of important proteins in the body in response to inflammation or tissue injury. Although most healthy individuals have undetectable levels of IL-6 in their serum, huge quantities of IL-6 are detected in severe inflammatory situations such as septicemia. The elevation of serum IL-6 precedes that of acute phase proteins, e.g., in a postoperative phenomenon, and may thus be a sensitive early parameter to investigate inflammatory conditions. Serum levels of IL-6 are used in studies of surgical or traumatic tissue injuries, infectious diseases, auto-immune diseases including arthritis, graft rejection, alcoholic liver cirrhosis, malignancies, etc.
RADIOIMMUNO-ASSAYS ("RIA"). We produce and market RIAs, which are used internationally in large volume clinical laboratories for the measurement of hormones and proteins important in growth, reproductive and thyroid disease. These assays utilize radioisotopically labeled molecules to compete with non-isotopically labeled molecules for sites on known antibody concentrations. RIA is a mature technology used primarily in European and other foreign countries and is no longer widely used in the United States.
OTHER ASSAYS. We have combined our oligonucleotide and ELISA technologies to develop a portfolio of other assay kits that measure the quantity of messenger RNA, the type of RNA that serves as a template for protein synthesis of various cytokines in blood, cultured cells or tissues. Our molecular analysis kit product line permits detection of the individual genes and quantitates the amount of the gene that encodes for a specific protein. We also have developed kits that allow researchers to measure multiple genes at the same time from a single sample.
BIOLOGICALS: We define a "biological" as a naturally occurring or synthetically produced animal or human based nucleic acid or protein. Nucleic acids are the basic building blocks of the genetic structure of all living things. The genetic structure directs the synthesis of proteins. Proteins control the structure and function of all living organisms.
Biologicals are the essential active components to our assay kits. These may include monoclonal or polyclonal antibodies, bioactive recombinant proteins, synthetic peptides or synthetic oligonecliotides. In addition to use in assay test kits, these biologicals are sold individually as either a catalog or as a custom produced product. The Company's expertise in selecting, creating and purifying these biologicals is a differentiating core competency that provides the high level of sensitivity and specificity to its cellular pathway research products.
ANTIBODIES
Antibodies are used in the Company's assay kits as detector systems in the research of normal and abnormal proteins. Antibodies are proteins generated by immune cells in response to foreign substances, which are called antigens. Antibodies have specific amino acid sequences, which cause them to interact only with the antigen that induced their creation. Antibodies circulate in the blood and assist the body's immune system by searching out and neutralizing or eliminating antigens. Antibodies are used by researchers in a variety of applications, including neutralization studies in bioassay systems, as capture and detection molecules for protein quantitation and for cellular differentiation. Antibodies used in research are generally produced by injecting an antigen into animals, which cause the animals' immune system to produce an antibody specific to that antigen.
In addition to use in the Company's assay kits, this broad biological product line provides researchers and biotechnology companies with an array of high quality reagents used to develop analytical signals in various assays. In addition, other companies use our secondary antibodies as a component of their test kits.
We also have developed a significant catalog of innovative signal transduction tools that enable customers to more readily understand the complex signals, which control cellular processes. Many of these tools are antibodies that recognize specific, activated or inactivated forms of proteins containing one or more molecules of phosphate at specific sites. Such an addition of phosphate molecules, which is referred to as phosphorylation, or removal of phosphate molecules, which is referred to as dephosphorylation, control most of the signaling within and between cells. Diseases such as cancer, heart disease and Alzheimer's have been shown to be at least in part due to the malfunctioning of key molecules within cells, in many cases due to alterations in their activity through altered phosphorylation.
We offer over 1,640 antibody products. The following table illustrates some of the uses for the antibodies we offer:
USES DESCRIPTION - ---------------- -----------------------------------------------------
ELISA Test Kits Antibodies are used in our ELISA test kits to detect and measure proteins in biological fluids. An antibody is coupled with an enzyme which reacts with a colorless substrate in the presence of a sample containing the antigen of interest to generate a colored reaction product. The color produced is proportional to, and thereby indicates the amount of, antigen present in the sample.
Flow Cytometry In order to identify specific cell types by the nature of the antigens expressed on their surface, antibodies are bound to cells and visualized by labeling the antibody molecules with a fluorescent dye or "fluorochrome." The result is examined with an instrument known as a flow cytometer.
High Throughput High throughput screening permits the researcher to screen test thousands of drug candidates in a short period of time for their effect on target molecules. In order to be used in this manner, we conjugate our antibodies to different dyes or enzymes.
Immunoblotting Immunoblotting uses antibodies to identify a specific protein in a complex mixture. In this process, a protein of interest is separated by molecular weight using gel electrophoresis. A specific antibody is then passed over the mixture, and any protein that binds to the antibody is visibly detected.
The research conducted by our customers often requires that we manufacture unique, specific peptides or antibodies for custom research projects. Previously unidentified genes and proteins are being identified at a rapid rate, which often precedes the introduction of catalog offerings by many months to years. Through our Massachusetts facility we engage in the manufacture of these custom peptides and antibodies thus allowing customers to perform timely research on these new or proprietary targets. The capabilities to provide custom peptides and antibodies as well as innovative catalog products further strengthens our strategic relationships with our customers and has led to the development of new catalog products and expanded sales opportunities.
BIOACTIVE PROTEINS AND PEPTIDES
Proteins, which are chains of amino acids in particular sequences, and their interactions are responsible for all of the biochemical and physical properties of a cell, as well as variations among different types of cells. Proteins take various forms, including enzymes, hormones, antibodies, receptors, cytokines and chemokines. Proteins are ideal for use in basic research, drug discovery, enzymology, high throughput screening, in vivo studies, x-ray crystallography or as antigens for antibody production. Our primary protein products are cytokines and chemokines, which are regulatory molecules that control growth and differentiation of cells.
CYTOKINES. The development of an effective immune response involves complex cell-to-cell communications, which are mediated by a group of small hormone-like soluble secreted proteins collectively called cytokines. Cytokines, like growth factors, interact with specialized target receptors on the surface of the cells and stimulate a chain of secondary messengers leading to a biological response. These responses result from changes in both the molecular capabilities and behaviors of cells. For example, cytokines can activate cells to recognize and eliminate harmful bacteria and viruses. They carry vital signals to the cell's genetic machinery that can trigger it to grow or stop growing. Cytokines can also signal a cell to differentiate, that is, to acquire the features necessary for it to take on more specialized tasks. Specific cytokines play a key role in stimulating cells surrounding a wound to grow and divide and also in attracting migratory cells to the site. Some cytokines have a regulatory function, and other cytokines exert direct effects of their own.
Cytokines are extracted from natural sources, such as human and animal platelets, white blood cells and lymphatic cells, or are produced through genetic engineering, also known as recombinant DNA technology. Cytokines coordinate and orchestrate the proper functioning of the immune system. In addition to producing the human cytokines, we also produce the equivalent proteins from mice, rats, swine and monkeys. Many cytokines are being investigated for their ability to activate or suppress host immunity. Cytokines and other similar growth factors and adhesion molecules are instrumental in the body's defense against cancer, AIDS and other life- threatening disorders.
CHEMOKINES. Chemokines are specific proteins that regulate the recruitment and activation of white blood cells and other sites of inflammation. Chemokines function by binding to receptors on the surface of affected cells. Tremendous interest in chemokines exists due to recent studies linking chemokines and their receptors to the development of HIV.
OTHER PROTEINS. To date we have focused on cytokines, chemokines and growth factors; however, with the progress of the human genome project, protein discoveries will expand beyond these proteins. Signal transduction proteins, of which it is hypothesized that only a fraction have been discovered, will be important in high throughput screens of drug candidates since the irregular functioning of these proteins is involved in substantially all diseases. Additionally, researchers will want reagents to the nuclear proteins, cytoskeletal proteins and others that will be discovered to study their role in various diseases. Reagents to these markers can be created using our core competencies.
We offer over 390 protein products. The following table shows examples of different cytokines, growth factors and kinases we produce and use:
PROTEIN RESEARCH USES - --------- --------------------------------------------------------------
IL-4 Interleukin 4 is a protein that has been observed to have direct growth-suppressive activity on a variety of malignancies. IL-4 is used in cancer research.
VEGF Vascular Endothelial Growth Factor regulates angiogenesis, the process of new blood vessel growth. VEGF is used in drug development, cancer research and as a growth factor for endothelial cells.
TNF Tumor Necrosis Factor is a protein that plays a vital role in the regulation of the immune system. TNF is used to study immunological processes, cancer, inflammation and septic shock.
c-Src Rous Sarcoma Virus kinase is one of the most extensively studied kinase oncogenes in academia and industry for its role in human cancer and leukemia.
PEPTIDES. Bioactive peptides are subsections of proteins or small proteins that are synthetically created. These peptides represent the active or inhibitory site of a particular protein, and are used to study the activity of various proteins. Some bioactive peptides, such as beta amyloid peptides, have been shown to play a major role in the development of Alzheimer's Disease.
OLIGONUCLEOTIDES
The production of oligonucleotides is a custom service we provide for researchers engaged in molecular biology. An oligonucleotide is a synthesized polymer made up of the same building blocks that form DNA. Synthetic oligonucleotides have been used in molecular biology for over twenty years, essentially as templates for nucleic acid and protein synthesis, and more recently, as the therapeutic agents for the inhibition of gene expression or as a diagnostic agent to identify disease. DNA is used by almost every discipline in biomedical research in both academic and commercial areas, including molecular biology and cell biology departments of major universities and biomedical companies developing gene therapy products. These researchers use synthetic oligonucleotides to determine the exact sequence of a gene, or to perform experiments leading to the potential development of pharmaceutical drugs. The primary use of the oligonucleotides we develop and sell is for DNA sequencing and polymerase chain reaction, or PCR, priming.
In DNA sequencing, we synthesize oligonucleotides pursuant to customer specifications, which they use to initiate a process of sequencing a DNA strand. DNA sequencing is used in a wide range of biomedical research applications to identify the makeup of particular strands of DNA.
In PCR priming, our synthesized oligonucleotides are used by our customers in combination with other reagents to amplify a specific genetic sequence isolated from a cell sample. After PCR amplification, gel electrophoresis is used to identify and even to quantitate a specific DNA or RNA sequence from that sample. PCR is an extremely powerful tool in molecular biology research because it can amplify genetic information from a single copy of DNA or RNA. Using PCR technology, the presence of the genetic message used to code for the production of protein can be identified, thereby offering numerous possibilities in the detection of genetic disorders, monitoring disease progression, and in understanding cellular functions.
Genomics research requires large quantities of oligonucleotides. DNA arrays for expression profiling and single nucleotide polymorphism, or SNP, analysis all require the use of synthetic DNA oligonucleotides. In addition, high throughput screening techniques, used in drug discovery are incorporating the use of fluorescent modified DNA oligonucleotide probes to detect and quantify target gene expression. We have developed technologies to rapidly produce and manufacture large number of high quality DNA oligonucleotides for DNA array construction and developed proprietary processes to produce fluorescent probes.
The following table illustrates some of the uses for the DNA oligonucleotide services we offer:
USES APPLICATIONS - ------- ------------------------------------------------------------------
Primers Oligonucleotides are used in the initiation of the PCR process. Probes DNA oligonucleotides are used in hybridization reactions for the Real Time PCR quantitation. Probes are duel labeled fluorescent probes used in real time PCR quantitation and molecular diagnostic analysis. We offer three different styles of FRET probes for our customers. Arrays Oligonucleotides are used on a solid matrix to profile gene expression or to identify single nucleotide polymorphisms, or SNP's.
SERUM, BUFFERS AND MEDIA
Much of the disease research our customers pursue is performed in a laboratory on human or animal cells. These cells function as the disease model. Serum and media support the growth, maintenance and experimental manipulation of these cell-based disease models. The Company's broad serum and media product line of over 200 products is manufactured in Maryland under rigorous quality standards to provide the researcher with a highly consistent, viable and reproducible disease model. We manufacture and offer in our catalog over 245 serum, media and buffer products. We also offer custom formulation services for unique applications.
CUSTOMERS
BioSource has over 6,000 customers worldwide. No single customer accounted for more than 10% of our total revenue during any of the last three years and our top 20 customers made up approximately 30% of our consolidated sales in 2003. Our customers include:
PHARMACEUTICAL BIOTECHNOLOGY UNIVERSITIES -------------- ------------- ------------
Astra Zeneca Amgen Brigham and Women's Hospital Aventis Pharmaceuticals Biogen Baylor College of Medicine Bristol Myers Squibb Exelixis Columbia University Eli Lilly Genentech John Hopkins University Glaxo SmithKline Human Genome Sciences UCLA Merck & Company Nuvelo UC San Francisco Pfizer Millennium University of Pennsylvania Schering-Plough Pharmaceuticals University of Texas Wyeth-Ayerst Rigel Pharmaceuticals MD Anderson Cancer Tularik Research Center Zymogenetics University of Washington at St. Louis
GOVERNMENT ----------
Centers for Disease Control Food and Drug Administration National Cancer Institute National Institutes of Health VA Medical Centers U.S. Army Research Institute
RESEARCH AND DEVELOPMENT
As a life sciences company with significant internal R&D and manufacturing capability, BioSource strives to produce uniquely capable test kits and related biologicals for cellular communication pathway research in the government, academic and bio/pharma communities. BioSource has been predominantly known for its products for extra cellular signaling research, in this respect, for its work in cytokines, chemokines and growth factors. These proteins act as chemical communicators especially in the immune system and are critical to the maturation and function of normal cells. These proteins continue to play an important role as indicators of the health of the immune system and are thus indicators of some critical disease processes. We will continue to leverage this immunological expertise to appropriately expand our product offerings in this area. We have also achieved success in extending our product lines into intracellular signaling, more commonly known as signal transduction. Signal transduction is a market that is growing in importance as researchers begin to understand its central role in disease and its significance as targets for drug therapy. In 2001, BioSource introduced the first in its line of phosphoELISA(TM) kits that has allowed the quantitative measurement of sequence specific phosphorylation events on proteins. We have expanded this line to now include over 50 kits and will continue to expand and dominate this field of study. To expand the application of this technology, we have invested in developing assays for use in high content instrument platforms that exploit the increasing demand for quantitatively profiling various proteins. These platforms, such as microarrays and Luminex bead assays enable pharmaceutical and biotechnology companies to fully realize the opportunities represented by the sequencing of the human genome.
Our current research and development activities are focused in the following areas:
o Selective addition of new cytokine, chemokine and growth factors to our existing product offerings.
o Development of new signal transduction reagents, assays and platforms for measuring signal transduction proteins.
o Development of reagents for new detection technologies and assay platforms for the growing high-content screening markets.
As of March 1, 2003, we employed 49 research scientists, 14 of whom hold Ph.D.'s. Among these professionals are experts in peptide chemistry, molecular biology, immunology and signal transduction. In particular, their knowledge is fundamental to the development of peptides, oligonucleotides, proteins, antibodies and assay kits. Our research laboratories are located in Camarillo, California; Hopkinton, Massachusetts; and Nivelles, Belgium. In the year ended December 31, 2003, we introduced over 200 new products. In addition, as of February 4, 2004, we had approximately 150 products under development. We spent approximately $7,007,000
$6,187,000, and $3,986,000 on research and development in 2003, 2002, and 2001, respectively. Research and development spending represented approximately 16%, 15% and 11% of net sales in 2003, 2002, and 2001 respectively. In 2004, our research and development spending is projected to be similar dollar levels to those incurred in 2003, or approximately 14% of sales. The spending will be focused on programs that accentuate our investment in high value assays and supporting reagents.
MANUFACTURING
Our largest production facility is located in our corporate headquarters in Camarillo, California. Here we manufacture the majority of our assay kits. We manufacture our custom and catalog oligonucleotides at our facilities in Foster City, California. Our custom peptides and antibodies and other antibodies are manufactured at our facilities in Hopkinton, Massachusetts. Our serum and media are manufactured at our facilities in Rockville, Maryland. We also manufacture antibodies and assay kits at our European facility in Nivelles, Belgium. We currently manufacture products for inventory and ship products shortly after receipt of orders and anticipate that we will continue to do so in the future. Accordingly, we have not developed a significant backlog of products and do not anticipate we will develop a material backlog of products in the future.
Labeling, packaging, and shipping are carried out independently at each facility. We purchase our packaging components from outside suppliers who follow our own custom packaging designs. We have an internal graphic arts department located at our Camarillo, California facility that designs our packaging and marketing materials. We believe there are numerous available suppliers for our packaging components.
We believe that we have adequate supplies of raw materials on hand to continue to manufacture almost all of our products and meet customer demand, and that those materials that we do not produce internally are readily available from multiple sources.
SALES AND MARKETING
BioSource employs 65 sales and marketing professionals worldwide. The principal markets for our products are in the United States, Western Europe and Japan. We have a direct sales force strategically located in major metropolitan areas in the United States. We advertise in various scientific trade journals and distribute our own product catalog to all current and selected potential customers. We sell to our international markets directly through our European subsidiary that employs 19 of our 65 sales and marketing personnel. We also use international distributors that specifically target selected foreign life science markets.
Our sales people hold a minimum of a biological sciences undergraduate degree and undergo training in the nature and application of our products and proven selling techniques. We believe that by investing in the scientific training of our sales force we are better able to satisfy the needs of researchers and scientists in the biomedical community. Our sales force is also used to provide valuable feedback for product development. Each representative is responsible for the maintenance of existing accounts as well as the generation of new business. Representatives are paid a base salary and commissions. The commissions are based upon sales growth over previous years' sales levels.
In addition to the United States, we sell directly into Germany, Belgium, Holland, Denmark, Sweden, Norway, Finland and the United Kingdom. We also use a network of international distributors covering over 40 other countries. We utilize a network of both exclusive and non-exclusive international distributors, but we generally grant exclusive distribution rights only where the distributor maintains direct field representatives proportionate to the potential for sales of our products in a defined geographical area. In order to serve as our distributor, the distributor must agree to and meet acceptable annual sales goals. We offer all of our distributors' annual training to enhance their knowledge of our products. In 2003, 25% of the Company's revenues were through distributors.
SEGMENT INFORMATION
The Company operates primarily in one industry segment, the licensing, development, manufacture, marketing and distribution of biological reagents and assays used in life sciences. For information regarding the revenues
and assets associated with the Company's geographic segments, see Note 10 of the Notes to the Company's Consolidated Financial Statements included elsewhere in this filing.
COMPETITION
We are engaged in a segment of the life sciences products industry that is highly competitive. Our primary competitors include companies such as Techne Corporation, BD BioSciences, Cell Signaling Technologies, BioRad Laboratories and Invitrogen. Many of our competitors have been involved in the life sciences industry significantly longer than we have and benefit from greater name recognition. In addition, many of our competitors have greater resources to devote to research and development, sales and marketing and occasionally engage in price cutting measures to achieve leadership in their field. However, we believe that by offering a focused cellular pathway assay menu complemented with associated key custom biologicals and serum & media, we gain a competitive advantage.
PATENTS AND TRADEMARKS
We are currently seeking and intend to seek patent protection on certain proprietary technologies. Although our intent is to protect our interests in select technologies, there is no guarantee that these patents will be granted, or if granted, be effective in fully protecting the use of these technologies. We also seek to protect our interests by treating certain technologies and know-how as trade secrets and by requiring all employees and contractors to execute invention and assignment agreements with us, which include confidentiality provisions.
"PhosphoELISA," "BGB," "Messagescreen," "TAGOImmunologicals," "Cytoscreen," "Primescreen," "Cytosets" and "Cartesian" are unregistered product trademarks used for some of our products, but are only of limited importance to our business. "Biofluids" is also a registered trademark we acquired as part of our acquisition of Biofluids in December 1998.
GOVERNMENT AND ENVIRONMENTAL REGULATION
Except as we indicate in the following paragraph, approval by the Food and Drug Administration is not required for the sale of any of our products in the United States because our products are marketed and sold for research use only. Research products are not currently required to comply with the lengthy FDA approval process associated with diagnostic or therapeutic products. In the event we develop products directly for the diagnostic market in the United States, we will be required to obtain FDA approval prior to selling them. This approval, if required, could be time consuming and costly.
Some of our products, however, are used by our customers as raw materials or intermediates in the production of diagnostic products. As such, we received clearance by the State of California and the FDA to manufacture our TAGOImmunologics product line as Analyte Specific Reagents. These reagents are classified as Class I biologics that are manufactured in compliance with the FDA's Quality System Regulation, also known as cGMP. This registration allows us to market these products to clinical laboratories and manufacturers of in vitro diagnostic products.
We believe that we are materially in compliance with the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, and other similar laws of general application.
Our European subsidiary's clinical products are produced in facilities that have achieved ISO 9001 certification, and are eligible to be used in Europe for clinical diagnostics. In all of the markets in which we sell through distributors, our distributors are contractually responsible for compliance with the applicable governmental regulations.
Except as we indicated above, we are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate, including those governing the handling and disposal of hazardous wastes and other environmental matters. Our research and development activities involve the controlled use of small amounts of hazardous materials, chemical and radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with applicable regulations, the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, we could be held liable for resulting damages. This liability could have a material adverse effect on us.
EMPLOYEES
As of March 1, 2004, we employed 271 individuals, 267 of whom were full-time employees. Twenty-one of our employees at that date had doctoral degrees.
None of our employees in the United States are represented by a labor union. As of March 1, 2004, 61 of our 271 employees worked for our Europeon subsidiary in Belgium. As is customary under Belgian labor law, employees of our Belgian subsidiary, BioSource Europe S.A., are represented by two national unions who represent employee interests to the national chemistry industry employer organization. We believe we are in compliance with these Belgium legal restrictions. We consider our current Belgium subsidiary employee and labor relations to be good.
Pursuant to Belgian law, we have in the past been subject to heightened restrictions related to union representation for work and safety councils applicable to companies with more than 50 employees. Because we employed less than 50 employees at our Nivelles, Belgian facility in 2000, these heightened restrictions terminated in April 2000. Since we currently employ over 50 employees at our Belgian facility, and since the next election for work and safety councils is in 2004, the heightened restrictions for certain employees are again applicable to us.
ITEM 2.
ITEM 2. PROPERTIES
In March 2000, the Company entered into a lease for a new facility at 542 Flynn Road in Camarillo, California, and relocated its previous offices and laboratories to this new location in July 2000. The new building contains approximately 51,821 square feet and is situated in an industrial park approximately two blocks from the previous corporate headquarters. The lease commenced on May 1, 2000 and runs through June 30, 2005, with the option to continue the lease for two additional five-year terms. Monthly lease payments in 2004 are approximately $31,000. The new facility has several laboratory areas, including molecular biology facilities, a protein purification facility, an oligonucleotide facility, and an assay development and manufacturing facility, as well as ELISA development and manufacturing space and cold storage rooms sufficient to accommodate our current and anticipated future needs.
For our oligonucleotide laboratory, we lease a 6600 square feet facility in Foster City, California, approximately 20 miles south of San Francisco. This lease expires in May 2006. Monthly lease payments in 2004 are approximately $15,000.
We lease two facilities in Hopkinton, Massachusetts, approximately 25 miles west of Boston. Our first facility consists of 11,500 square feet, of which approximately 7,000 square feet is laboratory space. In February 2001, the Company amended its lease to this facility, extending the term of the lease for five additional years, through May 2006. Monthly lease payments in 2004 are approximately $11,000. In January 2002, the Company leased an additional facility in Hopkinton, Massachusetts, which consists of 10,500 square feet, of which approximately 7,000 is laboratory space, under a lease that expires in January, 2007. Monthly lease payments in 2004 are approximately $16,000.
We lease a facility in Rockville, Maryland, which consists of approximately 11,500 square feet of warehouse, manufacturing, and office space, under a lease that expires in May 2004. Monthly lease payments through May 2004 are approximately $14,000.
Our European subsidiary leases facilities in Nivelles, Belgium, which consist of approximately 45,500 square feet of manufacturing, laboratory and office space, under a lease that expires in March 2007. Monthly lease payments in 2004 are approximately $22,000.
Additional satellite sales offices are located in Germany and Holland.
We believe that all of our facilities are in good condition, are adequately covered by insurance and will be adequate for our occupancy needs for the foreseeable future.
The Company's lease commitments for the above referenced properties make up substantially all of the Company's total lease commitments. At December 31, 2003, total future minimum payments under all of the Company's leases are as follows (in thousands):
2004........................................ $ 1,474 2005........................................ 1,192 2006........................................ 644 2007........................................ 593 Thereafter.................................. -- --------
$ 3,369
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not materially affect the financial position, results of operations or liquidity of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth quarter of our last fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol "BIOI." The following table sets forth, for the periods indicated, the high and low closing sales price per share of our common stock as reported on the Nasdaq National Market. HIGH LOW ---- --- 2002 Fiscal Year First Quarter $ 8.20 $ 5.19 Second Quarter 6.16 5.86 Third Quarter 6.08 4.89 Fourth Quarter 6.31 5.50 2003 Fiscal Year First Quarter $ 6.95 $ 5.83 Second Quarter 6.92 5.00 Third Quarter 7.97 6.15 Fourth Quarter 7.87 6.33 2004 Fiscal Year First Quarter, through March 15, 2004 $ 6.84 $ 8.09
On March 15, 2004, the closing sale price of our common stock on the Nasdaq National Market was $7.83. As of March 15, 2004, there were 9,402,618 shares of our common stock outstanding held by approximately 323 holders of record.
EQUITY COMPENSATION PLAN INFORMATION - The following table sets forth certain information regarding the Company's equity compensation plans as of December 31, 2003.
In January 2000, the compensation committee of the Company's Board of Directors approved the 2000 BioSource International, Inc. Non-Qualified Stock Option Plan (the "2000 Plan"). The 2000 Plan was not approved by shareholders of the Company. Under the 2000 Plan, non-qualified stock options may be granted to full-time employees, part-time employees, directors and consultants of the Company to purchase a maximum of 2,000,000 shares of the company's common stock. Options granted under the 2000 Plan vest and are generally exercisable at the rate of 25% each year beginning one year from the date of grant. The stock options generally expire ten years from the date of grant. Stock options outstanding under the 2000 Plan as of December 31, 2003 were 1,421,852. See note 6 of the accompanying audited consolidated financial statements.
In 1993, the compensation committee of the Company's Board of Directors approved the 1993 BioSource International, Inc. Stock Incentive Plan (the "1993 Stock Option Plan"). On December 31, 2003, the 1993 Stock Option Plan expired. Therefore, the Company will no longer grant stock options under that plan.
The Company also has stock option agreements that are outside the 2000 Plan. Those agreements are only for the purchase of non-qualified stock options.
The Compensation Committee of our Board of Directors currently administers our stock option plans.
DIVIDEND POLICY
BioSource has never paid cash dividends on its common stock and does not currently anticipate that it will do so in the foreseeable future. The Company plans to retain earnings to finance our operations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the captions "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" for, and as of the end of each of the years in the five-year period ended December 31, 2003, are derived from the audited consolidated financial statements of the Company. The following selected data should be read in conjunction with the Company's consolidated financial statements and notes thereto, as well as the section included herein entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AS OF DECEMBER 31, ----------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (in thousands)
CONSOLIDATED BALANCE SHEET DATA: Current assets ............... $21,694 $23,389 $24,963 $26,420 $18,325
Total assets ................. 44,333 46,506 49,841 50,364 40,222 Current liabilities .......... 6,031 6,793 5,963 6,318 7,340 Long-term debt, less current portion ................... -- -- -- -- 11,459
Total stockholders' equity ... 38,302 39,713 43,878 44,046 21,422
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW -
BioSource develops, manufactures, markets and distributes products and services that are widely used in biomedical research. Its 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, peptides and antibodies to the specifications of its customers. It uses recombinant DNA technology to produce cytokines and other proteins and has registered its analyte specific reagents with the FDA for which it has received a license to sell such products as Class I Medical Devices. The Company markets these products to in vitro diagnostic manufacturers and clinical reference laboratories as "active ingredients" in the tests those parties produce to identify specific diseases or conditions. In order to market these products as medical devices, BioSource is required to be in compliance with the FDA's Current Good Manufacturing Practices and Regulations. The Company believes it offers a unique combination of technological, production, and research and development skills resulting in a spectrum of products and services for the worldwide pharmaceutical and biotechnology industries.
The Company manufactures products for inventory and typically ships products shortly after receipt of orders and anticipates that it will continue to do so in the future. Accordingly, the Company has not developed a significant backlog of products and does not anticipate it will develop a material backlog of products in the future.
During 2003, to better drive sales and profitability growth, and to focus on key market opportunities, the Company began analyzing its business as three separate product categories, or Strategic Business Units, "SBUs." These SBUs consist of Signal Transduction Products, Cytokine Products, and Custom Products. Signal Transduction Products consist of the proteins, antibodies, assays and other reagents used to study internal cellular processes. Our phosphospecific antibodies and phosphoELISA(TM)s are included in this SBU. Cytokine Products include the proteins, antibodies, assays and other reagents that are used to study the processes by which cells communicate. Interleukin, growth factor and other biological response modifier products are included in this group. Custom Products includes oligonucleotides, custom peptides and antibodies, cell culture and diagnostics and other reagents not specifically categorized.
In November 2003, the Company hired Terrance J. Bieker as its new President and Chief Executive Officer. With Mr. Bieker's leadership, during the fourth quarter of 2003, the Company developed and implemented a business plan that clarifies the Company's strategic focus for the future. This fundamental shift in strategy is to focus the Company's time, effort and financial resources on its core strengths as an assay company. These assay products are higher margin products and generally fall into two categories, Cytokine and Signal Processing Assays. The Company will be placing a more direct focus in the sales of cytokine assays and their directly related products and the sales of signal transduction assays and their directly related products. This strategic plan is designed to allow BioSource to penetrate and increase its market share in the cytokine assay market and continue to maintain a strong leadership position in the signaling market, which includes the trademarked Phospho ELISA assays. This strategy will focus the Company's direction on these high margin products and allow it to more effectively market their complimentary product lines, including our Phospho Site Specific Antibodies, or PSSA's, including its sera and media and its custom products: peptides, antibodies and oligonucleotides.
As a result of this new strategic direction, certain assumptions related to fixed, working and human assets were evaluated and revised. With a more focused approach on assay kits and the directly related product lines, other non-strategic products were discontinued. These non-strategic products included outsourced cell surface marker and secondary antibodies and certain peptides, and were analyzed for profitability and overall marketability. After its review, the Company realized these products did not possess the characteristics for significant growth or adequate profit margins in order for the Company to continue to provide such products. This strategic shift has caused the Company to review its existing product line and certain inventory levels and values. In the fourth
quarter of 2003, $1.3 million of the Company's currently inventoried products were discontinued, scrapped or fully reserved. For a detailed discussion, see the discussion on the consolidated results of operations below.
The implementation of the new strategy is intended to bring continued positive organic growth to the Company's sales for 2004 and beyond. The increased investment in sales and marketing, in conjunction with our new strategy is designed to bring a more focused approach to promoting and selling assays and their directly related products. In addition, we have incorporated a corporate account strategy into our selling approach which we believe will help support our organic sales growth. As a result of its new strategy, the Company believes overall gross profit and gross product margins should improve in 2004, when compared to 2003 due to its more focused approach on selling assays, a higher margin product than many of its other products. As a result, the Company believes operating results should also improve in 2004 compared to 2003. Management's longer term financial objective is to generate increasing annual operating profits to the Company.
The following discussion should be read in conjunction with our consolidated financial statements provided under Part II, Item 8 of this annual report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein.
The forward-looking information set forth in this annual report on Form 10-K is as of March 15, 2004, and the Company undertakes no duty to update this information. Should events occur subsequent to March 15, 2004 that make it necessary to update the forward-looking information contained in this Form 10-K, the updated forward-looking information will be filed with the Securities and Exchange Commission in a quarterly report on Form 10-Q or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the Securities and Exchange Commission's website at www.sec.gov. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" beginning on page 26 of this Form 10-K.
CRITICAL ACCOUNTING POLICIES
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Specifically, management must make estimates in the following areas:
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company has $6,566,000 in gross trade accounts receivable and $258,000 in allowance for doubtful accounts on the consolidated balance sheet at December 31, 2003. The Company has procedures in place to adequately review the credit worthiness of new customers and also to properly review orders from existing customers to determine if a change in credit terms is warranted. A review of our allowance for doubtful accounts is done timely and consistently throughout the year. The Company does have accounts receivable amounts from certain customers as of December 31, 2003 such that if their financial condition deteriorated and a significant allowance was needed, the amount of allowance could have a material adverse effect on the Company's financial results for 2004.
INVENTORY ADJUSTMENTS. The Company reviews the components of its inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. In conjunction with the new strategic direction the Company has taken, it may see material write downs of inventory due to obsolescence or discontinuation of certain product lines in the future. The Company will be evaluating product lines on an ongoing basis.
The manufacturing process for antibodies has and may continue to produce quantities substantially in excess of forecasted usage, if any, and anticipated antibody sales volumes are highly uncertain and realization of individual product cost may not occur. As a result, the Company reserves its entire manufactured antibody inventory at 100% of its value. As of December 31, 2003, the Company had $5,347,000 of manufactured antibodies in its inventory and a reserve for these antibodies totaling $5,347,000. The Company will continue to monitor its antibody inventory and the continued need for a 100% reserve. Additionally, material inventory write-downs in our inventory can occur if competitive conditions or new product introductions by our customers or us vary from our current expectations.
DEFERRED TAX ASSETS AND DEFERRED INCOME TAXES. The Company has $12,441,000 in deferred income tax assets on its consolidated balance sheet as of December 31, 2003. See note 8 to the consolidated financial statements included in this Form 10-K for a listing of the specific components. A large component of the Company's deferred tax assets is its net operating losses. As of December 31, 2003, the Company has a net operating loss (NOL) carryforward of approximately $11,540,000, $14,152,000 and $1,443,000 for Federal, State and foreign income tax purposes, respectively. The federal NOL's are available to offset future taxable income, if any, through 2020 to 2023. The state NOL's are available to offset future taxable income, if any, through 2006 to 2023.
As of December 31, 2003, the Company determined it is necessary to set up a valuation allowance of $393,000 for deferred tax assets related to net operating losses it has accumulated for the State of Massachusetts. This allowance is included in the net deferred tax assets on its balance sheet as of December 31, 2003. The ability to realize these net deferred tax assets depends entirely on the Company generating taxable income in the future. The Company has used historical information as well as a projected financial outlook to project taxable income amounts. The Company believes, except for the valuation allowance previously discussed, it is more likely than not that they will be able to realize the current value of net benefits in the future. A material change in our expected realization of these assets would occur if the ability to deduct tax loss carryforwards against future taxable income is altered. If our projections involving tax planning and operating strategies do not materialize or if significant changes in tax laws occur within the various tax jurisdictions in which we operate, we would have to set up a valuation allowance against our deferred tax assets that could materially affect our tax expense and our financial results.
ADVERTISING COSTS. For the year ended December 31, 2003, the Company capitalized its annual catalog production costs and expensed them evenly throughout the year. In the past, the Company has expensed catalog production costs as incurred, which was primarily in the first quarter of its fiscal year. During 2002, and after production of the 2002 catalog, the Company put substantial effort into increasing the number of customers in its customer database and in conjunction with that increased its dependence on its catalog to attract more customers. As a result, the Company believes that its 2003 catalog is a direct response advertisement whose primary purpose is to elicit sales to customers who respond specifically to the catalog resulting in probable future economic benefit. Accordingly, beginning in 2003, the Company is capitalizing its catalog production costs and expensing them evenly throughout the fiscal year in accordance with the AICPA's Statement of Position 93-07. For the year ended December 31, 2003, the Company expensed approximately $560,000 of catalog costs compared to $529,000 and $419,000 for the years ended December 31, 2002 and 2001 respectively.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of our consolidated financial statements.
REVENUE RECOGNITION. The Company's revenue is generated from the sale of products primarily manufactured internally. The Company does have a small amount of products that are sold on an outside equipment ("OEM") basis. The Company sells standard and custom products directly to end users and distributors and recognizes revenue upon transfer of title to the customer, which occurs upon shipment. General sales and payment terms to distributors are similar to those granted to end user customers. Certain end user customers prepay for product and request shipment of the product at future dates, primarily sera or media products. The Company records deferred revenue until such time as a product is shipped to a customer. Approximately 25% of the Company's 2003 net sales were to
distributors. The Company's distribution agreements do not provide a general right of return. The amount of the Company's inventory held by distributors is not believed to be substantial.
LONG-LIVED ASSETS. In October, 2001 the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental provisions of that statement. The standard is effective for fiscal years beginning after December 15, 2001. It is our policy, and in accordance with SFAS No. 144, to account for long-lived assets, including intangibles, at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. If this review indicates that long-lived assets will not be recoverable, as determined by a non-discounted cash flow analysis over the remaining amortization period, the carrying value of the Company's long-lived assets would be reduced to its estimated fair value based on discounted cash flows. In the quarter ended December 31, 2003, the Company incurred a long-lived asset impairment charge of $341,000 related to the sale or disposition of certain fixed assets primarily related to the Company's oligonucleotide division. The Company has determined that all its remaining long-lived assets are not impaired as of December 31, 2003. The Company's long-lived assets were not impaired as of December 31, 2002.
CONSOLIDATED RESULTS OF OPERATIONS
The selected data presented below under the caption "Consolidated Statement of Operations Data Presented as a Percentage of Sales" for each of the years ended December 31, 2003, 2002 and 2001 are derived from the audited consolidated financial statements of the Company. The following selected data should be read in conjunction with the Company's consolidated financial statements and notes thereto, as well as the data and information included herein entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
CONSOLIDATED STATEMENT OF OPERATIONS DATA YEARS ENDED DECEMBER 31, PRESENTED AS A PERCENTAGE OF SALES 2003 2002 2001 ---- ---- ----
Net sales ........................................ 100% 100% 100% Cost of sales .................................... 50% 44% 44% ---- ---- ---- Gross profit ................................. 50% 56% 56% Operating expenses: Research and development ..................... 16% 15% 11% Sales and marketing .......................... 21% 21% 21% General and administrative ................... 16% 15% 20% Long-lived asset impairment .................. 1% 0% 0% Amortization of intangibles .................. 1% 2% 3% ---- ---- ---- Total operating expenses ................ 54% 53% 55% ---- ---- ---- Operating income (loss) .......................... -4% 3% 1%
Interest income .................................. 0% 0% 1% Interest expense ................................. 0% 0% 0% Other income, net ................................ 0% 0% 0% ---- ---- ---- Income (loss) before income tax (benefit) ........ -4% 3% 2% Income tax expense (benefit) ..................... 2% 0% 0% ---- ---- ---- Income (loss) before cumulative effect of accounting change .......... -2% 3% 2% Cumulative effect of accounting change ........... 0% -6% 0% ---- ---- ---- Net income (loss) available to common stockholders ................................. -2% -3% 2% ==== ==== ====
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET SALES. Net sales for the year ended December 31, 2003 were a record $44.1 million, an increase of $4 million or 10% compared to net sales for the year ended December 31, 2002. In 2003, the Company's revenues benefited by a $2,082,000 positive impact of foreign exchange when compared to 2002.
For the year ended December 31, 2003, sales of the Company's signaling product lines grew 31% compared to the comparable prior year period, from $6,900,000 to $9,100,000. The Company believes its volume of transactions in the signal transduction market is growing and has opportunities for continued significant growth in this market. The Company's sales growth in its cytokine product lines for the year ending December 31, 2003 was 10%, growing from $18,200,000 to $20,100,000. The cytokine market is a mature market which the Company believes continues to have opportunities for sales growth through focused sales and marketing efforts and through targeted research and development activities. The Company's sales in its custom product lines remained flat compared to the comparable prior year period at $14,900,000.
North American sales represented 56% of consolidated net sales in 2003 and grew 2% as compared to the twelve months ended December 31, 2002. North American sales grew primarily due to increases in cytokine and signaling products offset by lower sales in our custom products, particularly our oligonucleotide product line. European sales represented 31% of consolidated net sales in 2003 and grew 23% (9% in local currency), as compared to the comparable prior year period. European sales growth was primarily due to our signaling products, including our Phospho ELISA's and our diagnostic product line. Sales in Japan and the rest of the world, representing 13% of consolidated net sales, increased 18% compared to 2002. Sales growth in Japan and the rest of the world was primarily due to increases in our signaling product lines and continued penetration of products into countries outside of Europe and North America. When compared to 2002, our 2003 sales in Europe and Japan have increased as a percentage of total consolidated sales while North American sales have decreased as a percentage of total consolidated sales. The Company does not believe this is indicative of a long term trend and that it will see fluctuations of its sales in various geographical regions in the future.
The Company experienced a slowdown in sales in the third and fourth quarters of 2003 when compared to its internal operating expectations. The Company believes this was attributable in part to a slowdown in spending by the major US pharmaceutical and biotech companies during this time and to a delay in funding to the National Institutes of Health, which funds many academic life science research projects throughout the United States.
GROSS PROFIT. Gross profit margin was 50% for the year ended December 31, 2003 and 56% for the year ended December 31, 2002. The Company's margin decreased 6% due in part to the change in strategic direction discussed above. With this change in strategic direction, various assumptions related to specific inventoried items were evaluated and revised. With a more focused approach on assay kits and the directly related product lines, other non-strategic products were discontinued. The Company reviewed its catalog of products and eliminated over 400 non-strategic products. Accordingly, in the fourth quarter of 2003, approximately $250,000 of catalog products were discontinued and $1 million of inventoried products were evaluated and scrapped or fully reserved. The Company continues to evaluate catalog products on an ongoing basis. While the impact to our financial results from our continuing evaluation of catalog products is unknown at this time, any such evaluation could be material to the operating results of the Company.
General increases in the Company's scrap and obsolescence contributed to this margin decrease. Also contributing to this full year margin decrease were lower margins in the Company's custom product lines, specifically our oligonucleotide and custom peptide product lines. Steps have been taken to reduce our cost of manufacturing in the custom product lines and we are projecting to see an improvement in consolidated gross profit margin in 2004.
RESEARCH AND DEVELOPMENT. Research and development expense for the year ended December 31, 2003 and 2002 was $7.0 million and $6.2 million and represented 16% and 15% of sales, respectively. The increase in research and development expenses for the year ended December 31, 2003 when compared to the prior year period reflects the Company's increased expenses for additional personnel and materials in the cytokine and signal transduction research areas. For the year, the Company increased R & D spending by 13% and expects, with the focus on cellular pathway assays and related biologicals, to keep 2004 spending in line with 2003 spending
levels. This total investment in the Company's research capabilities has resulted in the commercialization of high quality, novel products which have produced increased sales in both the Cytokine and Signaling product lines.
SALES AND MARKETING. Sales and marketing expenses were $9,298,000 for the year ended December 31, 2003 and $8,339,000 for the year ended December 31, 2002, representing 21% of sales for each of the years 2003 and 2002. In the twelve months ended December 31, 2003, the Company's sales and marketing payroll and related expenses increased $900,000 from 2002 due to increased commissions and the hiring of certain sales and marketing positions in late 2002 and a new Vice President of Sales in December 2002. Marketing expenses including catalogs, advertising, and trade shows decreased $95,000 in 2003 compared to 2002. Travel expenses increased $170,000 due to increased costs related primarily to selling activities. The Company anticipates a continued increased investment in its sales and marketing, but will manage this investment in line with anticipated 2004 revenue growth.
For the year ended December 31, 2003, the Company expensed approximately $560,000 of catalog costs compared to $529,000 for the year ended December 31, 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $6,851,000 and $5,916,000 for the years ended December 31, 2003 and 2002, representing 16% and 15% of sales for each of the years 2003 and 2002, respectively. This represents an increase of G & A expenses in 2003 of $935,000 compared to 2002. Included in the 2003 G & A number is $560,000 of severance and sign on expenses related to the resignation of our previous CEO in September 2003 and the hiring of our new CEO in November 2003. Additional severance costs related to other employee terminations in 2003 totaled $130,000. Excluding this $690,000 of costs, 2003 general and administrative expenses increased by $375,000 compared to 2002 and represented 14% of sales. This increase was due primarily to increases in our reserve for doubtful accounts, travel expenses, consulting and accounting fees. These increases in expenses were offset by a decrease in certain benefit and incentive costs due to the lower than planned operating performance in 2003, and thus lower incentives being accrued for the Company in 2003 compared to 2002.
AMORTIZATION OF INTANGIBLES. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 142, "Accounting For Goodwill and Other Intangible Assets." The amortization of goodwill and intangible assets was approximately $575,000 and $641,000 for the years ended December 31, 2003 and 2002, respectively. Effective January 1, 2002, the Company's goodwill and other intangible assets are accounted for under FAS No. 142 "Goodwill and Other Intangible Assets." See discussion in the cumulative effect of accounting change section below.
NET INTEREST INCOME. Interest income was $31,000 in 2003 compared to $113,000 in 2002. This interest income was derived from the interest income on cash invested in short-term securities. Interest income in 2003 was offset by $4,000 of interest expense related to miscellaneous interest charges and fees. The decrease in interest income was the result of lower cash amounts invested in short-term interest bearing accounts in 2003 compared to 2002.
OTHER INCOME (EXPENSE), NET. Other expense, net was $103,000 in 2003 compared to net other income $10,000 in 2002. These net amounts consisted primarily from net gains and losses realized on foreign currency transactions.
INCOME TAX EXPENSE (BENEFIT). The Company is recognizing an income tax benefit of $884,000 for the year ended December 31, 2003. The Company's income taxes have and may continue to fluctuate in the future depending on a number of factors, including the ability to use its net deferred tax assets as of December 31, 2003. The Company believes it is more likely than not that it will be able to use those assets. In addition, the Company continues to benefit from R & D and other tax credits which, when applied to income levels for the periods presented, is resulting in effective tax rates lower than the current applicable federal and state statutory rates.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No.141, "Accounting For Business
Combinations," and FAS No. 142, "Accounting For Goodwill and Other Intangible Assets." FAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment in accordance with FAS No. 142. The amortization of goodwill and intangible assets was approximately $575,000, $641,000, and $1,098,000, for fiscal years ended December 31, 2003, 2002, and 2001, respectively. Effective January 1, 2002, the Company's goodwill and other intangible assets are accounted for under FAS No. 141 "Business Combinations" and FAS No. 142 "Goodwill and Other Intangible Assets." In 2002, the Company recognized a non-cash charge, net of applicable income taxes, of $2,447,000 representing the cumulative effect of a change in accounting principle resulting from the implementation of FAS 142. This amount is shown in the accompanying condensed consolidated statement of operations as a cumulative effect of an accounting change.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET SALES. Net sales for the twelve months ended December 31, 2002 were $40,055,000, an increase of $4,880,000, or 14%, (13% after eliminating the $476,000 positive impact of foreign exchange) compared to net sales for the twelve months ended December 31, 2001. North America sales, which represented 61% of consolidated net sales in 2002, grew $2,243,000 or 10% as compared to the twelve months ended December 31, 2001. European sales, which represent 27% of consolidated net sales in 2002, grew $2,090,000 or 24% (18% in local currency), as compared to the comparable prior year period. Sales in Japan and the rest of the world, representing 12% of consolidated net sales, increased 13% compared to 2001. North American sales grew 10% primarily due to an increase in sales of assays, proteins, serum and media and signal transduction antibodies. European sales grew 18% in local currency primarily due to assays, proteins, antibodies and diagnostic products. Sales in Japan and the rest of the world grew 13% primarily due to a full year distributor agreement in place with our Japanese distributor and continued penetration of products into countries outside of Europe and North America.
GROSS PROFIT. Gross profit for the year ended December 31, 2002 was $22,366,000, resulting in a gross margin of 56%, compared to a gross profit of $19,635,000, and a gross margin of 56% for the year ended December 31, 2001. The Company's margins remained constant in part due to the continued investment in production and planning related areas within the Company. The Company's 2002 consolidated margin of 56% was impacted by lower oligonucleotides sales in 2002 compared to 2001. These lower sales resulted in excess fixed costs being charged directly to cost of sales.
RESEARCH AND DEVELOPMENT. Research and development expense for the twelve months ended December 31, 2002 and 2001 was $6,187,000 and $3,986,000 and represented 15% and 11% of sales respectively. The increase in research and development expenses for the twelve months ended December 31, 2002 when compared to the comparable prior year period reflected the Company's investment in additional personnel and materials in the cytokine and signal transduction research areas with the goal of producing additional novel and proprietary products. The Company incrementally hired 18 additional research and development personnel during 2002 and more than doubled its core product introduction rate from 2001 to 2002.
SALES AND MARKETING. Sales and marketing expenses were $8,339,000 for the twelve months ended December 31, 2002 and $7,395,000 for the twelve months ended December 31, 2001, representing 21% of sales for each of the years 2002 and 2001. In the twelve months ended December 31, 2002, the Company's sales and marketing expenses in personnel and marketing programs increased $806,000 from the comparable prior year period. During 2002, the Company incrementally hired 8 additional employees in sales and marketing, including people in our technical service and sales departments.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5,916,000 and $6,945,000 for the years ended December 31, 2002 and 2001, representing 15% and 20% of sales for each of the years 2002 and 2001, respectively. This represented a decrease of $1,029,000, or 15% in 2002 compared to 2001. Excluding $1,406,000 of net general and administrative charges in 2001 that were related to non-recurring employee and legal matters, the Company decreased its general and administrative expenses, as a percentage of sales, from 16% for the year ended December 31, 2001 to 15% for the year ended December 31, 2002.
AMORTIZATION OF INTANGIBLES. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 142, "Accounting For Goodwill and Other Intangible Assets." The amortization of goodwill and intangible assets was approximately $641,000 and $1,098,000 for the years ended December 31, 2002 and 2001, respectively. Effective January 1, 2002, the Company's goodwill and other intangible assets are accounted for under FAS No. 142 "Goodwill and Other Intangible Assets." See discussion in the cumulative effect of accounting change section below.
INTEREST INCOME. Interest income was $113,000 in 2002 compared to $376,000 in 2001. This interest income was derived from the interest income on cash invested in short-term securities. The decrease in interest income was the result of lower cash amounts invested in short-term interest bearing accounts in 2002 compared to 2001 and lower average short-term interest rates in 2002 compared to 2001.
OTHER INCOME, NET. Other income, net was $10,000 in 2002 compared to $86,000 in 2001. The net other income in 2002 and 2001 consisted primarily from gains realized on foreign currency transactions.
INCOME TAX EXPENSE (BENEFIT). The effective tax rate for the twelve months ending December 31, 2002 and 2001 was 1% and (10%) respectively. The Company benefited from R & D and other tax credits which when applied to income levels for the periods presented resulted in effective tax rates lower than the current applicable federal and state statutory rates. In the fourth quarter of 2002, the Company elected to utilize the Extraterritorial Income Exclusion ("EIE") federal tax credit, which, along with other tax credits, reduced its effective tax rate for 2002 to 1%.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No.141, "Accounting For Business Combinations," and FAS No. 142, "Accounting For Goodwill and Other Intangible Assets." FAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment in accordance with FAS No. 142. The amortization of goodwill and intangible assets was approximately $641,000, $1,098,000, and $1,093,000, for fiscal years ended December 31, 2002, 2001, and 2000, respectively. Effective January 1, 2002, the Company's goodwill and other intangible assets have been accounted for under FAS No. 141 "Business Combinations" and FAS No. 142 "Goodwill and Other Intangible Assets."
QUARTERLY RESULTS
The following table sets forth various unaudited statement of operations data for the last eight quarters, which has been prepared on the same basis as the annual information and, in management's opinion, includes all adjustments necessary to present fairly the information for each of the quarters below.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 2003 of $3,297,000 decreased by $2,644,000, or 45%, from $5,941,000 at December 31, 2002. In 2003, $875,000 of cash was provided by operating activities, $1,068,000 and $2,403,000 were used in investing and financing activities, respectively.
The $583,000 of cash provided from operations was derived primarily from the 2003 net loss of $1,070,000 offset by $2,620,000 of depreciation and amortization, a $341,000 long-lived asset impairment charge, which was offset by the decrease in cash due to the net increase in other working capital components of $1,846,000.
Net cash used in investing activities in 2003 was $1,068,000 and was related to the cash outlay for capital expenditures, which were primarily for the purchase of laboratory and manufacturing equipment, offset by the proceeds from the sales of certain equipment. The Company anticipates capital spending in 2004 to be at higher levels than incurred in 2003.
Net cash used in financing activities in 2003 was $2,403,000 of which $1,075,000 was provided from the exercise of employee stock options and $3,478,000 was used in the repurchase of the Company's common stock pursuant to a stock repurchase program effective October 30, 2001. The repurchase program allows for spending up to $15,000,000 on the repurchase of the Company's common stock. The stock repurchase program expires on June 30, 2004. Through March 15, 2004, the Company had spent a total $8,734,000 and may
continue to repurchase its common stock until the $15,000,000 limit is used; however no repurchases were conducted by the Company in the fourth quarter of 2003.
The Company has never paid dividends on common stock and has no plans to do so in fiscal 2004. Our earnings will be retained for reinvestment in the business.
The Company has entered into various leases involving facility properties, copiers and automobiles. Lease expense for 2004 will be approximately $1,474,000.
At December 31, 2003, we had the following cash commitments:
PAYMENT DUE BY PERIOD
LESS THAN 2-3 4-5 AFTER CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS - ----------------------- ------ ------ ------ ------ ------
Long-Term Debt Obligations ........ $ 0 $ 0 $ 0 $ 0 $ 0 Operating Lease Obligations ....... 3,369 1,474 1,836 59 0 Purchase obligations .............. 2,621 2,621 0 0 0 ------ ------ ------ ------ ------ Total ............................. $5,990 $4,095 $1,836 $ 59 $ 0 ====== ====== ====== ====== ======
In June 2003, the Company established a one-year revolving loan with a commercial bank that allows the Company to withdraw from time to time amounts that in the aggregate are not to exceed $2,500,000. The loan was established for working capital and stock repurchase needs, when and as necessary. The principal terms of the revolving loan include an interest rate of 2.75% on borrowed funds and a quarterly unused balance fee of .375%. The principal covenants include maintaining quarterly profitability, a maximum liability to tangible net worth ratio of 1.0 to 1.0, and a minimum cash balance of $750,000 as of the end of each fiscal quarter. The Company received a waiver from its commercial bank for the three months ended September 30, 2003 and December 31, 2003 with respect to the profitability covenant it maintains on this one-year revolving loan. As of December 31, 2003 and from January 1, 2004 through March 15, 2004, the Company had no borrowings under the revolving loan. The Company currently anticipates maintaining the revolving loan until such time that management or the Board believes that working capital and stock repurchase needs no longer require its availability.
Notwithstanding its new strategic objectives, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). This new pronouncement establishes financial accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for obligations of lessees. The standard was effective for financial statements issued for fiscal years beginning after June 15, 2002. We adopted this standard effective January 1, 2003.
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses the accounting for contractual arrangements in which revenue-generating activities are performed. In some situations, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence for fair values to account separately for the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are closely interrelated or there is not sufficient evidence of fair value to account separately for the different
deliverables. EITF 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 is effective for interim periods beginning after June 30, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure," an amendment of FASB Statement No. 123, which provides guidance for transition to the fair value based method of accounting for stock-based employee compensation and the required financial statement disclosure. The adoption of SFAS No. 148 expanded the disclosure in our interim financial statements, and does not significantly impact our annual disclosures of stock-based compensation in our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others." FIN No. 45 requires a company to recognize a liability for the obligations it has undertaken to issue a guarantee. This liability would be recorded at the inception of the guarantee and would be measured at fair value. The measurement provisions of this statement apply prospectively to guarantees issued or modified after December 31, 2002. The disclosure provisions of the statement apply to financial statements for periods ending after December 15, 2002. The adoption of FIN No. 45 does not have a material impact on the financial position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (ARB 51), and requires companies to evaluate variable interest entities for specific characteristics to determine whether additional consolidation and disclosure requirements apply. This interpretation is immediately applicable for variable interest entities created after January 31, 2003, and applies to the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities acquired prior to February 1, 2003. The adoption of this interpretation did not have any impact on our financial position or results of operations. In December 2003, the FASB revised FIN 46 to exempt certain entities from its requirements and to clarify certain issues arising during the implementation of FIN 4. The adoption of this revised interpretation in the first quarter of 2004 is not expected to have any impact on our consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted this standard effective July 1, 2003, and it did not have a material effect on our consolidated financial statements.
RISK FACTORS
You should carefully consider the following risk factors and all other information contained in this report before purchasing shares of our common stock. Investing in our common stock involves a high degree of risk. If any of the following events or outcomes actually occurs, our business, operating results and financial condition would likely suffer. As a result, the trading price of our common stock could decline, and you may lose all or part of the money you paid to purchase our common stock.
RISKS RELATED TO OUR BUSINESS
FAILURE TO EXECUTE ON OUR NEWLY ADOPTED LONG-TERM STRATEGIC PLAN COULD IMPAIR OUR BUSINESS.
The Company historically has sought to increase its sales and profitability primarily through the acquisition or internal development of new product lines, additional customers and new businesses. Our historical revenue
growth is primarily attributable to our acquisitions and new product development and, to a lesser extent, to increased revenues from our existing products. In the quarter ended December 31, 2003, we adopted a fundamental shift in strategy to focus our time, effort and financial resources on our core strengths as an assay company. We have built a strategic plan to continue to penetrate and increase our market share in the cytokine assay market and continue to maintain a strong leadership position in the Phospho ELISA assay market. This strategy will focus our energies on these high margin products and allow us to pull through our complimentary product lines, including our Phospho Site Specific Antibodies, or PSSA's, sera and media and our custom products, peptides, antibodies and oligonucleotides.
Our ability to achieve our new strategic objectives depends upon a variety of factors, including:
o the market's continuing acceptance of our assay products; o our ability to internally develop new products; o our ability to acquire products or licenses to necessary technologies; o our ability to facilitate transactions with strategic partners; o establishment of new relationships or expansion of existing relationships with customers and suppliers; and o availability of capital.
Additionally, our shift in strategy has caused us to evaluate other non-strategic products, such as outsourced cell surface marker antibodies and discontinue them. The Company reviewed its catalog of products and eliminated over 400 non-strategic products. Accordingly, in the fourth quarter of 2003, approximately $250,000 of catalog products were discontinued and $1 million of inventoried products were evaluated and scrapped or fully reserved. This evaluation of catalog products is expected to continue in the future. While the impact to our financial results from our continuing evaluation of catalog products is unknown at this time, any such evaluation could be material to the operating results of the Company.
If our management is unable to manage this strategic shift effectively, our operating results could be adversely affected. Moreover, there can be no assurance that our historic rate of growth will continue through this strategic shift, that we will continue to successfully expand or that growth or expansion will result in profitability.
WE CANNOT GUARANTEE THAT OUR FUTURE ACQUISITIONS WILL BE SUCCESSFUL.
The Company competes for acquisition and expansion opportunities with companies which have significantly greater financial and management resources than us. There can be no assurance that suitable acquisition or investment opportunities will be identified, that any of these transactions can be consummated, or that, if acquired, these new businesses can be integrated successfully and profitably into our operations. These acquisitions and investments may also require a significant allocation of resources, which will reduce our ability to focus on the other portions of our business, including many of the factors listed in the prior risk factor.
REDUCTION OR DELAYS IN RESEARCH AND DEVELOPMENT BUDGETS AND IN GOVERNMENT FUNDING MAY NEGATIVELY IMPACT OUR SALES.
Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to numerous factors that are outside our control and are difficult to predict, including changes in available resources, spending priorities and institutional budgetary policies. Our business could be seriously damaged by any significant decrease in life sciences research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.
A significant portion of our sales has been to researchers, universities, government laboratories and private foundations whose funding is dependent upon grants from government agencies such as the U.S. National Institutes of Health and similar domestic and international agencies. Although the level of research funding has increased during the past several years, we cannot assure that this trend will continue. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Our revenues may be adversely affected if our customers delay purchases as a result of uncertainties surrounding the
approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities. A reduction in government funding for the NIH or other government research agencies could seriously damage our business.
Many of our customers receive funds from approved grants at particular times of the year, as determined by the federal government. Grants have, in the past, been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds affects the timing of purchase decisions by our customers and, as a result, can cause fluctuations in our sales and operating results.
WE RELY ON RAW MATERIALS AND SPECIALIZED EQUIPMENT FOR OUR MANUFACTURING, WHICH WE MAY NOT ALWAYS BE ABLE TO OBTAIN ON FAVORABLE TERMS.
Our manufacturing process relies on the continued availability of high-quality raw materials and specialized equipment. It is possible that a change in vendors, or in the quality of the raw materials supplied to us, could have an adverse impact on our manufacturing process and, ultimately, on the sale of our finished products. We have from time to time experienced a disruption in the quality or availability of key raw materials, which has created minor delays in our ability to fill orders for specific test kits. This could occur again in the future, resulting in significant delays, and could have a detrimental impact on the sale of our products and our results of operations. In addition, we rely on highly specialized manufacturing equipment that if damaged or disabled could adversely affect our ability to manufacture our products and therefore negatively impact our business. We rely on the timely transport of raw materials. Any disruption in transportation systems could have an adverse impact on our ability to manufacture and supply products.
OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO EXPAND OUR BUSINESS OR OTHERWISE ACHIEVE OUR LONG-TERM OBJECTIVES IS UNCERTAIN.
In the future, in order to expand our business through internal development or acquisitions or to otherwise achieve our long-term objectives, we may need to raise substantial additional funds through equity or debt financings, research and development financings or collaborative relationships. However, this additional funding may not be available or, if available, it may not be available on economically reasonable terms. In addition, any additional funding may result in significant dilution to existing stockholders. If adequate funds are not available, we may be required to curtail our operations or obtain funds through collaborative partners that may require us to release material rights to our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS FOR NEW PRODUCTS MAY BE UNSUCCESSFUL.
We incur significant research and development expenses to develop new products and technologies. There can be no assurance that any of these products or technologies will be successfully developed or that if developed, will be commercially successful. In the event that we are unable to develop commercialized products from our research and development efforts or we are unable or unwilling to allocate amounts beyond our currently anticipated research and development investment, we could lose our entire investment in these new products and technologies. Any failure to translate research and development expenditures into successful new product introductions could have an adverse effect on our business.
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT.
Our business model of providing products to researchers working on a variety of genetic projects requires us to develop a wide spectrum of products. To generate broad product lines it is advantageous to sometimes license technologies from others rather than depending exclusively on our own employees. As a result, we believe our ability to license new technologies from third parties is and will continue to be important to our ability to offer new products.
In addition, from time to time we are notified or become aware of patents held by third parties that are related to technologies we are selling or may sell in the future. After a review of these patents, we may decide to obtain a
license for these technologies from these third parties or discontinue the products. There can be no assurance that we will be able to continue to successfully identify new technologies developed by others. Even if we are able to identify new technologies of interest, we may not be able to negotiate a license on favorable terms, or at all. If we lose the rights to patented technology, we may need to discontinue selling certain products or redesign our products, and we may lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share for certain products. Our licenses typically subject us to various commercialization, sublicensing, minimum payment, and other obligations. If we fail to comply with these requirements, we could lose important rights under a license. In addition, certain rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent. We do not always receive significant indemnification from a licensor against third party claims of intellectual property infringement.
We are currently in the process of negotiating several of these licenses and expect that we will also negotiate these types of licenses in the future. There can be no assurances that we will be able to negotiate these licenses on favorable terms, or at all.
OUR FUTURE SUCCESS DEPENDS ON THE TIMELY INTRODUCTION OF NEW PRODUCTS AND THE ACCEPTANCE OF THESE NEW PRODUCTS IN THE MARKETPLACE.
Our ability to gain access to technologies needed for new products and services also depends in part on our ability to convince licensors that we can successfully commercialize their inventions. We cannot assure that we will be able to continue to identify new technologies developed by others. Even if we are able to identify new technologies of interest, we may not be able to negotiate a license on favorable terms, or at all.
IF WE FAIL TO INTRODUCE NEW PRODUCTS, OR OUR NEW PRODUCTS ARE NOT ACCEPTED BY POTENTIAL CUSTOMERS, WE MAY LOSE MARKET SHARE.
Rapid technological change and frequent new product introductions are typical for the markets we serve. Our future success will depend in part on continuous, timely development and introduction of new products that address evolving market requirements. We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and then are reluctant to switch. To the extent we fail to introduce new and innovative products, we may lose market share to our competitors, which will be difficult or impossible to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could reduce our growth rate or damage our business.
In the past we have experienced, and are likely to experience in the future, delays in the development and introduction of products. We cannot assure that we will keep pace with the rapid rate of change in life sciences research or that our new products will adequately meet the requirements of the marketplace or achieve market acceptance. Some of the factors affecting market acceptance of new products include:
o availability, quality and price relative to competitive products;
o the timing of introduction of the product relative to competitive products;
o customers' opinion of the products utility;
o ease of use;
o consistency with prior practices;
o scientists' opinion of the product's usefulness;
o citation of the product in published research; and
o general trends in life sciences research.
The expenses or losses associated with unsuccessful product development activities or lack of market acceptance of our new products could materially adversely affect our business, operating results and financial condition.
The development, introduction and marketing of innovative products in our rapidly evolving markets will require significant sustained investment. We cannot assure their cash from operations or other sources will be sufficient to meet these ongoing requirements.
FAILURE TO ATTRACT AND RETAIN QUALIFIED SCIENTIFIC OR PRODUCTION PERSONNEL OR LOSS OF KEY MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS.
Recruiting and retaining qualified scientific and production personnel to perform research and development work and product manufacturing are critical to our success. Because the industry in which we compete is very competitive, we face significant challenges attracting and retaining this qualified personnel base. Although we believe we have been and will be able to attract and retain these personnel, there can be no assurance that we will be able to continue to successfully attract qualified personnel. In addition, our anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, government approvals, production and marketing, will require the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to attract and retain these personnel or, alternatively, to develop this expertise internally would adversely affect our business. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time.
Our success also will continue to depend to a significant extent on the members of our management team. We do not maintain any "key man" insurance policies regarding any of these individuals. We may not be able to retain the services of our executive officers and key personnel or attract additional qualified members to management in the future. The loss of services of our key management or employees could have a material adverse effect upon our business.
MANY OF OUR CUSTOMERS ARE OBTAINING OUR PRODUCTS THROUGH NEW DISTRIBUTION CHANNELS AND METHODS THAT MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
A number of our customers have developed purchasing initiatives to reduce the number of vendors they purchase from in order to lower their supply costs. In some cases, these customers have established agreements with large distributors which include discounts and the distributors' direct involvement with the purchasing process. For similar reasons, many larger customers, including the federal government, have special pricing arrangements, including blanket purchase agreements. These agreements may limit our pricing flexibility with respect to our products, which could adversely impact our business, financial condition and results of operations. In addition, although we accept and process some orders through our Internet website, we also implement sales through a third party Internet vendor. Internet sales through third parties will negatively impact our gross margins because we pay commission on these Internet sales. On the other hand, if we do not enter into arrangements with third-party e-commerce providers, we may lose customers who prefer to purchase products using these Web sites. Our business may be harmed as a result of these Web sites or other sales methods which may be developed in the future.
WE RELY ON AIR TRANSPORT TO SHIP PRODUCTS TO OUR CUSTOMERS
Any disruption in standard air transport systems could have an adverse effect on our business.
WE RELY ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL RISKS.
International sales accounted for approximately 46% of our revenues in 2003, 41% of our revenues in 2002, and 40% of our revenues in 2001. International sales can be subject to many inherent risks that are difficult or impossible for us to predict or control, including:
o unexpected changes in regulatory requirements and tariffs;
o difficulties and costs associated with in staffing and managing foreign operations, including foreign distributor relationships;
o longer accounts receivable collection cycles in certain foreign countries; adverse economic or political changes;
o unexpected changes in regulatory requirements;
o more limited protection for intellectual property in some countries;
o changes in our international distribution network and direct sales force;
o potential trade restrictions, exchange controls and import and export licensing requirements;
o problems in collecting accounts receivable; and
o potentially adverse tax consequences of overlapping tax structure.
IMPAIRMENT OF THE ABILITY TO TRANSPORT GOODS INTERNATIONALLY.
We intend to continue to generate revenues from sales outside North America in the future. Future distribution of our products outside North America also may be subject to greater governmental regulation. These regulations, which include requirements for approvals or clearance to market, additional time required for regulatory review and sanctions imposed for violations, as well as the other risks indicated in the bullets listed above, vary by country. We may not be able to obtain regulatory approvals in the countries in which we currently sell our products or in countries where we may sell our products in the future. In addition, we may be required to incur significant costs in obtaining necessary regulatory approvals. Failure to obtain necessary regulatory approvals or any other failure to comply with regulatory requirements could result in a material reduction in our revenues and earnings.
We also depend on third-party distributors for a material portion of our international sales. If we lose or suffer any significant reduction in sales to any material distributor, our business could be materially adversely affected.
In addition, approximately 31% of our sales are made in foreign currencies, primarily Euros and British pounds. A significant portion of the foreign currencies in which we conduct our business is currently denominated in Euros. The Company is not certain about the effect of the Euro on our business, financial condition or results of operations. In the past, gains and losses on the collection of our accounts receivable arising from international operations have contributed to negative fluctuations in our results of operations. In general, increases in the exchange rate of the United States dollar to foreign currencies cause our products to become relatively more expensive to customers in those countries, leading to a reduction in sales or profitability in some cases. We historically have not, and currently are not, using hedging transactions or other means to reduce our exposure to fluctuations in the value of the United States dollar as compared to the foreign currencies in which many of our sales are made.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our operating results may vary significantly quarter to quarter and from year to year as a result of a variety of factors. These factors include:
o level of demand for our products;
o changes in our customer and product mix;
o timing of acquisitions and investments in infrastructure;
o competitive conditions;
o timing and extent of intellectual property litigation;
o exchange rate fluctuations; and
o general economic and political conditions.
We believe that quarterly comparisons of our financial results may not necessarily be meaningful and should not be relied upon as an indication of future performance. Additionally, if our operating results in one or more quarters do not meet the expectations of security analysts or others, the price of our common stock could be materially adversely affected.
Our continued investment in product development and sales and marketing are significantly ongoing expenses. If revenue in a particular period falls short of expectations, we may not be able to reduce significantly our expenditures for that period, which would materially adversely affect the operating results for that period.
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS.
We regard our trademarks, trade secrets and other intellectual property as a component of our success. We rely on trademark law and trade secret protection and confidentiality and/or license agreements with employees, customers, partners and others to protect our intellectual property. Effective trademark and trade secret protection may not be available in every country in which our products are available. We cannot be certain that we have taken adequate steps to protect our intellectual property, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, our third-party confidentiality agreements can be breached and, if they are, there may not be an adequate remedy available to us. If our trade secrets become known, we may lose our competitive position.
INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS.
Litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. We are aware that patents have been applied for, and in some cases issued to others, claiming technologies that are closely related to ours. As a result, and in part due to the ambiguities and evolving nature of intellectual property law, we periodically receive notices of potential infringement of patents held by others. Although to date we have successfully resolved these types of claims, we may not be able to do so in the future.
In the event of an intellectual property dispute, we may be forced to litigate. This litigation could involve proceedings declared by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our products and processes, pay license fees or cease our affected business activities. Although we might under these circumstances attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or at all.
In addition to intellectual property litigation, other substantial, complex or extended litigation could result in large expenditures by us and distraction of our management. For example, lawsuits by employees, stockholders, collaborators or distributors could be very costly and substantially disrupt our business. Disputes from time to time with companies or individuals are not uncommon in our industry, and we cannot assure you that we will always be able to resolve them out of court.
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous and radioactive materials. Although we believe our safety procedures comply with the standards prescribed by federal, state, local and foreign regulations, the risk of accidental contamination of property or injury to individuals from these materials cannot be completely eliminated. In the event of an accident, we could be liable for any damages that result, which could seriously damage our business and results of operations.
OUR SALES ARE SUBJECT TO SEASONALITY, WHICH MEANS THAT WE HAVE LESS REVENUE IN SOME MONTHS.
We experience a slowing of sales in Europe during the summer months and worldwide during the Christmas holidays. Generally, our fourth quarter revenues are lower than our revenues in each of the first three quarters of the year. We believe that period to period comparisons of our operating results may not necessarily be reliable indicators of our future performance. It is likely that in some future period our operating results will not meet expectations or those of public market analysts, which could result in reductions in the market price of our common stock.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL CONDITION.
We face a potential risk of liability claims based on our products and services, and we have faced such claims in the past. We carry product liability insurance coverage which is limited in scope and amount but which we believe to be adequate. We cannot assure you, however, that we will be able to maintain this insurance at reasonable cost and on reasonable terms. We also cannot assure that this insurance will be adequate to protect us against a product liability claim, should one arise.
THE LABOR LAWS APPLICABLE TO OUR EMPLOYEES IN EUROPE MAY RESTRICT THE FLEXIBILITY OF OUR MANAGEMENT.
As of March 1, 2004, 61 of our 271 employees worked for our BioSource Europe subsidiary, which is located in Nivelles, Belgium. As a result of Belgian labor laws, we are required to make specified severance payments in the event we terminate a European employee. Accordingly, our management may be limited by the application of the Belgian labor laws in the determination of staffing levels, and may have less flexibility in making such determinations than our competitors whose employees are not subject to similar labor laws.
RISKS ASSOCIATED WITH OUR INDUSTRY
THE BIOMEDICAL RESEARCH PRODUCTS INDUSTRY IS VERY COMPETITIVE, AND WE MAY BE UNABLE TO CONTINUE TO COMPETE EFFECTIVELY IN THIS INDUSTRY IN THE FUTURE.
We are engaged in a segment of the biomedical research products industry that is highly competitive. We compete with many other suppliers and new competitors continue to enter the markets. Many of our competitors, both in the United States and elsewhere, are major pharmaceutical, chemical and biotechnology companies, and many of them have substantially greater capital resources, marketing experience, research and development staffs, and facilities than we do. Any of these companies could succeed in developing products that are more effective than the products that we have or may develop and may also be more successful than us in producing and marketing their products. We expect this competition to continue and intensify in the future. Competition in our markets is primarily driven by:
o product performance, features and liability;
o price;
o timing of product introductions;
o ability to develop, maintain and protect proprietary products and technologies;
o sales and distribution capabilities;
o technical support and service;
o brand royalty;
o applications support; and
o breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be materially adversely affected.
Our competitors have in the past and may in the future compete by lowering prices. Our failure to anticipate and respond to price competition could reduce our revenues and profits, and may damage our market share.
Our industry has also seen substantial consolidation in recent years, which has led to the creation of competitors with greater financial and intellectual property resources than us. In addition, we believe that the success that others have had in our industry will attract new competitors. Some of our current and future competitors also may cooperate to better compete against us. We may not be able to compete effectively against these current or future competitors. Increased competition could result in price reductions for our products, reduced margins and loss of market share, any of which could adversely impact our business, financial condition and results of operations.
AS A RESULT OF CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY, WE MAY LOSE EXISTING CUSTOMERS OR HAVE GREATER DIFFICULTY OBTAINING NEW CUSTOMERS.
In recent years, the United States pharmaceutical industry has undergone substantial consolidation. As part of many business combinations, companies frequently reduce the number of suppliers used and we may not be selected as a supplier after any business combination. Further, mergers or corporate consolidations in the pharmaceutical industry could cause us to lose existing customers and potential future customers, which could have a material adverse effect on our business, financial condition and results of operations.
WE ARE CURRENTLY SUBJECT TO GOVERNMENT REGULATION.
Our business is currently subject to regulation, supervision and licensing by federal, state and local governmental authorities. Also, from time to time we must expend resources to comply with newly adopted regulations, as well as changes in existing regulations. If we fail to comply with these regulations, we could be subject to disciplinary actions or administrative enforcement actions. These actions could result in penalties, including fines.
RISKS ASSOCIATED WITH OUR COMMON STOCK
OUR STOCK PRICE HAS BEEN VOLATILE.
Our common stock is quoted on the NASDAQ National Market, and there has been substantial volatility in the market price of our common stock. The trading price of our common stock has been, and is likely to continue to be, subject to significant fluctuations due to a variety of factors, including:
o fluctuations in our quarterly operating and earnings per share results;
o the gain or loss of significant contracts;
o loss of key personnel;
o announcements of technological innovations or new products by us or our competitors;
o delays in the development and introduction of new products;
o legislative or regulatory changes;
o general trends in the industry;
o recommendations and/or changes in estimates by equity and market research analysts;
o biological or medical discoveries;
o disputes and/or developments concerning intellectual property, including patents and litigation matters;
o public concern as to the safety of new technologies;
o sales of common stock of existing holders;
o securities class action or other litigation;
o developments in our relationships with current or future customers and suppliers; and
o general economic conditions, both in the United States and abroad.
As a result of these factors, and potentially others, the sales price of our common stock has ranged from $4.89 to $13.69 per share from January 1, 2001 through March 15, 2004 and from $6.40 to $8.09 per share from January 1, 2004 through March 15, 2004. For additional information regarding the price range of our common stock, see "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters."
In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our common stock, as well as the stock of many biotechnology companies. Often, price fluctuations are unrelated to operating performance of the specific companies whose stock is affected.
In the past, following periods of volatility in the market price of a company's stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and a diversion of our management's attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities.
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND UNDER APPLICABLE LAW COULD IMPAIR THE ABILITY OF A THIRD PARTY TO TAKE OVER OUR COMPANY.
We are subject to various legal and contractual provisions that may impede a change in our control, including the following:
o our adoption of a stockholders' rights plan, which could result in the significant dilution of the proportionate ownership of any person that engages in an unsolicited attempt to take over our company; and
o the ability of our board of directors to issue additional shares of our preferred stock, which shares may be given superior voting, liquidation, distribution and other rights as compared to our common stock.
These provisions, as well as other provisions in our certificate of incorporation and bylaws and under the Delaware General Corporations Law, may make it more difficult for a third party to acquire our company, even if the acquisition attempt was at a premium over the market value of our common stock at that time.
Our principal stockholders and management own a significant percentage of our capital stock and will be able to exercise significant influence over our affairs. Our executive officers, directors and principal stockholders will continue to beneficially own 33.5% of our outstanding common stock, based upon the beneficial ownership of our common stock as of March 15, 2004. In addition, these same persons also hold options to acquire additional
shares of our common stock, which may increase their percentage ownership of the common stock further in the future. Accordingly, these stockholders:
o will be able to significantly influence the composition of our board of directors;
o will significantly influence all matters requiring stockholder approval, including change of control transactions; and
o will continue to have significant influence over our business.
This concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging a potential acquirer from attempting to obtain control of us. This in turn could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS.
Our executive officers, directors and principal stockholders beneficially own approximately 33.5% of our outstanding common stock, based upon the beneficial ownership of our common stock as of March 15, 2004. As a result, these stockholders, if they act together, could exert substantial influence over matters requiring stockholder approval, including the election of directors and approval of mergers and other significant corporate transactions. The voting power of such persons may have the effect of delaying, preventing or deterring a change in control, and could affect the market price of our common stock.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.
Some investors favor companies that pay dividends, particularly in general downturns in the stock market. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, the return on this investment likely depends on selling this stock at a profit.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We conduct business in various foreign currencies, including Euros and British pounds, 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 dates that they are converted. We are also subject to exchange rate exposures arising from the translation and consolidation of the financial results of our foreign subsidiaries. Although a significant portion of the foreign currencies in which we conduct our business is currently, or is anticipated in the future to be, denominated in Euros as a result of the European Monetary Union, we are not certain about the effect of the Euro on our business, financial condition or results of operations. We do not currently hedge either our translation risk or our economic risk associated with the exchange of foreign currencies into U.S. dollars. There can be no assurances that future changes in currency exchange rates will not have a material impact on our future cash collections and operating results.
Our exposure to market risks for changes in interest rates relates primarily to outstanding commercial debt. Due to the pay down of our commercial debt, we anticipate no material market risk exposure for changes in interest rates. Accordingly, we have not included quantitative tabular disclosures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ----
Independent Auditors' Report..............................................
Consolidated Balance Sheets at December 31, 2003 and December 31, 2002......................................................
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001.................................
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001.......................................
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.................................
Notes to Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 ......................................
Financial Statement Schedule--Valuation and Qualifying Account ...........
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, the end of the period covered by this report, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported by our management on a timely basis and to ensure that the quality and timeliness of our public disclosures complies with its Securities and Exchange Commission disclosure obligations.
As of December 31, 2003, there have been no material changes in our internal controls or in other factors that could materially affect internal controls.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION WITH RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors, executive officers and key employees as of March 15, 2004:
NAME AGE POSITION - ---- --- -------- Terrance J. Bieker 58 President and Chief Executive Officer, Director
Charles C. Best 44 Chief Financial Officer, Executive Vice President, Finance
Kevin J. Reagan, Ph.D. 52 Executive Vice President, Technical Operations
Jozef Vangenechten, Ph.D. 49 General Manager, BioSource Europe, S.A.
Rocco R. Raduazo 44 Vice President of Sales
Valerie Bressler-Hill 39 Vice President of Marketing
Jean-Pierre L. Conte* 40 Director
David J. Moffa, Ph.D.* ** 61 Director
John R. Overturf, Jr.** 43 Director
Robert J. Weltman 38 Director
John L. Zabriskie, Ph.D.* ** 64 Director - ---------- * Member of the Compensation Committee. ** Member of the Audit Committee.
Terrance J. Bieker, President and Chief Executive Officer, joined BioSource on November 1, 2003. From April 2003 to October 2003, Mr. Bieker served as Chief Executive Officer of Axya Medical, Inc. a medical devise company engaged in the sales of orthopedic surgical devices. From 2000 through 2002, Mr. Bieker served as President and Chief Executive Officer of MedSafe, Inc. a medical regulatory consulting company. Mr. Bieker was President and CEO of Transfusion Technologies Corporation, a medical device company from 1999 to 2000. From 1997 to 1999, Mr. Bieker served as Executive Vice President and Chief Operating Officer of Safeskin Corporation, a manufacturer of disposable gloveware. From 1989 to 1997, Mr. Bieker served as Chairman, CEO and President of Sanofi Diagnostics Pasteur, Inc., a clinical diagnostic division of Sanofi, SA, a French pharmaceutical and healthcare company. Prior to these appointments, Mr. Bieker served as General Manager of Genetic Systems Corporation. His early career was with various divisions of American Hospital Supply Corporation. Mr. Bieker holds a B.S. degree in Economics from the University of Minnesota.
Charles C. Best joined BioSource in December 1999 as Chief Financial Officer. Prior to his employment at BioSource, Mr. Best served four and a half years as Vice President and Chief Financial Officer of Cogent Light Technologies, Inc., a company engaged in the manufacture of surgical lighting instruments. From 1989 to 1995, Mr. Best worked in various positions including Corporate Controller for 3D Systems, Inc., a company engaged in the manufacture and sale of high tech rapid prototyping equipment. Mr. Best is a CPA and holds a Bachelor of Science degree in Business Administration and Accounting from San Diego State University.
Kevin J. Reagan, Ph.D. became Executive Vice President of Technical Operations in February of 2004 and was Vice President, Immunology from December 1996 through January 2004. From 1991 to December 1996, Dr. Reagan served as the first Director of Development Laboratories and then Vice President, Laboratory Operations at Specialty Laboratories, Inc., a clinical reference lab. From 1990 to 1991, Dr. Reagan was the Associate Director of AIDS/Hepatitis R&D at Ortho Diagnostics, Inc., a Johnson & Johnson Company. Dr. Reagan received his Bachelor of Arts in Biological Sciences from the University of Delaware. Dr. Reagan received both his Masters and Ph.D. degrees in Microbiology and Immunology from Hahnemann Medical College.
Jozef Vangenechten, Ph.D. became Managing Director of BioSource Europe, S.A. from February 1998. From 1988 to February 1998, Dr. Vangenechten worked for Societe Generale de Surveillance, n.v., an international provider of environmental compliance services, most recently as Managing Director of SGS's EcoCare Environmental Services division.
Rocco R. Raduazo joined BioSource in December 2002 as Vice President of Sales. From 1996 up to his employment at BioSource, Mr. Raduazo served in a number of positions at BD Biosciences Clontech including Vice President of Sales. BD Biosciences Clontech is a company engaged in the manufacture of genomic based products. From 1990 to 1995, Mr. Raduazo worked in various positions at Life Technologies, Inc., a company engaged in the manufacture and sale of biological reagents. Mr. Raduazo holds a Bachelor of Science degree in Biochemsitry from the University of New Hampshire, performed various graduate work at Ohio State University and holds an MBA in Finance from the American University.
Valerie Bressler-Hill, Ph.D. became Vice President, Marketing in January 2000, having served as Director of Marketing since 1999. From 1994 to 1998, Dr. Bressler-Hill served in the Research and Development group of the Company as a scientist and Associate Director. Dr. Bressler-Hill received her Ph.D. degree in Physical Chemistry from University of California at Santa Barbara.
Jean-Pierre L. Conte has served as a director of BioSource since February 2000. Mr. Conte is a Managing Director of Genstar Capital LLC, which is the sole general partner of Genstar Capital Partners II, L.P.; a private equity limited partnership and Chairman and Managing Director of Genstar Capital, L.P. which is the sole general partner of Genstar Capital Partners III L.P. Prior to joining Genstar in 1995, he was a principal for six years at the NTC Group, Inc., a private equity investment firm. Mr. Conte is currently a director of several private companies and is also a Director of North American Energy Partners, Inc. Mr. Conte earned a Masters of Business Administration from Harvard University Graduate School of Business and a Bachelor of Arts from Colgate University.
David J. Moffa, Ph.D. has been a director of BioSource since April 1995. Dr. Moffa serves as the Regional Director and as Special Projects Director for Lab Corporation of America, Inc. located in Fairmont, West Virginia, positions he has held since 1982 and 1984, respectively, and as director of LabCorp in Pittsburgh Pennsylvania, a position held since 1985. Dr. Moffa serves as Chairman of ClinServices, LLC and as an advisor and consultant to various diagnostic, scientific and health care facilities. Dr. Moffa also serves on a number of committees and boards of directors of various privately held companies and governmental offices, including BB&T, Inc. He was past owner and CEO of BioPreps Laboratories, Inc. Dr. Moffa has completed a post doctoral fellowship in Clinical Biochemistry at the West Virginia University National Institutes of Health, holds a Ph.D. in Medical Biochemistry from the West Virginia School of Medicine, a Masters of Science degree in Biochemistry from West Virginia University and a Bachelor of Arts degree in Pre-Medicine from West Virginia University.
John R. Overturf, Jr. has been a director of BioSource since September 1993. Mr. Overturf serves as the President of R.O.I., Inc., a private investment company, a position he has held since July 1993. He also serves as President of the Combined Penny Stock Fund, Inc., a closed-end stock market fund, a position he has held since August 1996. From September 1993 until September 1996, Mr. Overturf served as Vice President of the Rockies Fund, Inc., a closed-end stock market fund. Mr. Overturf holds a Bachelor of Science degree in Finance from the University of Northern Colorado.
Robert J. Weltman has served as a director of BioSource since February 2000. He is currently a Managing Director of Genstar Capital, LP, the sole general partner of Genstar Capital Partners II, L.P., a private equity
limited partnership. Mr. Weltman joined Genstar in August 1995. Prior to joining Genstar, from July 1993 to July 1995, Mr. Weltman was an Associate with Robertson, Stephens & Company, an investment banking firm. Mr. Weltman holds an A.B. degree in chemistry from Princeton University. Mr. Weltman has been appointed to the Board of Directors pursuant to an investor rights agreement among Genstar, Stargen and the Company, which is described under "Item 13. Certain Relationships and Related Transactions."
John L. Zabriskie, Ph.D., is Co-founder and has served as Director of Puretech Ventures, a venture creation company since 2001. From 1997 to 2000 Dr. Zabriskie was Chairman and Chief Executive Officer of NEN Life Science Products, Inc., a leading supplier of kits for labeling and detection of DNA. From 1995 to 1997, Dr. Zabriskie was President and Chief Executive Officer of Pharmacia and Upjohn, Inc., a Fortune 500 pharmaceutical company formed by the merger of Pharmacia AB of Sweden and the Upjohn Company of Kalamazoo, Michigan. From 1965 until joining Upjohn in 1994, Dr. Zabriskie was employed by Merck and Co., Inc. He began his career at Merck as a chemist in 1965 and held various positions including President of Merck Sharp & Dohme and Executive Vice President of Merck and Co., Inc. He has served on a number of boards for health care and academic institutions and currently serves on the Board of Directors of Kellogg Co., Array BioPharma, and MacroChem Corp. Dr. Zabriskie received his A.B. degree in chemistry from Dartmouth College (N.H.) in 1961 and his Ph.D. in organic chemistry from the University of Rochester (N.Y.) in 1965.
CODE OF ETHICAL CONDUCT
Our Board of Directors recently adopted a Code of Ethical Conduct (the "Code of Conduct"). We require all employees, directors and officers, including our Chief Executive Officer and Chief Financial Officer, to adhere to the Code of Conduct in addressing legal and ethical issues encountered in conducting their work. The Code of Conduct requires that these individuals avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest. The Code of Conduct contains additional provisions that apply specifically to our Chief Financial Officer and other financial officers with respect to full and accurate reporting. The Code of Conduct is available on our website at www.biosource.com.
IDENTIFICATION OF AUDIT COMMITTEE
Our Board of Directors has a separately standing Audit Committee. The Audit Committee currently consists of Messrs. David J. Moffa, PhD., John R. Overturf, Jr., and John L. Zabriskie, PhD. Mr. Overturf serves as Chairman of the Committee. Messrs. Moffa, Overturf and Zabriskie are "independent directors" within the meaning of Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended, and the NASDAQ Marketplace Rules. The Audit Committee's primary duties and responsibilities include appointment of the independent auditors, evaluation of the performance and independence of such auditors and review of the annual audited financial statements and the quarterly financial statements, as well as the adequacy of our internal controls.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that each of the members of its separately standing Audit Committee, Messrs. Moffa, Overturf and Zabriskie, are an "audit committee financial expert" as defined in Item 401(h) of Regulation S-K. Messrs. Moffa, Overturf and Zabriskie are "independent" for purposes of Rule 4200(a)(15) of the Nasdaq Marketplace Rules.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE -
Section 16(a) of the Securities Exchange Act of 1934, requires our executive officers, directors, and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. Based solely on our review of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the year ended December 31, 2003, all our executive officers, directors and greater-than-ten percent stockholders
complied with all Section 16(a) filing requirements, except for the following; Robert D. Weist filed two late Form 4s, each reporting late one transaction that occurred in November 2002 and December 2002, respectively; and each of John R. Overturf, Jr., David J. Moffa, Jean-Pierre L. Conte, and Robert J. Weltman filed one late Form 4, each reporting late one transaction that occurred for each in December 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as to each of the other four most highly compensated executive officers who were serving as executive officers at the end of the last fiscal year and whose compensation exceeded $100,000 during the last fiscal year (the "Named Executive Officers"), information concerning all compensation paid for services to us in all capacities for each of the three years ended December 31 indicated below.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding the grant of stock options made during the fiscal year ended December 31, 2003 to the Named Executive Officers.
OPTION EXERCISES AND STOCK OPTIONS HELD AT FISCAL YEAR END
The following table sets forth, for those Named Executive Officers who held stock options at fiscal year end, certain information regarding options exercised in fiscal year 2003, the number of shares of common stock underlying stock options held and the value of options held at fiscal year end based upon the last reported sales price of the common stock on the NASDAQ market on December 31, 2003 ($6.77 per share).
COMPENSATION OF DIRECTORS
Our non-employee corporate directors currently are paid $2,000 for each board meeting attended, and $1,000 per year for service on a board committee. We also pay out of pocket expenses incurred by our directors in connection with their attendance. In addition, non-employee directors, excluding Dr. Zabriskie, have received an annual grant of 4,000 non-statutory stock options, exercisable at the fair market value of our common stock on the date of grant, and which fully vest on the date of grant. Dr. Zabriskie, who was appointed as a board member in July 2002, received a grant of 55,000 stock options on July 17, 2002 of which 20,000 vested immediately and 50% of the remaining 35,000 shares vest annually over the next two year period.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
We have entered into an executive employment agreement with Terrance J. Bieker to serve as our President and Chief Executive Officer, effective as of November 1, 2003. Pursuant to this agreement, Mr. Bieker receives an annual base salary of $275,000, which the Board may increase at the end of each year of his employment. In addition to the base salary to be paid to Mr. Bieker, the Company paid Mr. Bieker a one time signing bonus in the amount of $90,000, upon commencement of his employment. In addition, Mr. Bieker received a one time payment of $235,000 the intent of which was to be applied to the costs and expenses incurred by him in connection with his relocation to California. Mr. Bieker is also eligible to receive an annual bonus under the Company's management incentive plan to be agreed upon between Mr. Bieker and the Board on an annual basis. The management incentive plan will provide for the payment of a bonus equal to fifty percent (50%) of Mr. Bieker's then-current base salary upon achieving specified target objectives set forth in the management incentive plan, and payments of such lesser or greater amounts upon achieving results less than or greater than the specified target objectives as shall be contained in the management incentive plan. The agreement terminates on December 31, 2007. In the event that Mr. Bieker's employment is terminated without cause during the term of the agreement, the Company is obligated to continue to pay Mr. Bieker's then-current base salary for a period of 12 months following the effective date of such termination. In connection with his employment, Mr. Bieker was also granted stock options to purchase 285,000 shares of Common Stock of the Company at an exercise price equal to the fair market value of the Company's Common Stock on the date of grant, or $7.18 per share. In certain instances involving a "change of control," all stock options which have been granted to Mr. Bieker that are unvested at the time of such change of control become immediately vested and exercisable. A "change of control," as defined in our 2000 Non-Qualified Stock Option Plan, which governs Mr. Bieker's stock option grant, means (i) the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned, directly or indirectly, by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; or (ii) the sale, transfer or other disposition of all or substantially all of the Company's assets.
We entered into an employment agreement with Leonard M. Hendrickson to serve as our President and Chief Executive Officer, effective as of October 15, 2001. Pursuant to that agreement Mr. Hendrickson received an annual base salary of $250,000. In addition to the base salary paid to Mr. Hendrickson, the Company paid Mr. Hendrickson a one time signing bonus in the amount of $90,000, upon commencement of his employment. In addition, Mr. Hendrickson was eligible to receive annual bonuses under the Company's management incentive plan. The agreement was intended to terminate on December 31, 2004. In connection with Mr. Hendrickson's indefinite medical disability leave of absence in September 2003, we entered into a Separation and Release Agreement with him which is dated as of September 29, 2003 (the "Separation Agreement"). In connection with entering into the Separation Agreement, Mr. Hendrickson resigned his positions as President and Chief Executive Officer of the Company, and as a member of the Board of Directors, and commenced a disability leave of absence effective as of the date of that agreement and continuing through December 31, 2004 (the "Leave Period"). Additionally, pursuant to the terms of that Separation Agreement, in consideration for a full release of any and all claims Mr. Hendrickson may have had against the Company, from September 29, 2003 through December 31, 2003, the Company continued to pay or otherwise provide to Mr. Hendrickson (i) the difference between his then current base salary and any amount received by him under our disability insurance plans and pursuant to any governmental disability benefits, and (ii) our portion of the health insurance and life insurance benefits previously provided to him, which we will continue to provide through March 31, 2004. The Separation Agreement also provides that, from January 1, 2004 through December 31, 2004, we will pay or otherwise provide to Mr. Hendrickson (i) the difference between sixty percent (60%) of his then current base salary and any amount received by him under our disability insurance plans and pursuant to any governmental disability benefits, and (ii) various other health and life insurance benefits, including portions of any amounts he is permitted to pay through the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), provided, however, although he will be entitled to receive these benefits beyond 2004, Mr. Hendrickson will be required to assume the responsibility for portions, or all, of these payments over the course of 2004 and in 2005, respectively. With respect to any stock options previously granted to Mr. Hendrickson, to the extent they were not fully vested on the date of the Separation Agreement, they continued to vest through December 31, 2003. On December 31, 2003, a "special terminating event," as that term is defined in Mr.
Hendrickson's Stock Option Agreements, was deemed to have occurred with respect to all stock options granted to him, and therefore any stock options previously granted to Mr. Hendrickson, to the extent not fully vested on that date, ceased to vest and became exercisable pursuant to their terms for a period of one year.
Effective as of December 17, 1999, Charles C. Best, our Chief Financial Officer, entered into a separation agreement with us. In the event we experience a "change of control," and the employment of Mr. Best is terminated within one year of the "change of control," we are obligated to continue to pay Mr. Best his then-current base salary for a period of 12 months following the effective date of such termination. For purposes of Mr. Best's separation agreement, a "change of control" includes (i) the acquisition by any person or entity of shares of our capital stock entitled to exercise 35% or more of the total voting power of our stockholders, (ii) the sale or transfer by us of all or substantially all of our assets or a merger, consolidation or reorganization with any other corporation or entity, which results in less than 75% of the total voting power represented by the capital stock or other equity interests of the corporation or entity to which our assets are sold or transferred or surviving such merger, consolidation or reorganization being held by the persons and entities who were holders of our common stock immediately prior to such agreement, (iii) the issuance by us, otherwise than on a pro rata basis, of additional shares of capital stock representing (after giving effect to such issuance) more than 35% of the total voting power of our stockholders, or (iv) the persons who were our directors as of the date of the separation agreement ceasing to comprise a majority of our Board of Directors.
We have also entered into an executive employment agreement with Kevin Reagan to serve as our Executive Vice President - Technical Operations, effective as of February 15, 2004. Dr. Reagan served as our Vice President, Immunology since December 1996. Pursuant to his employment agreement, Dr. Reagan receives an annual base salary of $190,000, which the President may increase at the end of each year of Dr. Reagan's employment. Dr. Reagan is also eligible to receive an annual bonus under the Company's management incentive plan. The management incentive plan will provide for the payment of a bonus equal to thirty percent (30%) of Dr. Reagan's then-current base salary upon achieving specified target objectives set forth in the management incentive plan, and payments of such lesser or greater amounts upon achieving results less than or greater than the specified target objectives as shall be contained in the management incentive plan. The agreement terminates on December 31, 2007. In the event that Dr. Reagan's employment is terminated without cause during the term of the agreement, the Company is obligated to continue to pay Dr. Reagan's then-current base salary for a period of 9 months following the effective date of such termination. In connection with his employment, Dr. Reagan was also granted stock options to purchase 30,000 shares of Common Stock of the Company at an exercise price equal to the fair market value of the Company's Common Stock on the date of grant, or $6.99 per share.
STOCK OPTION PLANS
We adopted a Stock Option Plan (the "1993 Plan") in 1993. The purpose of the 1993 Plan is to attract, retain and motivate certain of our key employees by giving them incentives which are linked directly to increases in the value of our common stock. Each of our officers, directors and employees and under certain circumstances, our consultants are eligible to be considered for the grant of awards under the 1993 Plan. The maximum number of shares of common stock that may be issued pursuant to awards granted under the 1993 Plan is 2,000,000, subject to certain adjustments to prevent dilution. Any shares of common stock subject to an award, which for any reason expires or terminates unexercised are again available for issuance under the 1993 Plan.
The 1993 Plan authorizes the Compensation Committee to enter into any type of arrangement with an eligible employee that, by its terms, involves or might involve the issuance of (1) shares of our common stock, (2) an option, warrant, convertible security, stock appreciation right or similar right with an exercise or conversion privilege at a price related to our common stock, or (3) any other security or benefit with a value derived from the value of our common stock. Any stock option granted may be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or a nonqualified stock option.
As of December 31, 2003, the Board had granted options under the 1993 Plan covering an aggregate of 2,000,000 shares of common stock to certain of our directors, officers and employees, of which options to purchase 677,484 shares were outstanding. On December 31, 2003, the 1993 Plan was terminated in accordance
with its specified terms. Options granted under the 1993 Plan remain outstanding pursuant to the terms of each individual grant. However, the Company will not grant additional stock options under the 1993 Plan.
In January 2000, our Board of Directors approved the 2000 BioSource International, Inc. non-qualified stock option plan (the "2000 Plan"). Under the 2000 Plan, non-qualified stock options may be granted to full-time employees, part-time employees, directors and consultants of the Company to purchase a maximum of 2,000,000 shares of the company's common stock. Options granted under the 2000 Plan are generally exercisable at the rate of 25% each year beginning one year from the date of grant. The stock options generally expire ten years from the date of grant. Stock options outstanding under the 2000 Plan as of December 31, 2003 were 1,421,852. See note 8 of the accompanying audited consolidated financial statements.
The Compensation Committee of our Board of Directors currently administers our stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER TRADING PARTICIPATION
Compensation Committee currently consists of Messrs. Zabriskie, Moffa and Conte. The Compensation Committee is responsible for considering and making recommendations to the Board of Directors regarding executive compensation and is responsible for administrating our stock option and executive incentive compensation plans. None of the members of the compensation committee is a current officer or employee of the Company. None of our executive officers or Directors served as a member of the board of directors of any other entity of which an executive officer or Director served on our Board of Directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 15, 2004 certain information relating to the ownership of our common stock by (i) each person known by us to be the beneficial owner of more than five percent of the outstanding shares of our common stock, (ii) each of our directors, (iii) each of our executive officers, and (iv) all of our executive officers and directors as a group. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each such person has the sole voting and investment power with respect to the shares owned. Unless otherwise indicated, the address of each person listed is in care of BioSource International, Inc., 542 Flynn Road, Camarillo, California 93012, and the address of Messrs. Conte, Weltman and Genstar Capital LLC is Four Embarcadero Center, Suite 1900, San Francisco, California 94111.
NUMBER OF SHARES OF COMMON STOCK BENEFICIALLY NAME AND ADDRESS OWNED (1) PERCENT (1,2) ---------------- ---------------- -------------
Genstar Capital LLC (3) .................... 3,452,856 32.2% Jean-Pierre L. Conte (3) ................... 3,400,189 31.8% Kennedy Capital Management, Inc. (4) ....... 793,228 8.4% Royce & Associates LLC (5) ................. 684,200 7.3% Dimensional Funds Advisors Inc. (6) ........ 513,700 5.5% Leonard M. Hendrickson (7) ................. 291,831 3.0% Charles C. Best (8) ........................ 107,122 * John L. Zabriskie, Ph.D. (9) ............... 52,500 * David J. Moffa, Ph.D. (10) ................. 47,900 * John R. Overturf, Jr. (11) ................. 34,600 * Robert J. Weltman (12) ..................... 19,333 * Terrance J. Bieker (13) .................... 0 * All of the directors and executive officers as a group (seven persons) (13) 3,661,644 33.5%
- ---------- * Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of common stock actually outstanding at March 21, 2000. (2) Percentage ownership is based on 9,402,618 shares of common stock outstanding as of March 15, 2004. (3) Genstar Capital Partners II, L.P. holds 2,032,809 shares of common stock and 1,262,542 shares of common stock issuable upon exercise of warrants and Stargen II LLC holds 34,380 shares of common stock and 24,458 shares of common stock issuable upon exercise of warrants, all of which are currently convertible or exercisable. Includes 16,000 stock options held by Mr. Conte and 16,000 stock options held by Mr. Weltman. In addition, Mr. Conte holds 30,000 shares of common stock, Richard F. Hoskins holds 16,667 shares of common stock, Mr. Weltman holds 3,333 shares of common stock, and Richard D. Paterson holds 16,667 shares of common stock. Genstar Capital LLC is the general partner of Genstar Capital Partners II, L.P. Mr. Conte, Mr. Hoskins and Mr. Paterson are the managers and managing directors of Genstar Capital LLC and are members of Stargen, and Mr. Paterson is the Administrative Member of Stargen. In such capacities Messrs. Conte, Hoskins and Paterson may be deemed to beneficially own shares of common stock beneficially held by Genstar Capital Partners and Stargen, but disclaim such beneficial ownership, except to the extent of their economic interest in these shares. Messrs. Conte, Hoskins, Paterson, Genstar Capital LLC, Genstar Capital Partners II, L.P. and Stargen II LLC may be deemed to be acting as a group in relation to their respective holdings in BioSource but do not affirm the existence of any such group. (4) As disclosed in the Schedule 13G filed with the Securities and Exchange Commission on February 13, 2004 by Kennedy Capital Management, Inc. (5) As disclosed in the Schedule 13G filed with the Securities and Exchange Commission on January 28, 2004 by Royce & Associates LLC. (6) As disclosed in the Schedule 13G filed with the Securities and Exchange Commission on February 6, 2004 by Dimensional Fund Advisors, Inc. (7) Includes 239,831 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004. On December 31, 2003, a "special terminating event," as that term is defined in Mr. Hendrickson's Stock Option Agreements, was deemed to have occurred with respect to all stock options granted to him, and therefore any stock options previously granted to Mr. Hendrickson, to the extent not fully vested on that date, ceased to vest and became exercisable pursuant to their terms for a period of one year, until December 31, 2004. Also includes (i) 48,000 shares of common stock owned; (ii) 4,000 shares of common stock held of record by two of Mr. Hendrickson's minor children. (8) Includes 107,122 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004. (9) Includes (i) 37,500 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004; and (ii) 15,000 shares of common stock owned. (10) Includes (i) 40,500 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004; (ii) 550 shares of common stock held solely by Dr. Moffa's spouse; (iii) 4,000 shares of common stock held jointly with Dr. Moffa's spouse; and (iv) 2,850 shares of common stock held directly. (11) Includes (i) 28,000 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004; and (ii) 6,600 shares of common stock owned. (12) Includes (i) 3,333 shares of common stock held directly; (ii) 16,000 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004. Mr. Weltman is also a Principal of Genstar Capital LP and a member, but not a managing member, of Stargen II LLC. Mr. Weltman does not have power to vote or dispose of, or to direct the voting or disposition of, any securities beneficially owned by Genstar Capital LLC or Stargen II
LLC. Mr. Weltman disclaims that he beneficially owns any shares of common stock beneficially owned by Genstar Capital LLC or Stargen II LLC, except to the extent of his economic interest in shares owned by Genstar Capital LLC or Stargen II LLC. (13) Mr. Bieker joined the Company on November 1, 2003 and was granted 285,000 stock options whose initial vesting occurs one year from the date of grant. Mr. Bieker owns no shares directly. (14) Includes (i) 245,122 shares of common stock reserved for issuance upon exercise of stock options that are currently exercisable or are exercisable within 60 days of March 15, 2004; (ii) 1,287,000 shares of common stock reserved for issuance upon the exercise of warrants and (iii) includes 2,129,522 shares of common stock owned.
EQUITY PLAN COMPENSATION INFORMATION
The Equity Plan Compensation Information identified in Part II, Item 5 above is incorporated into this Part III, Item 12 by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
AUDIT FEES
KPMG LLP, our independent accountants ("KPMG") billed us an aggregate of approximately $191,000 and $160,000 for professional services rendered for the audit of our annual financial statements for the fiscal years ended December 31, 2003 and December 31, 2002, respectively, and the reviews of the financial statements included in our Form 10-Q's for fiscal 2003 and 2002.
AUDIT-RELATED FEES
KPMG billed us an aggregate of approximately $0 in fees for assurance and related services related to the audit of our annual financial statements for the fiscal years ended December 31, 2003 and 2002, respectively.
TAX FEES
KPMG billed us an aggregate of approximately $97,000 and $109,000 in fees for tax compliance, tax advice, and tax planning services for the fiscal years ended December 31, 2003 and 2002.
ALL OTHER FEES
KPMG billed us an aggregate of approximately $0 for all other services performed in fiscal 2003 and 2002, respectively.
Our Audit Committee is directly responsible for interviewing and retaining our independent accountant, considering the accounting firm's independence and effectiveness, and pre-approving the engagement fees and other compensation to be paid to, and the services to be conducted by, the independent accountant. The Audit Committee does not delegate these responsibilities. During each of the fiscal years ended December 31, 2003 and 2002, respectively, our Audit Committee pre-approved 100% of the services described above.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements listed below are included as part of this report:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for the Years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
(a)(2) The following schedule supporting the financial statements of the Company is included herein:
Financial Statement Schedule--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated October 20, 2003, reporting Items 7 and 5 and filed with the Securities and Exchange Commission on October 20, 2003.
Current Report on Form 8-K dated November 7, 2003, reporting Items 7 and 12, filed with the Securities and Exchange Commission on November 7, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BioSource International, Inc
Date: March 29, 2004 By: /S/ CHARLES C. BEST ----------------------------------- Charles C. Best Chief Financial Officer
Date: March 29, 2004 By: /S/ TERRANCE J. BIEKER ----------------------------------- Terrance J. Bieker President and Chief Executive Officer
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Terrance J. Bieker and Charles Best, and each of them, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE --------- ----- ----
/S/ TERRANCE J. BIEKER President, Chief Executive March 29, 2004 - ------------------------------ Terrance J. Bieker Officer and Director
/S/ DAVID J. MOFFA, PH.D. Director March 29, 2004 - ------------------------------ David J. Moffa, Ph.D.
/S/ JOHN R. OVERTURF, JR. Director March 29, 2004 - ------------------------------ John R. Overturf, Jr.
/S/ JEAN-PIERRE L. CONTE Director March 29, 2004 - ------------------------------ Jean-Pierre L. Conte
/S/ ROBERT J. WELTMAN Director March 29, 2004 - ------------------------------ Robert J. Weltman
/S/ JOHN L. ZABRISKIE PH. D. Director March 29, 2004 - ------------------------------ John L. Zabriskie Ph.D
EXHIBIT INDEX FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant (1)
3.2 Bylaws of Registrant (1)
4.1 Specimen Stock Certificate of Common Stock of Registrant (1)
4.2 Certificate of Designation of Series A Preferred Stock (9)
4.3 Certificate of Designation of Series B Preferred Stock (11)
4.4 Rights Agreement, dated as of February 25, 1999, between Registrant and U.S. Stock Transfer and Trust Corporation, as Rights Agent (9)
4.5 Amendment to Rights Agreement, dated as of January 10, 2000, between Registrant and U.S. Stock Transfer and Trust Corporation (13)
4.6 Second Amendment to Rights Agreement, dated September 28, 2000, between Registrant and U.S. Stock Transfer and Trust Corporation (13)
4.7 Form of Right Certificate (9)
4.8 Summary of Share Purchase Rights (9)
4.9 Investor Rights Agreement dated February 15, 2000, by and among Registrant, Genstar Partners II, L.P. and Stargen II LLC (12)
4.10 Amendment to Investor Rights Agreement dated September 18, 2000, among Registrant, Genstar Capital Partners II, L.P., Stargen II LLC, Russell D. Hays and George Uveges (13)
4.11 Second Amendment to Investor Rights Agreement, dated September 28, 2000, among Registrant, Genstar Capital Partners II, L.P., Stargen II LLC, Russell D. Hays, George Uveges, Jean-Pierre Conte, Richard Hoskins, Richard Paterson and Robert Weltman (13)
4.12 Warrant to Purchase Common Stock of Registrant issued to Genstar Capital Partners II, L.P. on February 15, 2000 (12)
4.13 Warrant to Purchase Common Stock of Registrant issued to Stargen II LLC on February 15, 2000 (12)
10.1 Registrant's 1993 Stock Incentive Plan (4)
10.2 Licensing Agreement dated May 1, 1990, by and between TAGO, Inc., as licensee, and St. Jude's Children's Hospital, as licenser (1)
10.3 License Agreement dated February 14, 1991, by and between Registrant and Schering Corporation (1)
10.4 License Agreement dated October 1, 1993, by and between Registrant, as licensee, and Schering Corporation, as licensor (2)
EXHIBIT INDEX FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, CONTINUED
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------
10.5 Separation and Consulting Agreement between Registrant and James H. Chamberlain dated September 19, 2000 (15)
10.6 License Agreement dated February 7, 1994, by and between Registrant, as licensee and Fundacio Clinic (4)
10.7 Form of Indemnification Agreement for Directors and Executive Officers (6)
10.8 List of Indemnities relating to Form of Indemnification Agreement previously filed as Exhibit 10 (16)
10.9 Registrant's Employee Stock Purchase Plan (7)
10.10 Securities Purchase Agreement dated January 10, 2000, by and among Registrant, Genstar Capital Partners II, L. P. and Stargen II LLC (15)
10.11 Securities Purchase Agreement, effective as of August 9, 2000, between the Registrant and Genstar Capital Partners II, L.P. (13)
10.12 Amendment to Securities Purchase Agreement, dated as of September 28, 2000, among the Registrant, Genstar Capital Partners II, L.P., Jean-Pierre Conte, Richard Hoskins, Richard Paterson and Robert Weltman (13)
10.13 Securities Purchase Agreement, effective as of August 9, 2000, between the Registrant and Russell D. Hays (13)
10.14 Securities Purchase Agreement, effective as of September 5, 2000, between the Registrant and George Uveges (13)
10.15 Letter agreement regarding employment, dated August 2, 2000, between Registrant and Russell D. Hays (15)
10.16 Amendment to letter agreement regarding employment, dated September 18, 2000, between Registrant and Russell D. Hays (15)
10.17 Letter agreement regarding employment, dated August 18, 2000 between Registrant and George Uveges (15)
10.18 Amendment to letter agreement regarding employment, dated September 18, 2000, between Registrant and George Uveges (15)
10.19 Registrant's 2000 Non-Qualified Stock Option Plan (14)
10.20 Lease Agreement for 542 Flynn Road, dated March 7, 2000, between Registrant and Lincoln Ventura Technology Center (15)
10.21 Executive Employment Agreement between Registrant and Leonard M. Hendrickson, dated September 24, 2001(16)
EXHIBIT INDEX FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, CONTINUED
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------
10.22 Separation and Release Agreement dated as of September 29, 2003, between Registrant and Leonard Hendrickson.
10.23 Executive Employment Agreement between Registrant and Terrance J. Bieker, dated as of October 8, 2003.
21 Subsidiaries of the Company
STATE/COUNTRY OF NAME INCORPORATION ------------------------------------------------------------ Keystone Laboratories, Inc..................California BioSource Europe S.A........................Belgium BioSource B.V...............................Holland BioSource GmbH..............................Germany BioSource U.K., Ltd.........................U.K. Quality Controlled Biochemicals, Inc........Massachusetts Javelle, Inc................................Massachusetts
23.1 Consent of KPMG LLP, Independent Auditors
31.1 Certificate of Terrance J. Bieker, Chief Executive Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
31.2 Certificate of Charles C. Best, Chief Financial Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.1 Certificate of Terrance J. Bieker, Chief Executive Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.2 Certificate of Charles C. Best, Chief Financial Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission on October 22, 1992, as amended. (2) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1992. (3) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1993. (4) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1994. (5) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1995. (6) Incorporated by reference to the Company's Registration Statement on Form SB-2 (SEC No. 333-3336) as filed with the Securities and Exchange Commission on May 31, 1996, as amended. (7) Incorporated by reference to the Company's Registration Statement on Form S-8 (SEC No. 33-91838) as filed with the Securities and Exchange Commission on May 4, 1995. (8) Incorporated by reference to the Company's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on February 19, 1999. (9) Incorporated by reference to the Company's Current Report on Form 8-A filed with the Securities and Exchange Commission on March 1, 1999.
(10) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998. (11) Incorporated by reference to the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on March 16, 2000. (12) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on March 22, 2000. (13) Incorporated by reference to the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on October 26, 2000, and as amended on October 31, 2000. (14) Incorporated by reference to the Company's definitive proxy statement as filed with the Securities and Exchange Commission on May 16, 2000. (15) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000. (16) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2001.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ----
Independent Auditors' Report..............................................
Consolidated Balance Sheets at December 31, 2003 and 2002.................
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001..........................................
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001..........................................
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001..........................................
Notes to Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 .........................................
Financial Statement Schedule--Valuation and Qualifying Accounts...........
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders BioSource International, Inc.:
We have audited the consolidated financial statements of BioSource International, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BioSource International, Inc. and subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As explained in Note 1 to the financial statements, effective January 1, 2002, the Company changed its method of accounting for the impairment of goodwill and other intangibles.
KPMG LLP
Los Angeles, California February 9, 2004
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except for per share data)
DECEMBER 31, 2003 2002 -------- --------
ASSETS Current assets: Cash and cash equivalents ....................... $ 3,297 $ 5,941 Accounts receivable, less allowance for doubtful accounts of $258 and $261 at December 31, 2003 and 2002 .................... 6,308 6,157 Inventories, net (note 2) ....................... 9,074 8,880 Prepaid expenses and other current assets ....... 652 538 Deferred income taxes (note 8) .................. 2,363 1,873 -------- -------- Total current assets ...................... 21,694 23,389
Property and equipment, net (note 3) ............... 6,235 7,398 Intangible assets net of accumulated amortization of $3,230 and $2,655 at December 31, 2003 and 2002 (notes 1 and 4) ...... 5,500 6,076 Goodwill ........................................... 307 307 Other assets ....................................... 519 526 Deferred income taxes (note 8) ..................... 10,078 8,810 -------- -------- $ 44,333 $ 46,506 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................ $ 2,451 $ 3,115 Accrued expenses ................................ 3,227 2,910 Deferred revenue ................................ 249 427 Income tax payable .............................. 104 341 -------- -------- Total current liabilities ................. 6,031 6,793 -------- --------
Commitments and contingencies (note 11)
Stockholders' equity: Common stock, $.001 par value. Authorized 20,000,000 shares: issued and outstanding 9,376,860and 9,676,931 shares at December 31, 2003 and 2002 ............................... 9 10 Additional paid-in capital ......................... 42,633 44,500 Accumulated deficit ................................ (4,452) (3,382) Accumulated other comprehensive gain (loss) ........ 112 (1,415) -------- -------- Net stockholders' equity .................. 38,302 39,713 -------- -------- $ 44,333 $ 46,506 ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Amounts in thousands, except per share data)
2003 2002 2001 -------- -------- --------
Net sales ............................ $ 44,094 $ 40,055 $ 35,175 Cost of sales ........................ 21,900 17,689 15,540 -------- -------- -------- Gross profit ...................... 22,194 22,366 19,635
Operating expenses: Research and development .......... 7,007 6,187 3,986 Sales and marketing ............... 9,298 8,339 7,395 General and administrative ........ 6,851 5,916 6,945 Long-lived asset impairment ....... 341 -- -- Amortization of intangibles ....... 575 641 1,098 -------- -------- -------- Total operating expenses ........ 24,072 21,083 19,424 -------- -------- -------- Operating income (loss) .............. (1,878) 1,283 211
Interest income ...................... 31 113 376 Interest expense ..................... (4) 0 (2) Other income (expense), net .......... (103) 10 86 -------- -------- -------- Income (loss) before income tax expense (benefit) ................. (1,954) 1,406 671 Income tax expense (benefit) ......... (884) 11 (70) -------- -------- -------- Income (loss) before cumulative effect of accounting change ............ (1,070) 1,395 741 Cumulative effect of accounting change (net of applicable income taxes of $1,500) ........... -- (2,447) -- -------- -------- -------- Net income (loss) available to common stockholders ............... $ (1,070) (1,052) 741 ======== ======== ========
Income (loss) per share before accounting change: Basic ............................. $ (0.11) 0.14 0.07 ======== ======== ======== Diluted ........................... $ (0.11) 0.14 0.07 ======== ======== ========
Net income (loss) per share: Basic ............................. $ (0.11) (0.11) 0.07 ======== ======== ======== Diluted ........................... $ (0.11) (0.11) 0.07 ======== ======== ========
Shares used to compute per share amounts: Basic ............................. 9,403 9,787 10,398 ======== ======== ======== Diluted ........................... 9,403 10,189 10,965 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Amounts in thousands)
2003 2002 2001 ------- ------- ------- Cash flows from operating activities: Net income (loss) ....................... $(1,070) (1,052) 741 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ...... 2,620 2,324 2,431 Long-lived asset impairment ........ 341 -- -- Stock compensation ................. -- -- (388) Income tax benefit from the exercise of stock options ....... 538 56 205 Cumulative effect of accounting change .......................... -- 4,629 -- Changes in assets and liabilities Accounts receivable ................ 415 505 (753) Inventories ........................ 622 (1,011) (654) Prepaid expenses and other current assets .................. (109) 9 716 Deferred income taxes .............. (1,758) (1,774) (31) Other assets ....................... 7 (35) 245 Accounts payable ................... (890) 522 (748) Accrued expenses ................... 37 (63) 12 Deferred income .................... (177) 23 90 Income taxes payable ............... 7 (384) 199 ------- ------- ------- Net cash provided by operating activities ......... 583 3,749 2,065 ------- ------- ------- Cash flows from investing activities: Purchase of property and equipment ...... (1,321) (3,481) (2,559) Proceeds from sales of property and equipment ............................ 253 -- -- ------- ------- ------- Net cash used in investing activities ...................... (1,068) (3,481) (2,559) ------- ------- ------- Cash flows from financing activities: Proceeds from the exercise of options ......................... 1,075 291 308 Payments to acquire treasury stock ........................... (3,481) (4,608) (668) ------- ------- ------- Net cash used in financing activities ...................... (2,406) (4,317) (360) ------- ------- -------
Net decrease in cash and cash equivalents ..................... (2,891) (4,049) (854) Effect of exchange rates on cash and cash equivalents ................................ 247 519 (308)
Cash and cash equivalents at beginning of year ....................................... 5,941 9,471 10,633 ------- ------- -------
Cash and cash equivalents at end of year ...... $ 3,297 5,941 9,471 ======= ======= =======
Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ........................... $ 4 44 2 ======= ======= ======= Income taxes ....................... $ 738 -- -- ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
BioSource International, Inc. and subsidiaries (BioSource or the Company), develops, manufactures, markets and distributes products used worldwide in disease related biomedical research and clinical diagnostics, principally in the fields of immunology and molecular biology. Our products include ELISA assay test kits, clinical diagnostic kits, bioactive proteins, antibodies, bioactive peptides, oligonucleotides and related products. These products enable scientists to better understand the biochemistry, immunology and cell biology of the human body. Some examples would include certain diseases such as cancer, aging, arthritis and other inflammatory diseases, AIDS and certain other infectious diseases.
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 original maturities of three months or less.
FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash and cash equivalents, trade receivables, and payables approximates their fair value at December 31, 2003 and 2002 due to the short-term nature of these instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value).
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization of property and equipment and identifiable intangibles is provided using the straight-line method over the estimated useful lives of the related assets which generally range from three to fifteen years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is shorter.
GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No.141, "Accounting For Business Combinations," and FAS No. 142, "Accounting For Goodwill and Other Intangible Assets." FAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment in accordance with FAS No. 142. The amortization of goodwill and intangible assets was approximately $575,000, $641,000, and $1,098,000, for fiscal years ended December 31, 2003, 2002, and 2001, respectively. Effective January 1, 2002, the Company's goodwill and other intangible assets are accounted for under FAS No. 141 "Business Combinations" and FAS No. 142 "Goodwill and Other Intangible Assets." The Company considers certain of its subsidiaries including BioSource Europe S.A., Keystone Laboratories, Inc., Quality Controlled Biochemicals, Inc. and its Biofluids division reporting units as defined under FAS 142. The Company used the
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
present value method for determining the fair value of its reporting units. In 2002, the Company recognized a non-cash charge, net of applicable income taxes, of $2,447,000 representing the cumulative effect of a change in accounting principle resulting from the implementation of FAS 142. This amount is shown in the accompanying condensed consolidated statement of operations as a cumulative effect of an accounting change.
Prior to 2002, the Company accounted for its intangible assets under FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Under FAS 121, Long-Lived assets and intangible assets are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company reviewed for impairment by comparing the carrying amount of the asset to future cash flows expected to be generated by the asset.
The Company reviewed its remaining goodwill for impairment in the third quarter of 2003 using FAS No. 142 and determined that the carrying value was not impaired. Accordingly, the Company continues to carry the goodwill related to its 1996 acquisition of certain assets and assumed liabilities of Medgenix Diagnostics, SA, now BioSource Europe, S.A., a wholly-owned subsidiary of the Company on its Consolidated Balance Sheets.
ADVERTISING, MARKETING AND PROMOTION COSTS
For the year ended December 31, 2003, the Company capitalized its annual catalog production costs and expensed them evenly throughout the year. In the past, the Company has expensed catalog production costs as incurred, which was primarily in the first quarter of its fiscal year. During 2002, and after production of the 2002 catalog, the Company put substantial effort into increasing the number of customers in its customer database increasing its dependence on its catalog to attract more customers. As a result, the Company believes that its 2003 catalog is a direct response advertisement, the primary purpose of which is to elicit sales to customers who respond specifically to the catalog resulting in probable future economic benefit. Accordingly, beginning in 2003, the Company is capitalizing its catalog production costs and expensing them evenly throughout the fiscal year in accordance with the AICPA's Statement of Position 93-07. For the years ended December 31, 2003, 2002 and 2001, the Company expensed approximately $560,000, $529,000 and $419,000 of catalog costs respectively.
LICENSE AGREEMENTS
License agreements primarily for the use of antibodies 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 (generally five to ten years). These costs are included with other assets in the accompanying consolidated balance sheets. Accumulated amortization at December 31, 2003 and 2002 was approximately $447,000 and $396,000, respectively.
REVENUE RECOGNITION
The Company's revenue is generated from the sale of products primarily manufactured internally. The Company does have a small amount of products that are sold on an outside equipment ("OEM") basis. The Company sells standard and custom products directly to end users and distributors and recognizes revenue upon transfer of title to the customer, which occurs upon shipment. General sales and payment terms to distributors are similar to those granted to end user customers. Certain end user customers prepay for product and request shipment of the product at future dates, primarily sera or media products. The Company records deferred revenue until such time as a product is shipped to a customer. Approximately 25% of the Company's 2003 net sales were to distributors.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
The Company's distribution agreements do not provide a general right of return. The amount of the Company's inventory held by distributors is not believed to be substantial.
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.
The Company has not provided U.S. federal or foreign withholding taxes on foreign subsidiary undistributed earnings as of December 31, 2003, because such earnings are intended to be permanently invested. It is not practicable to determine the U.S. Federal income tax liability, if any that would be payable if such earnings were not reinvested indefinitely.
LONG-LIVED ASSETS
It is our policy to account for long-lived assets (property, plant, equipment and intangible assets) at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. If this review indicates that long-lived assets will not be recoverable, as determined by a non-discounted cash flow analysis over the remaining amortization period, the carrying value of the Company's long-lived assets would be reduced to its estimated fair value based on discounted cash flows. As a result, the Company has determined that its long-lived assets are not impaired as of December 31, 2003 and 2002. Effective January 1, 2002, other long-lived assets are accounted for under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental provisions of that statement. The adoption of SFAS No. 144 did not have a material impact on the financial position or results from operations.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity. Except for net income (loss) and foreign currency translation adjustments, the Company does not have any transactions or other economic events that qualify as comprehensive income (loss) as defined under SFAS No. 130.
BUSINESS SEGMENT REPORTING
Management of the Company has determined its reportable segments are strategic business units that offer both sales to external customers from geographic company facilities and sales to external customers in certain geographic regions. Significant reportable business segments are the United States and European facilities, and sales to external customers are summarized as those located in the United States, Europe, Japan and other. Information related to these segments is summarized in Note 10.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). This new pronouncement establishes financial accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for obligations of lessees. The standard was effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted this standard effective January 1, 2003 with no material effect on the Company's financial position or results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses the accounting for contractual arrangements in which revenue-generating activities are performed. In some situations, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence for fair values to account separately for the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are closely interrelated or there is not sufficient evidence of fair value to account separately for the different deliverables. EITF 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 is effective for interim periods beginning after June 30, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure," an amendment of FASB Statement No. 123, which provides guidance for transition to the fair value based method of accounting for stock-based employee compensation and the required financial statement disclosure. The adoption of SFAS No. 148 expanded the disclosure in our interim financial statements, and does not significantly impact our annual disclosures of stock-based compensation in our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others." FIN No. 45 requires a company to recognize a liability for the obligations it has undertaken to issue a guarantee. This liability would be recorded at the inception of the guarantee and would be measured at fair value. The measurement provisions of this statement apply prospectively to guarantees issued or modified after December 31, 2002. The disclosure provisions of the statement apply to financial statements for periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on the Company's financial position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (ARB 51), and requires companies to evaluate variable interest entities for specific characteristics to determine whether additional consolidation and disclosure requirements apply. This interpretation is immediately applicable for variable interest entities created after January 31, 2003, and applies to the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities acquired prior to February 1, 2003. The adoption of this interpretation did not have any impact on the Company's financial position or results of operations. In December 2003, the FASB revised FIN 46 to exempt certain entities from its requirements and to clarify certain issues arising during the implementation of FIN 4. The adoption of this revised interpretation in the first quarter of 2004 is not expected to have any impact on the Company's consolidated financial statements.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted this standard effective July 1, 2003, and it did not have a material effect on our consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect 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. Significant areas requiring the use of management estimates relate to the valuation of inventories, accounts receivable allowances, the useful lives of assets for depreciation and amortization, evaluation of impairment, restructuring expense and accrual, litigation accruals and recoverability of deferred taxes.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash equivalents and trade accounts receivable. The credit risk associated with trade accounts is mitigated by a credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiary, whose functional currency is Euros, 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 stockholders' equity. Gains and losses from foreign currency transactions are included in net income. Foreign currency transaction gains and losses were insignificant to the operating results for each of the years in the three-year period ended December 31, 2003.
STOCK OPTION PLAN
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation and FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of Statement 123, as amended. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---------- --------- -------- (in thousands, except per share data)
Net income (loss): As reported .......................... $ (1,070) $ (1,052) $ 741
Add/deduct: Total stock-based employee compensation expense determined under intrinsic value based method for all awards, net of tax effects ............... -- -- (233)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects ... (1,292) (2,458) (2,764) ---------- --------- --------
Pro forma net loss ................... $ (2,362) $ (3,510) $ (2,256) ========== ========= ========
Net income (loss) per share: Basic - as reported .................. $ (0.11) $ (0.11) $ 0.07 ========== ========= ========
Basic - pro forma .................... $ (0.25) $ (0.36) $ (0.22) ========== ========= ========
Diluted - as reported ................ $ (0.11) $ (0.10) $ 0.07 ========== ========= ========
Diluted - pro forma .................. $ (0.25) $ (0.36) $ (0.22) ========== ========= ========
2. INVENTORIES
Inventories at December 31, 2003 and 2002 are summarized as follows (000's):
2003 2002 ------ ------
Raw materials .................. $3,193 $2,703 Work in process ................ 455 493 Finished goods ................. 5,426 5,684 ------ ------
$9,074 $8,880 ====== ======
In the fourth quarter of 2003, approximately $1,250,000 of inventory was discontinued, scrapped or fully reserved and was charged in cost of sales in the accompanying consolidated statement of operations.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 are summarized as follows (000's):
2003 2002 -------- --------
Machinery and equipment ............ $ 9,225 $ 9,241 Office furniture and equipment ..... 4,270 3,708 Leasehold improvements ............. 1,874 1,530 -------- -------- 15,369 14,479 Less accumulated depreciation and amortization ................ (9,134) (7,081) -------- --------
$ 6,235 $ 7,398 ======== ========
4. GOODWILL AND INTANGIBLE ASSETS - ADOPTION OF FINANCIAL ACCOUNTING STATEMENT 142
In July 2001, the FASB issued FAS No. 141, "Accounting For Business Combinations," and FAS. 142, "Accounting for Goodwill and Other Intangible Assets."
The pro forma effects of implementation of FAS 142 to prior periods would be as follows: (amounts in thousands, except per share data):
FOR YEARS ENDED DECEMBER 31, ---------------------------------------- 2003 2002 2001 --------- --------- ---------
Reported income (loss)................ $ (1,070) (1,052) 741 Add: Impairment charge, net of tax......... -- 2,477 -- Goodwill Amortization, net of tax..... -- -- 283 --------- --------- --------- Adjusted net income (loss)............ (1,070) 1,425 1,024 ========= ========= =========
Basic net income (loss) per share: Reported income (loss)............. $ (0.11) (0.11) 0.07 Impairment charge, net of tax...... -- 0.25 -- Goodwill Amortization, net of tax.. -- -- 0.03 --------- --------- --------- Adjusted net income (loss)......... $ (0.11) 0.15 0.10 ========= ========= =========
Diluted net income (loss) per share: Reported income (loss)............. $ (0.11) (0.10) 0.07 Impairment charge, net of tax...... -- 0.24 -- Goodwill Amortization, net of tax.. -- -- 0.03 --------- --------- --------- Adjusted net income (loss)......... $ (0.11) 0.14 0.10 ========= ========= =========
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Acquired Intangible assets are as follows (in thousands):
AS OF DECEMBER 31, 2003 AS OF DECEMBER 31, 2002 ------------------------ ------------------------ GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION --------- ---------- --------- ---------- Amortized intangible assets Developed Technology..... $ 7,656 (2,597) $ 7,656 (2,115) Core technology.......... 665 (225) 665 (181) Tradename................ 257 (256) 257 (206) --------- ---------- --------- ---------- Total................. $ 8,578 (3,078) $ 8,578 (2,502) ========= ========== ========= ==========
At December 31, 2004, estimated amortization expense was as follows (in thousands):
2004...................... $ 515 2005...................... $ 515 2006...................... $ 515 2007...................... $ 515 2008...................... $ 515
The changes in the carrying amount of goodwill for the year ended December 31, 2003, is as follows (in thousands):
UNITED STATES EUROPEAN SEGMENT SEGMENT ----------- -----------
Balance as of December 31, 2001.................. $ 4,629 307 Goodwill acquired during the year................ -- -- Impairment losses................................ (4,629) -- ---------- ---------- Balance as of December 31, 2002.................. -- 307 Goodwill acquired during the year................ -- -- Impairment losses................................ -- -- ---------- ---------- Balance as of December 31, 2003.................. $ -- 307 ========== ==========
5. COMMON STOCK AND TREASURY STOCK
The Company has a stock repurchase program under which it is allowed to repurchase up to $15 million of common stock, at managements discretion, through June 30, 2004. As of December 31, 2003, the Company had repurchased 1,536,000 shares of common stock and incurred a cash outlay totaling $8,734,000.
6. STOCK OPTIONS, PURCHASE PLANS AND WARRANTS
The Company currently has two stock option plans in place during 2003 - the 1993 Stock Incentive Plan (the "1993 Plan") and the 2000 BSI non-qualified stock option Plan (the "2000 Plan"). The Company also has several stock option agreements with certain officers in effect.
Under the 2000 Plan, non-qualified stock options may be granted to full-time employees, part-time employees, directors and consultants of the Company to purchase a maximum of 2,000,000 shares of the company's common stock. Options granted under the 2000 Plan vest and are generally exercisable at the rate of 25% each year beginning one year from the date of grant. The stock options generally expire ten years from the date of grant.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Under the 1993 Plan, incentive and non-qualified stock options may be granted to full-time employees, part-time employees, directors and consultants of the Company to purchase a maximum of 2,000,000 shares of common stock. Options granted under the 1993 Plan vest and are generally exercisable at the rate of 25% each year beginning one year from the date of grant. The stock options generally expire ten years from the date of grant.
The per share weighted average market value of stock options granted during 2003, 2002 and 2001 was $7.14, $6.20, and $6.00, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2003 2002 2001 - --------------------------------------------------------------------------------
Expected dividend yield................ 0.00% 0.00% 0.00% Risk-free interest rate................ 3.03% 3.82% 4.50% Expected volatility.................... 106.64% 106.42% 89.87% Expected option life (years)........... 4.70 5.18 4.81
To the extent that BioSource derives a tax benefit from options exercised by employees, such benefit is credited to additional paid-in capital. Tax benefits recognized totaling $538,000, $56,000, and $205,000 were credited to additional paid-in capital in fiscal 2003, 2002 and 2001, respectively.
The following summarizes the stock option transactions under the 1993 Plan and the 2000 Plan during the periods presented:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ --------------
Options outstanding at December 31, 2000... 2,064,823 $ 12.67 Options granted............................ 904,647 7.84 Options exercised.......................... (36,952) 2.50 Options canceled........................... (885,166) 17.55 ----------- --------
Options outstanding at December 31, 2001... 2,047,352 8.74 Options granted............................ 474,300 6.12 Options exercised.......................... (76,514) 3.10 Options canceled........................... (516,063) 13.14 ----------- --------
Options outstanding at December 31, 2002... 1,929,075 7.14 Options granted............................ 303,000 7.14 Options exercised.......................... (170,830) 3.07 Options canceled........................... (138,071) 7.42 ----------- --------
Options outstanding at December 31, 2003... 1,923,174 $ 7.48 =========== ========
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
At December 31, 2003, the range of exercise prices and weighted average remaining contractual life of outstanding options were as follows:
Weighted Weighted Number of Average Average Number of Options Exercise Life of Options Currently Price Option Outstanding Exercisable ---------------------------------------------------------------
$1.37 - $3.10 3.50 166,658 166,658 $3.11 - $6.20 7.10 560,164 368,367 $6.21 - $9.30 8.20 753,363 284,895 $9.31 - $15.50 7.10 275,000 193,987 $15.51 - $31.00 6.80 167,989 133,425 ------- ----------- ----------- Total 7.20 1,923,174 1,147,332 ======= =========== ===========
At December 31, 2003, 2002 and 2001, the number of options exercisable was 1,147,332, 1,007,601, and 777,836, respectively, and the weighted average exercise price of those options was $7.41, $6.47, and $6.41, respectively.
The Company has a stock option agreement with Mr. Leonard Hendrickson, a former officer of the Company that is outside the 1993 and the 2000 Plan. The outstanding options expire on December 31, 2004 according to their terms at the date of grant.
The following summarizes transactions outside the option plan during the periods presented:
WEIGHTED AVERAGE EXERCISE SHARES PRICE -------- --------
Options outstanding at December 31, 2000............ 290,000 $ 2.89 Options granted..................................... 280,000 5.19 Options exercised................................... (64,000) 2.61 Options canceled.................................... --- -- -------- --------
Options outstanding at December 31, 2001............ 506,000 4.19 Options granted..................................... -- -- Options exercised................................... (28,600) 2.00 Options canceled.................................... -- -- -------- --------
Options outstanding at December 31, 2002............ 477,400 $ 4.33
Options granted..................................... -- -- Options exercised................................... (187,400) 2.94 Options canceled.................................... (61,835) 6.44 -------- -------
Options outstanding at December 31, 2003............ 228,165 $ 5.19 ======== ========
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
At December 31, 2003, the exercise price and weighted average remaining contractual life of outstanding options under certain agreements were as follows:
Weighted Weighted Number of Average Average Number of Options Exercise Life of Options Currently Price Option Outstanding Exercisable -------- ------- ----------- -----------
$5.19 1.00 228,165 228,165 ------- ----------- ----------- Total 1.00 228,165 228,165 ======= =========== ===========
At December 31, 2003, 2002 and 2001, the number of exercisable options was 228,165, 279,000, and 226,000, respectively, and the weighted average exercise price of those options was $5.19, $3.72, and $2.97, respectively.
During 2003, 2002 and 2001, 358,230 105,114, and 100,952 stock options, respectively were exercised for proceeds totaling $1,075,000, $291,000 and $308,000 of cash received by the company.
Effective April 7, 1995, the Company adopted an Employee Stock Purchase Plan to provide substantially all full-time employees, excluding officers, an opportunity to purchase shares of its common stock through payroll deductions. In addition, the Company provides a matching contribution equal to 50% of the participant's contribution. All contributions are invested in the Company's common stock, which is purchased on the open market at prevailing market prices. Participants have a fully vested interest in the shares purchased with payroll deductions and become fully vested in the shares purchased with Company matching contributions after two years. The Company's matching expense for the years ended December 31, 2003, 2002 and 2001 was approximately $19,000, $24,000, and $19,000, respectively.
The Company has 1,287,000 detachable stock purchase warrants outstanding. The warrants have a term of up five years from date of issuance and are exchangeable for 1,287,000 shares of Common Stock at an exercise price of $7.77 per share. The warrants expire in January 2005.
7. STOCKHOLDER RIGHTS PLAN
The Company has adopted a stockholders' rights plan to protect the Company and its stockholders from unsolicited attempts or inequitable offers to acquire the Company's stock. The rights plan has no immediate dilutive effect and does not diminish the Company's ability to accept an offer to purchase the Company that is approved by the board of directors. The stockholder rights plan was implemented through a dividend of one preferred share purchase right on each outstanding share of the Company's common stock outstanding on March 2, 1999. Each right will entitle stockholders to buy one one-thousandth of a share of Series A preferred stock at an exercise price of $24.50. 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 an acquisition of 15% or more of the Company's common stock, (b) a person or group announces the commencement of a tender offer the consummation of which would result in ownership by the person or group of 15% or more of the Company's common stock, (c) the filing of a registration statement for any such exchange offer under the Securities Act of 1933, or (d) the Company's board of directors 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% of the Company's common stock without negotiations with the Company's Board of Directors. The Company can redeem the rights for $.001 per right at certain times as provided in the rights agreement. The rights expire on January 31, 2009.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
8. INCOME TAXES
Income (loss) before income taxes (benefit) for 2003, 2002 and 2001 were from the following sources (000's):
2003 2002 2001 ------- ------- -------
Domestic ................. $(1,306) $ 723 $(1,203) Foreign .................. (648) 683 1,874 ------- ------- ------- $(1,954) $ 1,406 $ 671 ======= ======= =======
Income tax expense (benefit) is summarized as follows (000's):
2003 2002 2001 ------- ------- ------- Current: Federal ...................... $ 99 $ (440) $ 95 State and local .............. 109 401 42 Foreign ...................... 391 552 71 ------- ------- ------- $ 599 513 208 ------- ------- ------- Deferred: Federal ...................... (936) 307 (70) State and local .............. (18) (549) (350) Foreign ...................... (529) (260) 142 ------- ------- ------- (1,483) (502) (278) ------- ------- ------- $ (884) $ 11 $ (70) ======= ======= =======
The Company has credited to additional paid-in-capital tax benefits totaling $538,000, $56,000, and $205,000 in fiscal years 2003, 2002, and 2001, respectively.
The primary components of temporary differences which give rise to deferred taxes at December 31, 2003 and 2002 are (000's):
2003 2002 -------- --------
Deferred tax assets: Reserves for inventory .......................... $ 1,960 $ 1,517 Purchased in-process technology/goodwill ........ 2,385 3,046 Net operating loss carryforwards ................ 6,067 4,290 Allowance for doubtful accounts ................. 72 89 R & D and AMT credit carryforwards .............. 2,107 1,570 Other ........................................... 460 336 -------- -------- 13,051 10,848 Less: Valuation Allowance ......................... (393) -- -------- -------- Deferred Tax Assets ............................... 12,658 10,848 Deferred tax liability Depreciation .................................... 217 165 -------- --------
Net deferred tax assets ..................... $ 12,441 $ 10,683 ======== ========
The Company believes, except for the valuation allowance of $393,000 for Massachusetts net operating losses disclosed above, it is more likely than not that they will be able to realize the remaining current value of net benefits in the future.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Actual income tax expense (benefit) differs from that obtained by applying the Federal income tax rate of 34% to income (loss) before income taxes (benefits) as follows (000's):
2003 2002 2001 ----- ----- -----
Computed "expected" tax expense (benefit) ..... $(665) $ 478 $ 228 Nondeductible items ........................... 52 24 -- State taxes (net of Federal benefit) .......... (254) (98) 21 Tax credits ................................... (285) (213) (338) Extraterritorial Income Exclusion ............. (139) (244) -- Effect of foreign operations .................. 25 50 (18) Change in valuation allowance ................. 393 -- -- Other ......................................... (11) 14 37 ----- ----- -----
Total .................................. $(884) $ 11 $ (70) ===== ===== =====
The Company does not provide for U.S. federal income taxes on the undistributed earnings of its foreign subsidiaries since the Company intends to reinvest indefinitely its earnings in such subsidiaries. It is not practical to determine the U.S. federal income tax liability, if any that would be payable if such earnings were not reinvested indefinitely.
The Company has $12,441,000 in deferred income tax assets on its consolidated balance sheet as of December 31, 2003. A large component of the Company's deferred tax assets is its net operating losses. As of December 31, 2003, the Company has a net operating loss (NOL) carryforward of approximately $11,540,000, $14,152,000 and $1,443,000 for Federal, State and foreign income tax purposes, respectively. The federal NOL's are available to offset future taxable income, if any, through 2020 to 2023. The state NOL's are available to offset future taxable income, if any, through 2006 to 2023.
9. 401(K) BENEFIT PLAN
The Company has a 401(k) profit sharing plan, which covers substantially all domestic employees of the Company. Plan participants may make voluntary contributions up to 20% of their earnings up to the statutory limitation. The Company's contribution is $0.25 for each $1.00 contributed by employees up to the first $2,000. Company contributions have no vesting period. The Company's contributions were $66,000, $67,000, $57,000 in 2003, 2001 and 2001, respectively.
10. BUSINESS SEGMENTS
The Company is engaged in a single industry, the licensing, development, manufacture, marketing and distribution of immunological reagents, test kits and oligonucleotides used in biomedical research and human diagnostics. Our customers are not concentrated in any specific geographic region and no single customer accounts for a significant amount of our sales.
Management of the Company has determined its reportable segments are strategic business units that offer both sales to external customers from geographic company facilities and sales to external customers in certain geographic regions. The Company characterizes its product lines as Strategic Business Units ("SBU's") and these include Signal Transduction Products, Cytokine Products, and Custom Products. Significant reportable business segments are the United States and European facilities, and sales to external customers are summarized as those located in the United States, Europe, Japan and other. We evaluate performance for the "Sales-from" segments on net revenue and profit and loss from operations. Our SBU's are managed separately because each business requires different marketing and distribution strategies. Business information is summarized as follows (000's):
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 -------- -------- -------- SALES - FROM SEGMENTS: Net sales to external customers from: United States: Domestic ....................... $ 23,891 $ 23,574 $ 21,027 Export ......................... 4,546 4,082 4,623 -------- -------- -------- Total United States ..... 28,437 27,656 25,650 Europe ............................. 15,657 12,399 9,525 -------- -------- -------- Consolidated ............ $ 44,094 $ 40,055 $ 35,175 ======== ======== ========
Operating income (loss): United States ...................... $ (3,584) $ (1,250) $ (1,970) Europe ............................. 1,706 2,533 2,181 -------- -------- -------- Consolidated ............ $ (1,878) $ 1,283 $ 211 ======== ======== ========
2003 2002 2001 -------- -------- -------- SALES - TO SEGMENTS: Net sales to external customers in: United States ...................... $ 23,891 $ 23,574 $ 21,027 Europe ............................. 9,704 10,940 8,846 Japan .............................. 3,448 3,319 3,085 Other .............................. 7,051 2,222 2,217 -------- -------- -------- Consolidated ............ $ 44,094 $ 40,055 $ 35,175 ======== ======== ========
SALES - BY PRODUCT GROUP: Net sales by product group: Cytokine ........................... $ 9,083 $ 6,910 $ 4,734 Signaling .......................... 20,107 18,207 16,647 Custom ............................. 14,904 14,938 13,794 -------- -------- -------- Consolidated ............ $ 44,094 $ 40,055 $ 35,175 ======== ======== ========
IDENTIFIABLE ASSETS AT END OF YEAR: United States ...................... $ 33,959 $ 36,263 $ 42,420 Europe ............................. 10,374 10,243 7,421 -------- -------- -------- Consolidated ............ $ 44,333 $ 46,506 $ 49,841 ======== ======== ========
NET INTEREST EXPENSE (INCOME): United States ...................... $ (151) $ (92) $ (363) Europe ............................. 124 (21) (11) -------- -------- -------- Consolidated ............ $ (27) $ (113) $ (374) ======== ======== ========
DEPRECIATION AND AMORTIZATION: United States ...................... $ 2,246 $ 2,028 $ 2,145 Europe ............................. 374 296 286 -------- -------- -------- Consolidated ............ $ 2,620 $ 2,324 $ 2,431 ======== ======== ========
CAPITAL EXPENDITURES: United States ...................... $ 913 $ 3,132 $ 2,106 Europe ............................. 408 349 453 -------- -------- -------- Consolidated ............ $ 1,321 $ 3,481 $ 2,559 ======== ======== ========
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
11. COMMITMENTS AND CONTINGENCIES
At December 31, 2003, future minimum payments under the Company's non-cancelable operating leases are as follows (in thousands):
2004........................................ $ 1,474 2005........................................ 1,192 2006........................................ 644 2007........................................ 59 Thereafter.................................. -- ---------
$ 3,369
Rent expense for 2003 totaled $1,441,000.
On January 14, 2002, we settled a lawsuit filed by a former employee in the United States Central District Court of California for $275,000, all which was expensed in 2001.
On July 2, 2002, we settled a AAA arbitration proceeding filed by the former shareholders of QCB, which settlement included a final settlement of all related claims we maintained against those former shareholders, in consideration of the payment to us of $800,000 from escrowed funds held by us in connection with the acquisition of QCB. The remaining funds held in escrow were released to the former shareholders of QCB. This settlement was considered to be a reduction of the goodwill originally recorded in the acquisition of QCB. That goodwill was written off as a cumulative effect of accounting change in the adoption of FASB Statement No. 142 during the first quarter of 2002. The settlement was accounted for as an adjustment to the cumulative effect of accounting change during the third quarter of 2002.
The Company is involved in various other claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not materially affect the financial position, results of operations or liquidity of the Company.
12. EARNINGS PER SHARE
The Company presents basic and diluted earnings (loss) per share ("EPS"). Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
The reconciliation of basic to diluted weighted average shares is as follows:
Year ended December 31, 2003 2002 2001 --------- --------- -------- Income (loss) before cumulative effect of accounting change used for basic and diluted income (loss) per share ............. $ (1,070) $ (1,395) $ 741 ========= ========= ========
Net income (loss) used for basic and diluted income (loss) per share ............................... $ (1,070) $ (1,052) $ 741 ========= ========= ========
Weighted average shares used in basic computation ................... 9,403 9,787 10,398 Dilutive stock options and warrants .... -- 402 567 --------- --------- --------
Weighted average shares used for diluted computation ................. 9,403 10,189 10,965 ========= ========= ========
Income (loss) per share before accounting change: Basic ............................... $ (0.11) $ 0.14 $ 0.07 ========= ========= ======== Diluted ............................. $ (0.11) $ 0.14 $ 0.07 ========= ========= ========
Net income (loss) per share: Basic ............................... $ (0.11) $ (0.11) $ 0.07 ========= ========= ======== Diluted ............................. $ (0.11) $ (0.11) $ 0.07 ========= ========= ========
Options to purchase 913,946, 1,040,125, and 793,332 shares of common stock at prices ranging from $6.58 to $31.00, $6.08 to $31.00, and $8.00 to $31.00 were outstanding during 2003, 2002 and 2001, respectively, but were not included in the computation of diluted earnings (loss) per share because the options' exercise price was greater than the average market price of the common shares during the respective periods.
Warrants to purchase 1,287,000 shares at an exercise price of $7.77 per share were outstanding as of December 31, 2003 and 2002 but were not included in the computation of diluted net income per share because their effect would be anti-dilutive.
BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
BALANCE AT PROVISION DEDUCTIONS BALANCE AT BEGINNING CHARGED ACCOUNTS END OF OF YEAR TO INCOME WRITTEN OFF YEAR ------- --------- ----------- ---- (000's)
2001-allowance for doubtful accounts ....... $ 143 125 7 261
2002-allowance for doubtful accounts ....... $ 261 140 140 261
2003-allowance for doubtful accounts ....... $ 261 164 167 258
EXHIBIT INDEX FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant (1)
3.2 Bylaws of Registrant (1)
4.1 Specimen Stock Certificate of Common Stock of Registrant (1)
4.2 Certificate of Designation of Series A Preferred Stock (9)
4.3 Certificate of Designation of Series B Preferred Stock (11)
4.4 Rights Agreement, dated as of February 25, 1999, between Registrant and U.S. Stock Transfer and Trust Corporation, as Rights Agent (9)
4.5 Amendment to Rights Agreement, dated as of January 10, 2000, between Registrant and U.S. Stock Transfer and Trust Corporation (13)
4.6 Second Amendment to Rights Agreement, dated September 28, 2000, between Registrant and U.S. Stock Transfer and Trust Corporation (13)
4.7 Form of Right Certificate (9)
4.8 Summary of Share Purchase Rights (9)
4.9 Investor Rights Agreement dated February 15, 2000, by and among Registrant, Genstar Partners II, L.P. and Stargen II LLC (12)
4.10 Amendment to Investor Rights Agreement dated September 18, 2000, among Registrant, Genstar Capital Partners II, L.P., Stargen II LLC, Russell D. Hays and George Uveges (13)
4.11 Second Amendment to Investor Rights Agreement, dated September 28, 2000, among Registrant, Genstar Capital Partners II, L.P., Stargen II LLC, Russell D. Hays, George Uveges, Jean-Pierre Conte, Richard Hoskins, Richard Paterson and Robert Weltman (13)
4.12 Warrant to Purchase Common Stock of Registrant issued to Genstar Capital Partners II, L.P. on February 15, 2000 (12)
4.13 Warrant to Purchase Common Stock of Registrant issued to Stargen II LLC on February 15, 2000 (12)
10.1 Registrant's 1993 Stock Incentive Plan (4)
10.2 Licensing Agreement dated May 1, 1990, by and between TAGO, Inc., as licensee, and St. Jude's Children's Hospital, as licenser (1)
10.3 License Agreement dated February 14, 1991, by and between Registrant and Schering Corporation (1)
10.4 License Agreement dated October 1, 1993, by and between Registrant, as licensee, and Schering Corporation, as licensor (2)
EXHIBIT INDEX FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, CONTINUED
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------
10.5 Separation and Consulting Agreement between Registrant and James H. Chamberlain dated September 19, 2000 (15)
10.6 License Agreement dated February 7, 1994, by and between Registrant, as licensee and Fundacio Clinic (4)
10.7 Form of Indemnification Agreement for Directors and Executive Officers (6)
10.8 List of Indemnities relating to Form of Indemnification Agreement previously filed as Exhibit 10 (16)
10.9 Registrant's Employee Stock Purchase Plan (7)
10.10 Securities Purchase Agreement dated January 10, 2000, by and among Registrant, Genstar Capital Partners II, L. P. and Stargen II LLC (15)
10.11 Securities Purchase Agreement, effective as of August 9, 2000, between the Registrant and Genstar Capital Partners II, L.P. (13)
10.12 Amendment to Securities Purchase Agreement, dated as of September 28, 2000, among the Registrant, Genstar Capital Partners II, L.P., Jean-Pierre Conte, Richard Hoskins, Richard Paterson and Robert Weltman (13)
10.13 Securities Purchase Agreement, effective as of August 9, 2000, between the Registrant and Russell D. Hays (13)
10.14 Securities Purchase Agreement, effective as of September 5, 2000, between the Registrant and George Uveges (13)
10.15 Letter agreement regarding employment, dated August 2, 2000, between Registrant and Russell D. Hays (15)
10.16 Amendment to letter agreement regarding employment, dated September 18, 2000, between Registrant and Russell D. Hays (15)
10.17 Letter agreement regarding employment, dated August 18, 2000 between Registrant and George Uveges (15)
10.18 Amendment to letter agreement regarding employment, dated September 18, 2000, between Registrant and George Uveges (15)
10.19 Registrant's 2000 Non-Qualified Stock Option Plan (14)
10.20 Lease Agreement for 542 Flynn Road, dated March 7, 2000, between Registrant and Lincoln Ventura Technology Center (15)
10.21 Executive Employment Agreement between Registrant and Leonard M. Hendrickson, dated September 24, 2001(16)
EXHIBIT INDEX FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, CONTINUED
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------
10.22 Separation and Release Agreement dated as of September 29, 2003, between Registrant and Leonard Hendrickson.
10.23 Executive Employment Agreement between Registrant and Terrance J. Bieker, dated as of October 8, 2003.
21 Subsidiaries of the Company
STATE/COUNTRY OF NAME INCORPORATION ------------------------------------------------------------ Keystone Laboratories, Inc..................California BioSource Europe S.A........................Belgium BioSource B.V...............................Holland BioSource GmbH..............................Germany BioSource U.K., Ltd.........................U.K. Quality Controlled Biochemicals, Inc........Massachusetts Javelle, Inc................................Massachusetts
23.1 Consent of KPMG LLP, Independent Auditors
31.1 Certificate of Terrance J. Bieker, Chief Executive Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
31.2 Certificate of Charles C. Best, Chief Financial Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.1 Certificate of Terrance J. Bieker, Chief Executive Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.2 Certificate of Charles C. Best, Chief Financial Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission on October 22, 1992, as amended. (2) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1992. (3) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1993. (4) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1994. (5) Incorporated by reference to the Company's Form 10KSB for the year ended December 31, 1995. (6) Incorporated by reference to the Company's Registration Statement on Form SB-2 (SEC No. 333-3336) as filed with the Securities and Exchange Commission on May 31, 1996, as amended. (7) Incorporated by reference to the Company's Registration Statement on Form S-8 (SEC No. 33-91838) as filed with the Securities and Exchange Commission on May 4, 1995. (8) Incorporated by reference to the Company's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on February 19, 1999. (9) Incorporated by reference to the Company's Current Report on Form 8-A filed with the Securities and Exchange Commission on March 1, 1999.
(10) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998. (11) Incorporated by reference to the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on March 16, 2000. (12) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on March 22, 2000. (13) Incorporated by reference to the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on October 26, 2000, and as amended on October 31, 2000. (14) Incorporated by reference to the Company's definitive proxy statement as filed with the Securities and Exchange Commission on May 16, 2000. (15) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000. (16) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2001.