-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VbwJYX/D5rZpcpBTCHijagEhd2xlERUBd9sFzjtR7/DvyR/kiLkrYDnp64Du7B+7 7FlsrbRUJtkLZT+MntmeWw== 0000012208-99-000001.txt : 19990326 0000012208-99-000001.hdr.sgml : 19990326 ACCESSION NUMBER: 0000012208-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIO RAD LABORATORIES INC CENTRAL INDEX KEY: 0000012208 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 941381833 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07928 FILM NUMBER: 99572570 BUSINESS ADDRESS: STREET 1: 1000 ALFRED NOBEL DR CITY: HERCULES STATE: CA ZIP: 94547 BUSINESS PHONE: 5107247000 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________ FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________________ Commission file number 1-7928 BIO-RAD LABORATORIES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 94-1381833 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1000 Alfred Nobel Drive, Hercules, CA 94547 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (510) 724-7000 Securities registered pursuant to Section 12(b) of the Act:
Market Value on Name of Each Exchange Shares Outstanding March 1, 1999 of Stocks Title of Each Class on Which Registered March 1, 1999 Held by Non-Affiliates ------------------- --------------------- ------------------ ------------------------ Class A Common Stock Par Value $1.00 per share American Stock Exchange 9,973,679 $157,742,498 Class B Common Stock Par Value $1.00 per share American Stock Exchange 2,488,899 $ 6,756,600
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Documents Incorporated by Reference Document Form 10-K Parts _________________________________________ ____________________ (1) Annual Report to Stockholders for the fiscal year ended December 31, 1998 (specified portions) I, II, IV (2) Definitive Proxy Statement to be mailed to stockholders in connection with the registrant's 1999 Annual Meeting of Stockholders (specified portions) III P A R T I ITEM 1. BUSINESS General Founded in 1957, Bio-Rad Laboratories, Inc. ("Bio-Rad" or the "Company") was initially engaged in the development and produc- tion of specialty chemicals used in biochemical, pharmaceutical and other life science research applications. In 1967, the Com- pany entered the field of clinical diagnostics with the develop- ment of its first test kit based on separation techniques and materials developed for life science research. Recognizing that the fields of clinical diagnostics and life science research were evolving toward more automated techniques, Bio-Rad expanded into the field of analytical and measuring instrument systems through internal research and development efforts and acquisitions in the late 1970's and 1980's. As Bio-Rad broadened its product lines, it also expanded its geographical market. The Company controls its distribution chan- nels in twenty-seven countries outside the U.S.A. through subsidiaries whose primary focus is customer service and product distribution. During 1996 and 1997, the Company made five acquisitions. The assets acquired from Chiron Diagnostics Corporation and Chiron Corporation on December 5, 1997, enhanced the product line offering for diagnostic controls. The remaining acquisitions broadened product line offerings within the Analytical Instruments and Life Science segments. Bio-Rad manufactures and supplies the life science research, healthcare, analytical chemistry, semiconductor and other markets with a broad range of products and systems used to separate complex chemical and biological materials and to identify, analyze and purify their components. Description of Business Business Segments The Company operates in three industry segments designated Life Science, Clinical Diagnostics and Analytical Instruments. Each operates in both the U.S. and international markets. For a description of business and financial information on industry and geographic segments, see Note 14 on pages 19 through 22 of Exhibit 13.1, which is incorporated herein by reference. Exhibit 13.1 is the Company's Consolidated Financial Statements, which is an excerpt from the Company's 1998 Annual Report to Stockholders. Raw Materials and Components The Company utilizes a wide variety of chemicals, biological materials, electronic components, machined metal parts, optical parts, minicomputers and peripheral devices. Most of these materials and components are available from numerous sources and the Company has not experienced difficulty in securing adequate supplies. 1 Patents and Trademarks The Company owns numerous U.S. and international patents and patent licenses. Bio-Rad believes, however, that its ability to develop and manufacture its products depends primarily on its know-how, technology and special skills. Under several patent license agreements, Bio-Rad pays royalties on the sales of certain products. Bio-Rad views these patents and license agreements as valuable assets, however, no individual agreement is of material importance to any segment or to the Company's business as a whole. Seasonal Operations and Backlog The Company's business is not inherently seasonal, however, the European custom of concentrating vacation during the summer months usually has had a negative impact on third quarter sales volume and operating income. For the most part, the Company operates in markets characterized by short lead times and the absence of significant backlogs. The Company produces several analytical instruments against an order backlog. Management has concluded that backlog information is not material to the Company's business as a whole. Sales and Marketing Each of Bio-Rad's segments maintains a sales force to sell its products on a direct basis. Each sales force is technically trained in the disciplines associated with its products. Sales are also generated through direct mail advertising, exhibits at trade shows and technical meetings, telemarketing, and by extensive advertising in technical and trade publications. Sales and marketing efforts are augmented by technical service departments that assist customers in effective product utilization and in new product applications. Bio-Rad also produces and distributes technical literature and holds seminars for customers on the use of its products. The Company maintains an internet website, http://www.bio-rad.com, to further enhance its marketing efforts. Bio-Rad products are sold to a broad and diversified customer base. In 1998, no single customer accounted for as much as 3% of Bio-Rad's total sales. A number of the Company's customers, particularly in Life Science, are substantially dependent for their funding on government grants and research contracts. A portion of the Analytical Instruments segment is dependent upon large semiconductor manufacturers; the loss of these customers or a severe downturn in the semiconductor market would have a detrimental effect on the results of the segment. Most of the Company's international sales are generated by wholly-owned subsidiaries and their branch offices in Australia, Austria, Belgium, Canada, Denmark, England, Finland, France, Germany, Hong Kong, Hungary, India, Israel, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, People's Republic 2 of China, Poland, Russia, Singapore, Spain, Sweden and Switzerland. Certain of these subsidiaries also have manufacturing facilities. While Bio-Rad's international operations are subject to certain risks common to foreign operations in general, such as changes in governmental regulations, import restrictions and foreign exchange fluctuations, the Company's international operations are principally in developed nations, which the Company regards as presenting no significantly greater risks to its operations than are present in the United States. Competition Most markets served by Bio-Rad's product groups are competitive. Bio-Rad's competitors range in size from start-ups to large multi-nationals. Reliable independent information on sales and market share of products produced by Bio-Rad's competitors is not generally available. Bio-Rad believes, however, based on its own marketing information, that while some competitors are dominant with respect to certain individual products, no one company, including Bio-Rad, is dominant with respect to a material portion of any segment of Bio-Rad's business. Product Research and Development The Company conducts extensive product research and development activities in all areas of its business, employing approximately 330 people worldwide in these activities. Research and development have played a major role in Bio-Rad's growth and are expected to continue to do so in the future. New products and new applications for existing products are being developed continuously by Bio-Rad's researchers. In its development and testing of new products and applications, Bio-Rad consults with scientific and medical professionals at universities, hospitals and medical schools, and in industry. Bio-Rad spent approximately $41.4 million, $46.1 million and $39.6 million on R&D activities during the years ended December 31, 1998, 1997 and 1996, respectively. Regulatory Matters Certain of the Company's products (primarily diagnostic products) are subject to regulation in the United States by the Center for Devices and Radiological Health of the United States Food and Drug Administration (FDA) and in other jurisdictions by state and foreign government authorities. FDA regulations require that some new products have pre-marketing approval by the FDA and require certain of Bio-Rad's products to be manufactured in accordance with "good manufacturing practices," to be extensively tested and to be properly labeled to disclose test results and performance claims and limitations. As a multinational manufacturer and distributor of sophisticated instrumentation equipment, Bio-Rad must meet a wide array of electromagnetic compatibility and safety compliance requirements to satisfy regulations in the United States, the European Community and other jurisdictions. The Company is also subject 3 to government regulation of the use and handling of radioactive materials and controlled substances. The Company believes it is in compliance with these and other regulations. Certain of the Company's production processes involve the use of materials whose use is subject to federal, state and local environmental regulations. The Company regularly evaluates its processes and procedures to ensure compliance with applicable environmental standards and regulations. Although, from time to time, modification of processes and procedures may be required which will require additional capital expenditures, the Company presently believes that any such expenditures will have no material adverse effect on the future results of operations or the financial position of the Company. Employees At December 31, 1998, Bio-Rad had approximately 2,675 full-time employees. Fewer than 7% of Bio-Rad's employees are covered by a collective bargaining agreement which will expire on November 7, 2002. Bio-Rad considers its employee relations in general to be good. ITEM 2. PROPERTIES Bio-Rad owns its Corporate headquarters located in Hercules, California. The principal manufacturing and research locations for each segment are as follows: Life Science Richmond, California Owned/Leased Hercules, California Owned Hemel Hempstead, England Leased Milan, Italy Leased Clinical Diagnostics Hercules, California Owned/Leased Irvine, California Leased Munich, Germany Leased Nazareth-Eke, Belgium Leased Analytical Instruments Cambridge, Massachusetts Owned York, England Owned Philadelphia, Pennsylvania Owned Most manufacturing and research facilities also house administration, sales and distribution activities for the segment. In addition, the Company leases office and warehouse facilities in California, Colorado, Florida, New Mexico, Australia, Austria, Belgium, Canada, Denmark, England, Finland, France, Germany, Hong Kong, Hungary, India, Israel, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, People's Republic of China, Poland, Russia, Singapore, Spain, Sweden and Switzerland. These facilities are used principally for sales, service, distribution and administration for all three segments. 4 The Company has leased space in California, New York, Canada and England that is not currently being utilized. For the most part, reserves for future lease payments were recorded at the time the Company stopped using these facilities. The Company has subleased or is attempting to sublease these properties. Life Science segment's northern California distribution and instrument manufacturing facility lease expires in November 2000. The lease is not automatically renewable at that time. It is anticipated that the distribution and instrument manufacturing facility will be moved to a new location in northern California prior to November 2000. All other facilities are believed to be adequate to support the Company's current and anticipated production requirements. Historically, adequate space to expand sales and distribution channels has been available and is leased as needed. ITEM 3. LEGAL PROCEEDINGS Note 13, "Legal Proceedings," appearing on page 19 of Exhibit 13.1 is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report. P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Note 16, "Information Concerning Common Stock," appearing on page 23 of Exhibit 13.1 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The table headed "Summary of Operations" appearing on page 1 of Exhibit 13.1 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section headed "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing on pages 25 through 32 of Exhibit 13.1 is incorporated herein by reference. 5 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The section headed "Financial Risk Management" appearing on pages 31 and 32 of Exhibit 13.1 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Public Accountants and the Consolidated Financial Statements and Notes thereto appearing on pages 2 through 24 of Exhibit 13.1 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. P A R T III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections labeled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the definitive Proxy Statement mailed to stockholders in connection with the 1999 Annual Meeting of Stockholders (the 1999 Proxy Statement) are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections labeled "Executive Compensation and Other Information," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation," "Report of the Compensation Committee of the Board of Directors" and "Stock Performance Graph" of the 1999 Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section labeled "Principal and Management Stockholders" of the 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Compensation of Directors" of the 1999 Proxy Statement is incorporated herein by reference. 6 P A R T IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements The following Consolidated Financial Statements are included in the 1998 Annual Report and are incorporated herein by reference pursuant to Item 8: Page in Exhibit 13.1 Consolidated Balance Sheets at December 31, 1998 and 1997 2-3 Consolidated Statements of Income for each of the three years in the period ended December 31, 1998 4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 5 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1998 6 Notes to Consolidated Financial Statements 7-23 Report of Independent Public Accountants 24 2. Index to Financial Statement Schedule Page in Form 10-K Schedule II Valuation and Qualifying Accounts 8 Report of Independent Public Accountants on Schedule II 9 All other financial statement schedules are omitted because they are not required or because the required information is included in the Consolidated Financial Statements or the Notes thereto. 3. Index to Exhibits The exhibits listed in the accompanying Index to Exhibits on pages 11 and 12 of this report are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K There are no reports on Form 8-K filed by the Company during the last quarter of the period covered by this report. 7 BIO-RAD LABORATORIES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1998, 1997 and 1996 (In thousands) Reserve for doubtful accounts receivable
Additions Balance at Charged to Balance Beginning Costs and at End of Year Expenses Deductions of Year 1998 $ 3,374 $ 1,616 $(1,361) $ 3,629 ====== ====== ====== ====== 1997 $ 3,688 $ 1,088 $(1,402) $ 3,374 ====== ====== ====== ====== 1996 $ 3,094 $ 952 $ (358) $ 3,688 ====== ====== ====== ======
Valuation allowance for deferred tax assets
Deductions Balance at Charged to Balance Beginning Costs and at End of Year Additions Expenses of Year 1998 $ 3,285 $ 2,057 $ - $ 5,342 ====== ====== ====== ====== 1997 $ 5,572 $ - $(2,287) $ 3,285 ====== ====== ====== ====== 1996 $ 6,478 $ - $ (906) $5,572 ====== ====== ====== ====== 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II To the Stockholders and Board of Directors of Bio-Rad Laboratories, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Bio-Rad Laboratories, Inc.'s annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 3, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index, Item 14(a)2, is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP San Francisco, California, February 3, 1999 9 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. BIO-RAD LABORATORIES, INC. By: /s/ Sanford S. Wadler Sanford S. Wadler Secretary Date: March 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: /s/ David Schwartz President and Director March 25, 1999 (David Schwartz) Principal Financial Officer: /s/ T. C. Chesterman Vice President, March 25, 1999 (Thomas C. Chesterman) Chief Financial Officer Principal Accounting Officer: /s/ James R. Stark Corporate Controller March 25, 1999 (James R. Stark) Other Directors: /s/ James J. Bennett Director March 25, 1999 (James J. Bennett) /s/ Albert J. Hillman Director March 25, 1999 (Albert J. Hillman) /s/ Philip L. Padou Director March 25, 1999 (Philip L. Padou) /s/ Alice N. Schwartz Director March 25, 1999 (Alice N. Schwartz) /s/ Norman Schwartz Director March 25, 1999 (Norman Schwartz) _______________________ Director March 25, 1999 (Burton A. Zabin) 10 BIO-RAD LABORATORIES, INC. INDEX TO EXHIBITS ITEM 14(a)3 The following documents are filed as part of this report: Exhibit No. 3.1 Restated Certificate of Incorporation, as of September 15, 1988. (1) 3.2 Bylaws of the Registrant, as amended February 19, 1980. (2) 10.4 1994 Stock Option Plan. (3) 10.5 Amended and Restated 1988 Employee Stock Purchase Plan. (4) 10.6 Employees' Deferred Profit Sharing Retirement Plan (Amended and Restated effective January 1, 1997). (5) 10.10 Non-competition and employment continuation agreement with James J. Bennett. (6) 10.11 Employment and non-compete agreement with Dr. Burton A. Zabin. (7) 10.12 Credit Agreement dated as of May 15, 1998, by and among the Registrant, the Lenders, and The First National Bank of Chicago, as agent. (8) 10.12.1 Amendment dated as of February 12, 1999, to the Credit Agreement dated as of May 15, 1998, by and among the Registrant, the Lenders, and The First National Bank of Chicago, as agent. 13.1 Excerpt from Annual Report to Stockholders' for the fiscal year ended December 31, 1998, (to be deemed filed only to the extent required by the instructions to exhibits for reports on Form 10-K). 21.1 Listing of Subsidiaries. 23.1 Consent of Independent Public Accountants. 27.1 Financial Data Schedule. ________________________________________________________________ (1) Incorporated by reference from the Exhibits to the Company's Form 10-K filing for the fiscal year ended December 31, 1992, dated March 26, 1993. (2) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-7 Registration No. 2-66797, which became effective April 22, 1980. 11 (3) Incorporated by reference from the Exhibits to the Company's Form S-8 filing, dated April 28, 1994. (4) Incorporated by reference from the Exhibits to the Company's September 30, 1998, Form 10-Q filing dated November 10, 1998. (5) Incorporated by reference from the Exhibits to the Company's September 30, 1997, Form 10-Q filing dated November 13, 1997. (6) Incorporated by reference from the Exhibits to the Company's Form 10-K filing for the fiscal year ended December 31, 1996, dated March 26, 1997. (7) Incorporated by reference from the Exhibits to the Company's June 30, 1997, Form 10-Q filing dated August 6, 1997. (8) Incorporated by reference from the Exhibits to the Company's June 30, 1998, Form 10-Q filing dated August 13, 1998. 12
EX-10 2 EXHIBIT 10.12.1 - AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.12.1 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and dated as of the 12 day of February, 1999, by and among THE FIRST NATIONAL BANK OF CHICAGO ("FNBC"), UNION BANK OF CALIFORNIA, N.A., ABN AMRO BANK N.V., and BANQUE NATIONALE DE PARIS (each of the above parties, a "Lender", and collectively, the "Lenders"), FNBC as agent for the Lenders (in such capacity, the "Agent"), and BIO-RAD LABORATORIES, INC., a Delaware corporation (the "Borrower"). RECITALS A. Pursuant to that certain Credit Agreement dated as of May 15, 1998 among the Agent, the Lenders and the Borrower (as amended to date, the "Agreement"), the Lenders agreed to extend credit to the Borrower on the terms and subject to the conditions set forth therein. All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement. B. The parties hereto have agreed to certain amendments to the Agreement, all as more particularly described below. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Dividends. To reflect the agreement of the parties hereto to amend the Borrower's covenant on dividends, effective as of the First Amendment Effective Date (as defined in Paragraph 3 below), Section 6.10 of the Agreement is hereby amended to read in its entirety as follows: "6.10 Dividends. The Borrower will not, nor will it permit any Subsidiary to, declare or pay any dividends or make any distributions on its capital stock (other than (i) dividends payable in its own capital stock and (ii) excluding share repurchases used solely to fund employee stock purchase plans and employee stock option plans, provided such share repurchases do not exceed $4,000,000 in any fiscal year (including, without limitation, the fiscal year ended December 31, 1998)) or redeem, purchase or otherwise acquire or retire any of its capital stock at any time outstanding ("Restricted Payments"), except that any Subsidiary may declare and pay dividends to the Borrower or to a wholly-owned Subsidiary and the Borrower may make Restricted Payments in any one fiscal quarter up to an amount not in excess of 50% of the sum of consolidated net income during the four fiscal quarters ending on the date of determination less any Restricted Payments paid during such period, provided that during the term of this Agreement the total amount of Restricted Payments made shall not exceed $25,000,000 and further, provided 1 no Restricted Payment may be made if prior to, and after giving effect thereto, any Default or Unmatured Default exists." 2. Reaffirmation of Other Loan Documents. The Borrower hereby affirms and agrees that (a) the execution and delivery by the Borrower of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Borrower under the Agreement or any other Loan Document, (b) the term "Obligations" as used in the Loan Documents include, without limitation, the Obligations of the Borrower under the Agreement as amended by this Amendment, and (c) except as expressly amended hereby, the Loan Documents remain in full force and effect as written. 3. First Amendment Effective Date. This Amendment shall be effective on the earliest date (the "First Amendment Effective Date") upon which the Agent has received (a) duly executed copies of this Amendment from each of the Lenders, the Agent and the Borrower, and (b) such board resolutions, incumbency certificates and other additional documentation as the Agent may request in connection herewith. 4. Representations and Warranties. The Borrower hereby represents and warrants to the Agent and the Lenders as follows: (a) The Borrower has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. (b) This Amendment has been duly executed and delivered on behalf of the Borrower and constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms. 5. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. BIO-RAD LABORATORIES, INC. By: /s/ Ronald W. Hutton Name: Ronald W. Hutton Title: Treasurer THE FIRST NATIONAL BANK OF CHICAGO, as the Agent and as a Lender By: /s/ Mark A. Isley Name: Mark A. Isley Title: First Vice President UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ Michael E. Cooper Name: Michael E. Cooper Title: Vice President ABN AMRO BANK N.V., as a Lender By: /s/ Gina M. Brusatori Name: Gina M. Brusatori Title: Group Vice President By: /s/ Dianne D. Barkley Name: Dianne D. Barkley Title: Group Vice President 3 BANQUE NATIONALE DE PARIS, as a Lender By: /s/ Debra Wright Name: Debra Wright Title: Vice President By: /s/ Mark McElwain Name: Mark McElwain Title: Assistant Vice President 4 la-268130 EX-13 3 EXHIBIT 13.1 - EXCERPT FROM 1998 ANNUAL REPORT EXHIBIT 13.1 Bio-Rad Laboratories, Inc. SUMMARY OF OPERATIONS (In thousands, except per share data)
________________________________________________________________________________________________________________________ Year Ended December 31, 1998 1997 1996 1995 1994 1993 Net sales $441,942 $426,914 $418,789 $396,618 $355,299 $328,553 Cost of goods sold (1) 202,438 189,331 182,046 171,942 155,805 151,063 Gross profit 239,504 237,583 236,743 224,676 199,494 177,490 Selling, general and administrative expense 166,978 164,792 155,516 150,272 132,591 129,187 Product research and development expense 41,381 46,138 39,580 34,714 30,172 34,204 Restructuring costs - - 2,700 1,500 - 3,816 Income from operations 31,145 26,653 38,947 38,190 36,731 10,283 Other income (expense): Interest expense (3,731) (1,216) (3,027) (4,465) (6,138) (8,406) Other, net 6,814 (2,709) 553 (183) (6,596) 2,801 Income before taxes and extraordinary charge 34,228 22,728 36,473 33,542 23,997 4,678 Provision for income taxes 9,926 6,364 9,118 8,386 8,399 1,877 Income before extraordinary charge 24,302 16,364 27,355 25,156 15,598 2,801 Extraordinary charge (2) - - (1,176) - - - Net income $ 24,302 $ 16,364 $ 26,179 $ 25,156 $ 15,598 $ 2,801 Basic earnings per share before extraordinary charge (3) $1.98 $1.33 $2.23 $2.06 $1.29 $0.23 Extraordinary charge (2)(3) - - (.10) - - - Basic earnings per share (3) $1.98 $1.33 $2.13 $2.06 $1.29 $0.23 Weighted average common shares (3) 12,264 12,260 12,273 12,206 12,113 11,990 Cash dividends paid per common share - - - - - - Total assets $367,299 $351,876 $284,925 $285,098 $263,650 $259,890 Long-term debt, net of current maturities $ 42,339 $ 38,952 $ 6,721 $ 20,922 $ 26,287 $ 47,834 _______________________________________________________________________________________________________________________ (1) In 1996, cost of goods sold includes a charge of $2.1 million for a write-down of inventory associated with the restructuring costs. (2) Extraordinary charge for redemption of subordinated debt: 1996 - $1,176, net of tax effect of $817. (3) Restated to give effect to a stock split in the form of a 50% stock dividend in 1996.
1 Bio-Rad Laboratories, Inc. Consolidated Balance Sheets (In thousands)
________________________________________________________________________________________ December 31, Assets 1998 1997 Current Assets: Cash and cash equivalents $ 10,081 $ 10,843 Accounts receivable, less allowance of $3,629 in 1998 and $3,374 in 1997 106,010 96,965 Inventories: Raw materials 26,038 27,257 Work in process 21,614 21,242 Finished goods 44,759 42,929 Total inventories 92,411 91,428 Deferred tax assets 18,340 15,524 Prepaid expenses and other current assets 8,547 12,658 Total current assets 235,389 227,418 Property, Plant and Equipment: Land and improvements 8,057 8,057 Buildings and leasehold improvements 56,280 55,477 Equipment 133,838 115,097 Total property, plant and equipment 198,175 178,631 Accumulated depreciation (116,045) (99,953) Net property, plant and equipment 82,130 78,678 Marketable Securities 6,174 18,092 Goodwill 18,616 20,959 Other Assets 24,990 6,729 Total Assets $367,299 $351,876 ________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 2 Bio-Rad Laboratories, Inc. Consolidated Balance Sheets (In thousands, except share data)
__________________________________________________________________________________________ December 31, Liabilities and Stockholders' Equity 1998 1997 Current Liabilities: Notes payable $ 8,721 $ 9,872 Current maturities of long-term debt 672 930 Accounts payable 26,706 32,385 Accrued payroll and employee benefits 27,351 24,825 Sales, income and other taxes payable 6,396 5,055 Other current liabilities 27,398 27,715 Total current liabilities 97,244 100,782 Long-Term Debt, net of current maturities 42,339 38,952 Deferred Tax Liabilities 13,382 15,465 Total liabilities 152,965 155,199 Commitments and Contingent Liabilities Stockholders' Equity: Preferred stock, $1.00 par value, 2,300,000 shares authorized; none outstanding - - Class A common stock, $1.00 par value, 15,000,000 shares authorized; outstanding 1998 - 9,973,679; 1997 - 9,824,509 9,974 9,825 Class B common stock, $1.00 par value, 6,000,000 shares authorized; outstanding 1998 - 2,452,899; 1997 - 2,596,069 2,453 2,596 Additional paid-in capital 18,523 18,426 Class A treasury stock, 306,368 shares in 1998 and (7,047) (5,206) 193,539 shares in 1997 at cost Class B treasury stock, 30,000 shares in 1997 at cost - (800) Retained earnings 189,838 167,182 Accumulated other comprehensive income: Currency translation 92 (1,149) Net unrealized holding gain on marketable securities 501 5,803 Total stockholders' equity 214,334 196,677 Total Liabilities and Stockholders' Equity $367,299 $351,876 __________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 3 Bio-Rad Laboratories, Inc. Consolidated Statements of Income (In thousands, except per share data)
______________________________________________________________________________________________________________________ Year Ended December 31, 1998 1997 1996 Net sales $441,942 $426,914 $418,789 Cost of goods sold 202,438 189,331 182,046 Gross profit 239,504 237,583 236,743 Selling, general and administrative expense 166,978 164,792 155,516 Product research and development expense 41,381 46,138 39,580 Restructuring costs - - 2,700 Income from operations 31,145 26,653 38,947 Other income (expense): Interest expense (3,731) (1,216) (3,027) Investment income, net 8,790 1,601 2,385 Other, net (1,976) (4,310) (1,832) Income before taxes and extraordinary charge 34,228 22,728 36,473 Provision for income taxes 9,926 6,364 9,118 Income before extraordinary charge 24,302 16,364 27,355 Extraordinary charge, net of tax effect of $817 - - (1,176) Net income $ 24,302 $ 16,364 $ 26,179 Basic earnings per share: Income before extraordinary charge $1.98 $1.33 $2.23 Extraordinary charge - - (.10) Net income $1.98 $1.33 $2.13 Weighted average common shares 12,264 12,260 12,273 Diluted earnings per share: Income before extraordinary charge $1.97 $1.32 $2.19 Extraordinary charge - - (.09) Net income $1.97 $1.32 $2.10 Weighted average common shares 12,358 12,394 12,472 _______________________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 4 Bio-Rad Laboratories, Inc. Consolidated Statements of Cash Flows (In thousands)
________________________________________________________________________________________________________ Year Ended December 31, 1998 1997 1996 Cash flows from operating activities: Cash received from customers $436,029 $414,694 $409,144 Cash paid to suppliers and employees (395,265) (381,489) (354,641) Interest paid (3,833) (1,155) (3,710) Income tax payments (9,370) (10,950) (16,923) Miscellaneous receipts (payments) (226) 9 (717) Net cash provided by operating activities 27,335 21,109 33,153 Cash flows from investing activities: Capital expenditures, net (21,176) (23,571) (15,235) Payments for acquisitions - (31,238) (1,290) Purchases of marketable securities and investments (19,086) (8,352) (2,710) Sales of marketable securities and investments 16,367 3,419 2,968 Foreign currency hedges, net (1,360) 3,817 1,423 Net cash used in investing activities (25,255) (55,925) (14,844) Cash flows from financing activities: Net borrowings under line-of-credit arrangements (1,365) 4,665 (8,940) Long-term borrowings 133,710 87,275 5,024 Payments on long-term debt (130,666) (55,329) (20,841) Proceeds from issuance of common stock 103 1,459 1,262 Purchase of treasury stock (4,665) (5,302) (1,887) Reissuance of treasury stock 1,978 750 215 Net cash provided by (used in) financing activities (905) 33,518 (25,167) Effect of exchange rate changes on cash (1,937) 2,751 1,474 Net increase (decrease) in cash and cash equivalents (762) 1,453 (5,384) Cash and cash equivalents at beginning of year 10,843 9,390 14,774 Cash and cash equivalents at end of year $ 10,081 $ 10,843 $ 9,390 ________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 5 Bio-Rad Laboratories, Inc. Consolidated Statements of Changes in Stockholders' Equity (In thousands)
______________________________________________________________________ Year Ended December 31, 1998 1997 1996 Common Stock, $1.00 par value: Balance at beginning of year $12,421 $ 12,321 $ 12,239 Issuance of common stock 6 100 82 Balance at end of year 12,427 12,421 12,321 Additional Paid-In Capital: Balance at beginning of year 18,426 17,067 15,887 Issuance of common stock 97 1,359 1,188 Cash paid in lieu of fractional shares on 3-for-2 stock split - - (8) Balance at end of year 18,523 18,426 17,067 Treasury Stock: Balance at beginning of year (6,006) (1,639) - Purchase of treasury stock (4,665) (5,302) (1,887) Reissuance of treasury stock 3,624 935 248 Balance at end of year (7,047) (6,006) (1,639) Retained Earnings: Balance at beginning of year 167,182 151,003 124,857 Net income 24,302 16,364 26,179 Reissuance of treasury stock at less than cost (1,646) (185) (33) Balance at end of year 189,838 167,182 151,003 Accumulated Other Comprehensive Income: Balance at beginning of year 4,654 4,756 4,076 Currency translation adjustments 1,241 (4,719) 43 Net unrealized holding gains 819 5,746 1,767 Reclassification adjustment for gains included in net income (6,121) (1,129) (1,130) Balance at end of year 593 4,654 4,756 ________ ________ ________ Total Stockholders' Equity $214,334 $196,677 $183,508 Comprehensive Income: Net income $ 24,302 $ 16,364 $ 26,179 Currency translation adjustments 1,241 (4,719) 43 Net unrealized holding gains 819 5,746 1,767 Reclassification adjustments for gains included in net income (6,121) (1,129) (1,130) Total Comprehensive Income $ 20,241 $ 16,262 $ 26,859 _________________________________________________________________________
The accompanying notes are an integral part of these statements. 6 Bio-Rad Laboratories, Inc. Notes to Consolidated Financial Statements _________________________________________________________________ 1. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Bio-Rad Laboratories, Inc. and all subsidiaries ("Bio-Rad" or the "Company") after elimination of intercompany balances and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in such estimates may affect amounts reported in the future. Certain amounts in the financial statements of prior years have been reclassified to be consistent with the 1998 presentation. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid in- vestments with original maturities of three months or less which are readily convertible into cash. Cash equivalents are stated at cost, which approximates market value. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade accounts receivable. The Company performs credit evaluation procedures and with the exception of the Pacific Rim, generally does not require collateral. As a result of increased risk in certain Pacific Rim countries, many Bio-Rad sales are subject to collateral letters of credit. Credit risk is limited due to the large number of customers and their dispersion across many geographic areas. However, a significant amount of trade receivables are with national healthcare systems in countries within the European Economic Community. The Company does not currently anticipate a credit risk associated with these receivables. Inventory Valuation Inventories are valued at the lower of average cost or market and include material, labor and overhead costs. Property, Plant and Equipment Property, plant and equipment are carried at historical cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets ranging from two to thirty years. Leasehold improvements are amortized over the lives of the respective leases or the lives of the improvements, whichever is shorter. 7 Marketable Securities The Company's marketable securities are classified as available-for- sale and are recorded at current market value. Unrealized holding gains and losses are included as a separate component of stockholders' equity. Realized gains and losses are included in investment income. For the purpose of determining realized gains and losses, the cost of securities sold is based upon specific identification. Goodwill Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost and is amortized on a straight-line basis over the estimated future periods to be benefited, typically ten years. The Company reviews the recoverability of goodwill annually. Revenue Recognition and Warranty Bio-Rad recognizes revenues when products are shipped or services are rendered and all significant obligations of the Company have been met. Where appropriate, the Company also establishes a concurrent reserve for returns and allowances. The Company warrants certain equipment against defects in design, materials and workmanship, generally for one year. Upon shipment of equipment sold at a price which includes a warranty, the Company establishes, as part of cost of goods sold, a provision for the expected costs of such warranty. Foreign Currency Translation Balance sheet accounts of international subsidiaries are translated at the current exchange rate as of the end of the accounting period. Income statement items are translated at average exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Forward Exchange Contracts The Company does not use derivative financial instruments for speculative or trading purposes. As part of distributing its products, the Company regularly enters into intercompany transactions. The Company enters into forward foreign exchange contracts to hedge against future movements in foreign exchange rates that affect foreign currency denominated intercompany receivables and payables. These contracts generally have maturity dates of 60 days or less, relate primarily to currencies of industrial countries and are marked to market at each balance sheet date. The resulting gains or losses are included in other income and expense offsetting exchange losses or gains on the related receivables and payables. Unrealized gains and losses are not deferred. Exchange gains and losses on these contracts are net of premiums and discounts resulting from interest rate differentials between the U.S. and the countries of the currencies being traded. The cash flows related to these contracts are 8 classified as cash flows from investing activities in the statement of cash flows. Stock Compensation Plans Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share are provided as if the fair value method had been applied. Earnings Per Share Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding for each period. Diluted earnings per share are calculated assuming the exercise of certain stock options. Treasury stock is not considered outstanding for purposes of calculating weighted average shares. Fair Value of Financial Instruments For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, notes payable, accounts payable, long-term debt and forward exchange contracts, the carrying amounts approximate fair value. The fair values of other instruments are disclosed in relevant notes to the financial statements. 2. Acquisitions In December 1997, the Company acquired, for cash, the assets used by Chiron Diagnostics Corporation in the business of manufacturing, marketing and selling diagnostic controls (exclusive of blood gas controls). The business has been combined with the Clinical Diagnostics controls business based in southern California. In October 1997, the Company acquired, for cash, substantially all of the assets of Protein Databases, Inc. The assets purchased have been utilized by the Life Science segment in its imaging products. In September 1997, the Company acquired, for cash, certain assets related to the design and manufacture of the optical production profiler from Pacific Scientific Company. This expanded the semiconductor products offered by the Analytical Instruments segment. In conjunction with these acquisitions, liabilities were assumed and incurred as follows (in thousands):
Assigned value of assets acquired $12,173 Goodwill 20,959 Cash paid (31,238) Liabilities assumed and incurred $ 1,894
9 3. Marketable Securities The Company's portfolio is comprised principally of equity securities with an aggregate market value of $6,174,000 and $18,092,000 and cost of $5,469,000 and $12,289,000 at December 31, 1998 and 1997, respectively. At December 31, 1998, gross unrealized holding gains and losses were $1,044,000 and $339,000, respectively. At December 31, 1997, gross unrealized holding gains and losses were $6,039,000 and $236,000, respectively. Information regarding the proceeds and gross realized gains and losses from sales of securities is as follows (in thousands):
Year Ended December 31, 1998 1997 1996 Proceeds $ 16,367 $ 3,419 $ 2,968 Gross realized gains $ 9,168 $ 1,211 $ 1,130 Gross realized losses (548) (82) - Net realized gain $ 8,620 $ 1,129 $ 1,130
4. Investment in Affiliates Beginning in December 1997, Bio-Rad began investing in Instrumentation Laboratory, S.p.A. (IL), an Italian based clinical diagnostics company with fiscal 1997 revenues in excess of $200 million. At December 31, 1998, Bio-Rad held approximately 26% of the outstanding stock of IL. Grupo CH-Werfen, S.A., a privately held company based in Spain, controls over 50% of the outstanding stock of IL. Approximately 29% of the outstanding stock of IL is available in the U.S. evidenced by American Depository Shares (Nasdaq:ILABY). The most recently published financial statements for IL are as of February 28, 1998. Prior to September 1998, Bio-Rad classified the investment as Marketable Securities. Given the limited availability of financial information and the low volume of shares traded in recent months, Bio- Rad management does not believe there is a sufficient liquid market for IL stock. Accordingly, the investment was reclassified to Other Assets. Additionally, since Bio-Rad does not have the ability to significantly influence the operating and financial policies of IL, the investment has been recorded at its cost of $18,159,000. An unrealized holding gain of $652,000 was included in comprehensive income in 1997. This amount was reversed in 1998 when the investment in IL was reclassified to Other Assets. 5. Notes Payable and Long-Term Debt Notes payable include local credit lines maintained by the Company's subsidiaries aggregating approximately $33,311,000, of which $24,592,000 was unused at December 31, 1998. The weighted average interest rate on these lines was 5.14% and 5.78% at December 31, 1998 and 1997, respectively. The parent company guarantees most of these credit lines. 10 The principal components of long-term debt are as follows (in thousands):
December 31, 1998 1997 Revolving credit agreement $42,000 $38,000 Capitalized leases 606 1,046 Other 405 836 43,011 39,882 Less current maturities 672 930 Long-Term Debt $42,339 $38,952
The Company entered into a $100 million revolving credit agreement on May 15, 1998, replacing the $60 million credit agreement previously in place. The new agreement provides for borrowings on an unsecured basis through May 2003. Interest is based upon Eurodollar or corporate base (prime) rates. The applicable interest rates at December 31, 1998 and 1997 were 5.96% and 6.49%, respectively. A fee ranging from 0.15% to 0.30% annually is charged on the daily unborrowed portion of the commitment. The Company entered into interest rate swap agreements to reduce the impact of changing interest rates on its revolving credit agreement. At December 31, 1998, the Company had two interest rate swap agreements with commercial banks, having an aggregate notional amount of $25 million. The agreements essentially fix the Company's interest rate exposure on $25 million worth of floating rate loans under its revolving credit agreement at 6.30%. The agreements mature in December 2000, and June 2002. The resulting applicable interest rate was 6.23% on the revolving credit agreement. In terms of the interest rate swap, the Company is exposed to credit loss in the event of nonperformance by a counterparty, however the Company has not experienced such nonperformance to date and considers such a possibility remote. The Company redeemed all of its 10.9% Subordinated Notes in December 1996. This redemption resulted in an extraordinary charge of $1,176,000, net of income tax benefits of $817,000. The debt was extinguished with current operating funds and $5,000,000 borrowed from the Company's revolving credit agreement. The revolving credit agreement (including amendments) requires the Company, among other things, to comply with certain financial ratio covenants. The Company was in compliance with all financial ratio covenants as of December 31, 1998. This agreement also contains certain other restrictions, including the limitation of cash dividends. Approximately $11,486,000 of retained earnings were available for payment of cash dividends at December 31, 1998. Maturities of long-term debt at December 31, 1998, are as follows: 1999 - $672,000; 2000 - $213,000; 2001 - $116,000; 2002 - $10,000; 2003 - $42,000,000. 11 6. Income Taxes The U.S. and international components of income before taxes and extraordinary charge are as follows (in thousands):
Year Ended December 31, 1998 1997 1996 U.S. $ 24,173 $ 11,343 $ 23,766 International 10,055 11,385 12,707 Income before taxes and extraordinary charge $ 34,228 $ 22,728 $ 36,473
The provision for income taxes consists of (in thousands):
Year Ended December 31, 1998 1997 1996 Current: U.S. Federal $ 8,564 $ 3,277 $ 7,613 International 4,974 3,226 6,070 U.S. State 374 552 1,122 13,912 7,055 14,805 Deferred (3,986) (691) (5,687) Provision for income taxes $ 9,926 $ 6,364 $ 9,118
The Company's income tax provision differs from the amount computed by applying the U.S. federal statutory rate to income before taxes as follows:
Year Ended December 31, 1998 1997 1996 U.S. statutory tax rate 35% 35% 35% State taxes, net of federal income tax benefit (1) 1 1 Foreign Sales Corporation tax benefit (5) (6) (4) Research and development tax credit (1) (2) (1) International taxes in excess of U.S. Foreign Tax Credit - 1 4 Loss carryforwards utilized (1) (6) (4) Amortization of goodwill - 2 - Other 2 3 (6) Provision for income taxes 29% 28% 25%
12 Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands):
December 31, 1998 1997 Deferred Tax Assets: Reserves for obsolete inventory, warranty and bad debts $ 12,102 $ 10,418 Eliminated intercompany profit 3,265 3,483 Tax benefit of foreign loss carryforwards 4,732 1,822 Other 3,583 3,086 23,682 18,809 Valuation allowance (5,342) (3,285) Deferred Tax Assets $ 18,340 $ 15,524 Deferred Tax Liabilities: Deferred gain on condemnation $ 4,473 $ 4,426 Depreciation 1,174 1,921 Development cost of Hercules facility 1,413 1,438 Other 6,322 7,680 Deferred Tax Liabilities $ 13,382 $ 15,465
The valuation allowance is needed to reduce the deferred tax assets to an amount that is more likely than not to be realized. The net change in the valuation allowance in 1998 was an increase of $2,057,000, primarily resulting from an increase in tax loss carryforwards. The net change in 1997 was a decrease of $2,287,000, primarily resulting from unanticipated utilization of foreign loss carryforwards. At December 31, 1998, Bio-Rad's international subsidiaries had combined net operating loss carryforwards of $11,600,000. A portion of these loss carryforwards will expire in the following years: 1999 - $1,440,000; 2000 - $762,000; 2001 - $371,000; 2002 - $1,148,000; 2003 - $422,000; 2004 - $260,000; 2005 - $1,543,000 and 2008 - $243,000. The remainder of these loss carryforwards have no expiration date. The utilization of these carryforwards is limited to the separate taxable income of each individual subsidiary. Bio-Rad does not provide for taxes which would be payable if the cumulative undistributed earnings of its international subsidiaries, approximately $24,923,000 at December 31, 1998, were remitted to the U.S. parent company. Unless it becomes advantageous for tax or foreign exchange reasons to remit a subsidiary's earnings, such earnings are indefinitely reinvested in subsidiary operations. The withholding tax and U.S. federal income taxes on these earnings, if remitted, would in large part be offset by tax credits. 13 7. Stockholders' Equity Stock Classification The Company's outstanding stock consists of Class A Common Stock (Class A) and Class B Common Stock (Class B). Each share of Class A and Class B participates equally in the earnings of Bio- Rad, and is identical in most respects except that (i) Class A has limited voting rights, each share of Class A being entitled to one-tenth of a vote on most matters and each share of Class B being entitled to one vote; (ii) Class A stockholders are entitled to elect 25% of the Board of Directors (rounded up to the nearest whole number) and Class B stockholders are entitled to elect the balance of the directors; (iii) cash dividends may be paid on Class A shares without paying a cash dividend on Class B shares, but no cash dividend may be paid on Class B shares unless at least an equal cash dividend is paid on Class A shares; and (iv) Class B shares are convertible at any time into Class A shares on a one-for-one basis at the option of the stockholder. Stock Option Plans Bio-Rad maintains incentive and non-qualified fixed stock option plans for officers and certain other key employees. Under the Amended 1994 Stock Option Plan, the Company may grant options to its employees for up to 1,175,000 shares of common stock provided that no option shall be granted after March 1, 2004. Under the plans, Class A and Class B options are granted at prices not less than fair market value on the date of grant, are exercisable on a cumulative basis at a rate not greater than 25% per annum commencing one year after the date of grant and expire five years after the date of grant. The Company has made no charge to income with respect to any stock options. At the time options are exercised, the par value of the shares is credited to common stock and the excess is credited to additional paid-in capital. The Company may receive income tax benefits from the exercise of non-qualified stock options and from certain dispositions of stock received by employees under qualified or incentive stock options. The fair value of each option granted since January 1, 1995, was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for grants in 1998, 1997 and 1996, respectively: no dividend yield for all periods; expected lives of 2.0 and 2.9 years in 1998 and 1.8 and 2.8 years in 1997 and 1996; expected volatility of 35%, 33% and 33%; and risk-free interest rates ranging from 5.39% to 5.48%, 5.63% to 6.15% and 4.85% to 5.27%. 14 Activity under the plans is summarized below (amounts reported in the Price columns represent the weighted average exercise price):
Year Ended December 31, 1998 1997 1996 Shares Price Shares Price Shares Price Outstanding at beginning of year 517,018 $21.40 482,900 $16.34 427,457 $12.39 Granted 150,653 23.54 147,050 32.54 147,000 26.55 Exercised (89,625) 10.09 (90,445) 11.88 (59,576) 11.12 Forfeited (14,677) 25.07 (19,909) 25.38 (31,981) 20.21 Expired (2,322) 9.46 (2,578) 12.04 - - Outstanding at end of year 561,047 23.73 517,018 21.40 482,900 16.34 Options exercisable at year-end 222,539 172,689 149,605 Weighted average fair value of options granted during the year $7.62 $10.76 $8.57
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price $ 7.37 - $18.21 150,276 0.7 years $14.11 123,223 $13.23 $19.80 - $23.94 147,106 3.9 23.10 6,976 19.89 $25.92 - $31.63 161,971 2.4 27.53 66,952 27.14 $32.63 - $35.89 101,694 3.1 32.82 25,388 32.82 $ 7.37 - $35.89 561,047 2.5 23.73 222,539 19.86
15 Employee Stock Purchase Plan Under the Amended and Restated 1988 Employee Stock Purchase Plan (the Plan), the Company has authorized the sale of 645,000 shares of Class A to eligible employees. The purchase price of the shares under the Plan is the lesser of 85% of the fair market value on the first day of each calendar quarter, or 85% of the fair market value on the last day of each calendar quarter. Employees may designate up to 10% of their compensation for the purchase of stock. Under the Plan, the Company sold 51,446 shares for $1,129,000; 43,785 shares for $982,000 and 30,888 shares for $742,000 to employees in 1998, 1997 and 1996, respectively. At December 31, 1998, 64,126 shares remained authorized under the Plan. Management anticipates a stockholder resolution to extend the Plan. The fair value of the employees' purchase rights since January 1, 1995, was estimated using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996, respectively: no dividend yield for all periods; an expected life of three months for all periods; expected volatility ranging from 28% to 38%, 19% to 30% and from 26% to 38%; and risk-free interest rates ranging from 4.27% to 5.23%, 5.02% to 5.41% and from 4.90% to 4.99%. The weighted average fair value of those purchase rights granted in 1998, 1997 and 1996 was $5.55, $5.50 and $6.81, respectively. Pro Forma Disclosures Had compensation cost for the Company's stock-based compensation plans been determined based upon the fair value at grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):
Year Ended December 31, 1998 1997 1996 Net income As reported $24,302 $16,364 $26,179 Pro forma $23,026 $15,173 $25,348 Diluted earnings per As reported $1.97 $1.32 $2.10 share Pro forma $1.86 $1.22 $2.03
Under the requirements of SFAS No. 123, the above disclosures relate only to options granted after December 15, 1994, and do not include the impact of outstanding options that were made prior to the period for which SFAS No. 123 is effective. Since employee stock options vest over several years, and additional grants are likely to be made in the future, during the phase-in period of SFAS No. 123 the disclosures are not likely to be representative of the effects on reported pro forma net income or earnings per share in future years. 16 8. Earnings Per Share In the fourth quarter of 1997, Bio-Rad adopted SFAS No. 128, "Earnings per Share". Basic earnings per share as required by SFAS No. 128 are equal to earnings per share as historically reported by Bio-Rad. No historical restatement was necessary. Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 94,000, 134,000 and 199,000 shares, for the years ended December 31, 1998, 1997 and 1996, respectively. Options to purchase 229,000 and 133,000 shares of common stock were outstanding during 1998 and 1997, respectively, but were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common shares. The options were still outstanding at the end of 1998. No options were excluded in 1996. 9. Restructuring Costs In the fourth quarter of 1996, the Clinical Diagnostics segment provided a $2,700,000 restructuring charge and a $2,100,000 charge to cost of goods sold related to product line restructuring in the immunoassay market and disposition of the related production and research facility in northern California. The restructuring charge consisted primarily of lease-related costs and write-offs of production and research equipment dedicated to the Company's closed system immunoassay product line. The charge to cost of goods sold reflected the adjustment to inventory necessary to reduce the carrying value of inventory to its net realizable value. Cash outlays were primarily for lease-related costs and commenced in the first quarter of 1997. Future lease payments have been reserved through 2000. The Company is reviewing the use of this property and the reserve may be offset in the future should the Company sublease or utilize the property for alternative purposes. 10. Other Income and Expense Other, net includes the following income and (expense) components (in thousands):
Year Ended December 31, 1998 1997 1996 Amortization of goodwill $(2,068) $(1,612) $ (132) Exchange gains (losses) 22 (711) (641) Other non-operating litigation costs, net 117 (1,606) (971) Miscellaneous other items (47) (381) (88) Other, net $(1,976) $(4,310) $(1,832)
17 Exchange gains (losses) include premiums and discounts on forward foreign exchange contracts. 11. Supplemental Cash Flow Information The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
Year Ended December 31, 1998 1997 1996 Net income $24,302 $16,364 $26,179 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,975 19,470 17,870 Foreign currency hedge transactions, net 1,360 (4,001) (1,275) Gains on dispositions of marketable securities (8,620) (1,129) (1,130) Increase in accounts receivable, net (5,739) (6,176) (6,670) (Increase) decrease in inventories (166) (14,831) 5,339 (Increase) decrease in other current assets 4,629 (6,369) 435 Increase (decrease) in accounts payable and other current liabilities (4,808) 18,775 1,411 Increase (decrease) in income taxes payable 1,040 1,122 (2,926) Decrease in deferred taxes (5,292) (1,276) (4,879) Other (346) (840) (1,201) Net cash provided by operating activities $27,335 $21,109 $33,153
12. Commitments and Contingent Liabilities Rents and Leases Net rental expense under operating leases was $12,622,000 in 1998, $11,339,000 in 1997 and $11,505,000 in 1996. Leases are principally for facilities and automobiles. Annual future minimum lease payments at December 31, 1998, under operating leases are as follows: 1999 - $9,076,000; 2000 - $6,050,000; 2001 - $4,524,000; 2002 - $4,184,000; 2003 - $3,599,000; subsequent to 2003 - $12,121,000. Deferred Profit Sharing Retirement Plan The Company has a profit sharing plan covering substantially all U.S. employees. Contributions are made at the discretion of the Board of Directors. Bio-Rad has no liability other than for the current year's contribution. Contributions charged to income were $3,566,000, $3,285,000 and $3,165,000 in 1998, 1997 and 1996, respectively. 18 Foreign Exchange Contracts The Company enters into forward foreign exchange contracts as a hedge against foreign currency denominated intercompany receiv- ables and payables. At December 31, 1998, the Company had contracts maturing in January 1999 to sell foreign currency with a market value of $48,053,000 and to purchase foreign currency with a market value of $1,811,000. At December 31, 1997, the Company had contracts maturing in January 1998 to sell foreign currency with a market value of $37,651,000 and to purchase foreign currency with a market value of $559,000. 13. Legal Proceedings In the third quarter of 1996, Bio-Rad and Fuji Photo Film Co., Ltd. reached a settlement in the action filed in Civil Department No. 29 of the Tokyo District Court in July 1994 alleging in- fringement of a Japanese patent which covers an autoradiographic process. The settlement amounts were provided for in 1995 and 1994. The Company is a party to various other claims, legal actions and complaints arising in the ordinary course of business. One such action relates to the U.S. Environmental Protection Agency which has informed the Company that it may be a potentially responsible party under the Comprehensive Environmental Response, Compensa- tion and Liability Act, as amended, at one site in Colorado. In the opinion of management, the outcome of this and other claims, legal actions and complaints would have no material adverse effect on the future results of operations or the financial position of the Company. 14. Segment Information The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998 which changes the way the Company reports information about its operating segments. The information for 1997 and 1996 has been restated in order to conform to the 1998 presentation. Bio-Rad is a multinational manufacturer and worldwide distributor of life science research products, clinical diagnostics and analytical instruments. Bio-Rad has three reportable segments: Life Science, Clinical Diagnostics and Analytical Instruments. These reportable segments are strategic business lines that offer different products and services and require different marketing strategies. The Life Science segment develops, manufactures, sells and services liquid chromatography, electrophoresis, gene amplification and transformation, imaging and image analysis, DNA sequencing and sample preparation products. These products are sold to university and medical school laboratories, 19 pharmaceutical and biotechnology companies, and government and industrial research facilities. The Clinical Diagnostics segment develops, manufactures, sells and services automated test systems, informatics systems, test kits and specialized quality controls for the healthcare market. These products are sold to reference laboratories, hospital laboratories, state newborn screening facilities, physicians office laboratories, and insurance and forensic testing laboratories. The Analytical Instruments segment develops, manufactures, sells and services FT-IR spectroscopy systems, semiconductor test and manufacturing instruments, spectral reference publications and software. These products are sold to industrial companies, government institutions, academia and forensic analysis laboratories. The accounting policies of the segments are the same as those described in Significant Accounting Policies (see Note 1). Segment profit or loss used for corporate management purposes includes an allocation of corporate expense based upon sales and an allocation of interest expense based upon accounts receivable and inventories. In addition, certain items that are classified as non-operating expenses and reported as other income and expense on a consolidated basis are included in segment profit or loss. Segments are expected to manage only assets completely under their control. Accordingly, segment assets include primarily accounts receivable, inventories and gross machinery and equipment. Information regarding industry segments at December 31, 1998, 1997 and 1996 and for the years then ended is as follows (in thousands):
Life Clinical Analytical Science Diagnostics Instruments Segment net sales 1998 $209,655 $170,002 $ 66,100 1997 205,704 150,095 75,800 1996 199,461 148,938 74,034 Allocated interest expense 1998 $ 1,501 $ 1,464 $ 571 1997 550 428 212 1996 1,344 1,237 541 Depreciation and amortization 1998 $ 7,328 $ 11,242 $ 1,652 1997 7,258 7,553 3,768 1996 7,063 7,724 1,645 Segment profit (loss) 1998 $ 12,649 $ 18,160 $ (2,166) 1997 6,816 19,257 (1,003) 1996 15,716 15,805 4,327 20 Segment assets 1998 $124,219 $129,089 $ 38,607 1997 116,289 111,453 44,964 1996 108,706 96,653 41,038 Capital expenditures 1998 $ 6,487 $ 15,213 $ 1,912 1997 7,461 14,432 1,991 1996 7,103 7,514 2,133
Capital expenditures include capitalized leases of $311,000, $331,000 and $872,000 in 1998, 1997 and 1996, respectively. Inter-segment sales are primarily between Life Science and Clinical Diagnostics and are priced to give Life Science a market representative gross margin. The difference between total segment allocated interest expense, depreciation and amortization, and capital expenditures and the corresponding consolidated amounts is attributable to the Company's corporate headquarters. The following reconciles total segment profit (loss) to consolidated income before taxes and extraordinary charge (in thousands):
Year Ended December 31, 1998 1997 1996 Total segment profit (loss) $28,643 $25,070 $35,848 Gross profit on inter-segment sales (1,925) (2,338) (1,791) Net corporate operating, interest and other expense not allocated to segments (1,280) (1,605) 31 Investment income, net 8,790 1,601 2,385 Consolidated income before taxes and extraordinary charge $34,228 $22,728 $36,473
The following reconciles total segment assets to consolidated total assets (in thousands):
December 31, 1998 1997 1996 Total segment assets $291,915 $272,706 $246,397 Cash and other current assets 36,968 39,025 31,002 Net property, plant and equipment excluding segment specific gross machinery and equipment (11,364) (5,635) (7,002) Other long-term assets 49,780 45,780 14,528 Total assets $367,299 $351,876 $284,925
21 The following presents sales to external customers by geographic area based primarily on the location of the use of the product or service (in thousands):
Year Ended December 31, 1998 1997 1996 Europe $141,004 $132,551 $141,142 Pacific Rim 88,917 98,070 94,794 United States 195,309 184,533 171,445 Other (primarily Canada and Latin America) 16,712 11,760 11,408 Total net sales $441,942 $426,914 $418,789
The following presents long-lived assets by geographic area based upon the location of the asset (in thousands):
December 31, 1998 1997 1996 Europe $ 7,860 $ 7,004 $ 8,060 Pacific Rim 4,933 3,885 4,295 United States 118,628 112,967 73,352 Other (primarily Canada and Latin America) 489 602 683 Total long-lived assets $131,910 $124,458 $ 86,390
15. Quarterly Financial Data - (unaudited) Summarized quarterly financial data for 1998 and 1997 are as follows (in thousands, except per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter 1998 Net sales $116,174 $107,898 $ 98,982 $118,888 Gross profit 64,076 58,857 53,577 62,994 Net income 8,776 7,151 1,938 6,437 Basic earnings per share $0.72 $0.58 $0.16 $0.52 Diluted earnings per share $0.71 $0.58 $0.16 $0.52 1997 Net sales $105,854 $105,752 $ 99,491 $115,817 Gross profit 62,141 58,721 54,835 61,886 Net income 7,494 4,899 2,614 1,357 Basic earnings per share $0.61 $0.40 $0.21 $0.11 Diluted earnings per share $0.60 $0.39 $0.21 $0.11
22 16. Information Concerning Common Stock - (unaudited) The Company's Class A and Class B Common Stock are listed on the American Stock Exchange with the symbols BIO.A and BIO.B, respec- tively. The following sets forth, for the periods indicated, the high and low sales prices for the Company's Class A and Class B Common Stock.
Class A Class B High Low High Low 1998 First Quarter 27 22-1/2 26-3/8 23-1/4 Second Quarter 34-1/8 24-1/8 33-3/4 27 Third Quarter 31-7/8 23-5/16 29-1/2 24-1/4 Fourth Quarter 24-3/4 19-1/2 22-3/8 19-3/4 1997 First Quarter 33-1/2 25-1/2 32 26-3/4 Second Quarter 27-15/16 23-3/8 27-1/2 23-1/4 Third Quarter 30-3/4 26 30-1/8 26-1/4 Fourth Quarter 30-1/4 23-7/16 29-3/8 29
On February 22, 1999, the Company had 591 holders of record of Class A Common Stock and 281 holders of record of Class B Common Stock. Bio-Rad has never paid a cash dividend and has no present plans to pay cash dividends. 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Bio-Rad Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Bio-Rad Laboratories, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Bio-Rad Laboratories, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP San Francisco, California, February 3, 1999 24 Bio-Rad Laboratories, Inc. Management's Discussion and Analysis ________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion should be read in conjunction with the information contained in the Company's Consolidated Financial Statements and the accompanying notes which are an integral part of the statements. References are to the Notes to Consolidated Financial Statements. The following table shows operating income and expense items as a percentage of net sales:
Year Ended December 31, 1998 1997 1996 Net sales 100.0 100.0 100.0 Cost of goods sold 45.8 44.3 43.5 Gross profit 54.2 55.7 56.5 Selling, general and administrative 37.8 38.7 37.1 Product research and development 9.4 10.8 9.5 Restructuring costs - - 0.6 Income from operations 7.0 6.2 9.3 ===== ===== ===== Income before extraordinary charge 5.5 3.8 6.5 ===== ===== =====
Corporate Results -- Sales, Margins and Expenses Bio-Rad's net sales (sales) in 1998 were $441.9 million, an increase of 3.5% over 1997 sales. 1998 marked the third consecutive year that a strengthening U.S. dollar caused Bio-Rad to report slower sales growth due to currency translation. The 1998 impact was 2.5% or $10.5 million, just slightly more than half of the impact in the prior year when sales were reduced by 4.6%. When 1998 sales are compared to 1997 at constant 1997 exchange rates, sales for the Company grew 6.0%. Eliminating the effect of a strengthened U.S. dollar, sales increased 16% and 4% in Clinical Diagnostics and Life Science, respectively. The Analytical Instruments segment recorded 11% less in sales. The growth in Clinical Diagnostics was largely attributed to the December 1997 purchase of the controls business from Chiron Diagnostics Corporation. Life Science experienced strong growth in the U.S. especially in the imaging and microscopy product lines. Europe experienced slow growth, and Asia had a sales decline as research spending was limited by many governments in the area. The Analytical Instruments segment experienced lower sales as the markets it served contracted almost worldwide. This slowdown impacted the products sold 25 into the semiconductor test and manufacturing equipment market, which has been very successful for the past several years. Bio-Rad's sales in 1997 amounted to $426.9 million, an increase of 1.9% over sales in 1996. The effect of a strengthening U.S. dollar caused a reduction in sales growth of 4.6% or approximately $19.2 million. When 1997 sales are compared to 1996 at constant 1996 exchange rates, sales for the Company grew 6.5%. Sales increased in all segments of the Company's business. Eliminating the effects of a strengthened U.S. dollar, sales increased 8% in Life Science, 6% in Analytical Instruments and 5% in Clinical Diagnostics. Life Science sales growth was generated by its imaging product equipment and related software, gene transfer products, convenience electrophoresis and chromatography products. Analytical Instruments saw continued growth in the products sold into the semiconductor test and manufacturing equipment market. Consolidated gross margins were 54.2% for 1998 compared to 55.7% in the prior year. The decline in margins, as in 1997, reflects overall lower prices on international sales caused by a strengthening U.S. dollar and a majority of manufacturing costs being U.S. dollar denominated. Clinical Diagnostics gross margins declined 3.1% of sales, in part, from the Chiron acquisition (see Note 2), where several large supply agreements existed. Additionally, this business segment is seeing a continuing consolidation in its customer base. Company management believes that these larger, more formal agreements offer opportunities to offset pricing pressure through improved planning and resultant efficiencies. Analytical Instruments margins were negatively impacted by an increasingly weak semiconductor market and the strengthening dollar. Life Science margins declined from higher service and warranty costs, and were particularly impacted in Asia. Consolidated gross margins were 55.7% for 1997 compared to 56.5% for 1996. Gross margins overall were adversely affected by lower prices on international sales caused by the strengthening U.S. dollar and a majority of manufacturing costs being U.S. dollar denominated. Clinical Diagnostics gross margins declined by 0.6% of sales after adjustment for a $2.1 million 1996 write-down of inventory associated with a discontinued product line (see Note 9). Analytical Instruments gross margins declined 0.8% of sales largely in the Company's spectroscopy equipment product line as a number of reengineering and organizational changes were made to the manufacturing operations of this product line. Life Science margins declined 2.1% of sales. In addition to the impact of lower overall prices mentioned above, this segment experienced increased warranty and service expenses, increased returns and allowances, and unfavorable manufacturing overhead absorption. Consolidated selling, general and administrative expense (SG&A) decreased to 37.8% of sales in 1998 when compared to 38.7% for 1997. Spending increased in absolute dollars only in the Clinical Diagnostics segment yet at a growth rate of approximately half the growth rate in sales. Life Science and Analytical Instruments each had declines in absolute spending both from the currency effect on 26 foreign incurred SG&A and cost elimination programs begun in late 1997. SG&A headcount increased by approximately 7%; these increases took place in Asia and Latin America, developing markets for Bio-Rad, which have cost structures lower than those in the U.S. and Europe. SG&A increased to 38.7% of sales in 1997 from 37.1% in 1996. Spending increased in absolute dollars in all segments, with each segment growing SG&A faster than sales. While headcount grew approximately 2.5% (excluding the acquisition in December 1997), salaries rose at an even faster rate particularly in the United States as the labor market became tighter and the cost of retaining and recruiting personnel increased. Additionally, the Company increased its expenditures on information technology to add the necessary infrastructure for Bio-Rad to remain competitive in serving its worldwide customer base. Product research and development expense (R&D) decreased in 1998 by 10% to $41.4 million. Spending declined in the Life Science and Analytical Instruments segments and increased 3% in the Clinical Diagnostics segment. Declines in Life Science and Analytical Instruments were due to the completion or termination of projects. Future spending levels are expected to be more conducive to improved profitability while retaining the potential to grow the business. R&D increased in 1997 by 16.6% to $46.1 million compared to $39.6 million for the year 1996. While spending increased in each segment, Clinical Diagnostics remained virtually unchanged as spending increased $0.1 million. Life Science increased spending 24%. Analytical Instruments increased spending 28% as it prepared to meet new specifications for the next generation of test and measurement equipment and for new products that will complement the existing product line. In the fourth quarter of 1996, the Clinical Diagnostics segment made a provision of $2.7 million for lease-related occupancy costs and the write-down of certain dedicated fixed assets associated with its closed system immunoassay analyzer product line (see Note 9). Corporate Results -- Non-Operating Items Interest expense represents 0.8% of sales in 1998 compared to 0.3% in 1997 and 0.7% in 1996. The current year increase is attributable to an increase in the amount of interest bearing debt primarily resulting from the December 1997 acquisition. Average borrowings for the years 1998, 1997 and 1996 were $52.3 million, $14.7 million and $27.9 million, respectively. The decline in borrowings from 1996 to 1997 reflects the repayment of $20.0 million of 10.9% Subordinated Notes in December 1996. The funds were generated from operations and resulted in an extraordinary charge (see Note 5). Investment income in 1998, 1997 and 1996 includes gains on sales of marketable securities. During 1998, Bio-Rad realized significant investment income, $8.6 million, as it sold some of its investment in marketable securities in order to increase its investment in Instrumentation Laboratory (see Note 4). 1996 included interest 27 income of $0.8 million from short-term investments as a result of accumulating cash prior to repaying the 10.9% Subordinated Notes. Net other income and expense for 1998 is comprised principally of amortization of goodwill (see Note 10). Net other income and expense for 1997 was principally non-operating litigation costs and amortization of goodwill. Net other income and expense for 1996 was principally non-operating litigation costs and exchange losses. Bio- Rad's hedging program is limited to nonspeculative forward foreign exchange contracts (with major financial institutions) which hedge the exposure of intercompany receivables and payables. The net exchange gain or loss results from the estimating inherent in projecting intercompany balances and from transaction charges. Bio-Rad's consolidated effective tax rate was 29%, 28% and 25% in 1998, 1997 and 1996, respectively. The higher effective tax rate for 1998 is the result of changes in the source of taxable income and the diminishing availability of loss carryforwards. The tax rate for all years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. These benefits are not expected to continue indefinitely. However, for 1999 and 2000, the rate should remain at existing levels, then begin to rise over time to normalized statutory rates. Financial Condition Historically, the Company's principal capital requirement was for working capital to fund its growth in operations. Since 1994, the Company's efforts to improve profitability and emphasize working capital control have limited much of this requirement. At December 31, 1998, the Company had available $10.1 million in cash and cash equivalents, $24.6 million under its international lines of credit, $58.0 million under its principal revolving credit agreement (see Note 5) and marketable securities with a market value of $6.2 million, a majority of which could be readily converted into cash (see Note 3). Net cash provided by operations was $27.3 million, $21.1 million and $33.2 million in 1998, 1997 and 1996, respectively. The 1998 increase in net cash provided by operations was caused by R&D spending declines year-over-year and slower SG&A growth than sales. Consolidated net accounts receivable increased 9.3% in 1998 when compared to 1997. This increase is attributable to an increase in fourth quarter sales, the virtual elimination of factored receivables in Italy and Japan, and the late fourth quarter weakening of the U.S. dollar when compared to December 31, 1997 exchange rates. Bio-Rad's management regularly reviews the allowance for uncollectible receivables and believes net receivables are fully realizable. For the year ended December 1998, consolidated inventories rose 1% to $92.4 million. The Life Science and Analytical Instruments segments both had declining inventory levels from the prior year. The Clinical Diagnostics segment added approximately $2.4 million to inventory as 28 it began to manufacture products destined to fill some recently completed supply contracts. Inventory for the Clinical Diagnostics controls business, a growth area for the Company, is known for long lead times and large, infrequent batch production to meet customer requirements. The Company plans to increase its inventory levels in 1999 in this business segment. Management regularly reviews the impact of obsolescence on current inventory caused by the introduction of new products. Management will continue its focus on inventory control in the coming year to moderate capital requirements. A valuation reserve is necessary for deferred tax assets (see Note 6) primarily because realization of tax attributable to foreign loss carryforwards is uncertain. Net capital expenditures in 1998 totaled $21.2 million compared to $23.6 million and $15.2 million in 1997 and 1996, respectively. Expenditures in 1998 again included additions to the Clinical Diagnostics segment's southern California manufacturing operations facilities to accommodate the consolidation of the acquired assets in the fourth quarter of 1997. Expenditures in all years include clinical diagnostic equipment placed with customers to be used with the Company's diagnostic reagents. Capital expenditures are expected to increase substantially in 1999 when compared to the past three years. Consideration is being given to relocating the Life Science segment's northern California distribution and instrument manufacturing facility. The final review and approval are scheduled to take place in the first quarter of 1999. If approved, this will require a major investment, which could begin as early as the second quarter of 1999. The capital commitment to this project could be approximately $25 million over two years. Management regularly approves capital spending in the normal course of business. Additionally, the Company will continue its investment in information technology commenced in 1997 to provide the enterprise-wide infrastructure necessary for achieving greater competitiveness and further cost efficiencies. By historical standards, Bio-Rad's liquidity remained strong in 1998. Available funds and cash flow from operations are adequate to meet the Company's objectives for operations, research and development, and investment in its systems and equipment. In February 1998, the Board of Directors authorized the Company to repurchase up to an additional $10 million of common stock over an indefinite period of time. This is the third such authorization since July 1996, bringing the total authorized to $18 million. Through January 1999, the Company has repurchased 504,700 shares of Class A Common Stock and 30,000 shares of Class B Common Stock for a total of $12.8 million. The repurchase is designed to improve shareholder value and to satisfy the Company's obligations under the employee stock purchase and stock option plans. The Company continues to regularly review acquisition opportunities; currently no material acquisitions have reached a stage beyond exploratory discussions. 29 Euro - A New European Currency On January 1, 1999, certain member countries of the European Union began to fix the conversion rates between their national currencies and a common currency, the "Euro." Over the period January 1, 1999 through January 1, 2002 participating countries will gradually transition from their national currencies to the Euro. This transition will have business implications including the need to adjust internal systems to accommodate the Euro and cross-border price transparency. A group of Corporate and European managers have been assigned the task of preparing and accommodating the changes required to continue to do business in the European Union. The Company does not presently expect that the efforts involved will have a material impact on operations, financial position or liquidity. There will be increased competitive pressures, and marketing strategies will need to be continuously evaluated until the transition is complete. As a result of competitive forces and emerging government regulations, the Company cannot guarantee that all problems will be foreseen and remediated, and that no material disruption will occur. Year 2000 The Year 2000 issue is the result of computer programs being written using two rather than four digits to define the date. Failure to recognize "00" as the year 2000 could result in a temporary inability to conduct normal business activities. Bio-Rad currently operates in a decentralized processing environment. The Company, with the assistance of outside consultants and contractors, is well underway with phased identification, remediation, replacement, validation and notification processes to minimize the potential disruption to business from information technology and non- information technology systems. The project start-up, inventory and assessment phases are generally complete. For each location remediations or scheduled replacements will be completed prior to the Year 2000 deadline. Bio-Rad's manufactured products have also been undergoing assessment for Year 2000 readiness. Customers and investors can review the Year 2000 readiness status of the Company's products on its web site, http://www.bio-rad.com. The Company has identified significant suppliers and is requesting information from them regarding the Year 2000 readiness of their products or services. The Company has not yet received enough responses to ascertain that a material adverse impact can be avoided. It is not possible at this time to value the amount of business that might be lost as a result of Bio-Rad's business partners' failure to deliver products and services after December 31, 1999. Additionally, global infrastructure comprised of banking, transportation, communication, power generation and ordinary and necessary governmental activities are critical to the Company's operations. Should any of these suppliers not be fully functional after 1999 the negative impact to the Company would be significant and material. 30 The expenditures required in 1998 and 1999 to replace and remediate Year 2000 non-compliant Bio-Rad information technology systems, including equipment, is estimated at $8 million and primarily deals with distribution system capabilities worldwide. Approximately half of these costs have been incurred to date. Hardware and software purchased and installed in connection with these projects will provide both Year 2000 readiness and significant additional functionality. Manufacturing systems have been remediated at a cost that is not material to Bio-Rad overall; these costs have been included in operating results in 1997 and 1998. While some systems enhancements or modifications have been delayed to allow for the more significant Year 2000 remediation to be completed, weighing both cost and benefit, Bio-Rad management believes its response is prudent. The Company as of this date has not identified the "most likely worst case Year 2000 scenario." That scenario will be largely dependent on the Company's significant worldwide suppliers and its assessment of preparedness of the global infrastructure, including multiple national governments. During 1999 the Company will formulate and review contingency plans based on the aforementioned significant supplier responses and global infrastructure preparedness. Financial Risk Management Bio-Rad uses derivative financial instruments to reduce the Company's exposure to fluctuations in foreign exchange rates and interest rates. No derivative financial instruments are entered into for the purpose of speculating or trading. Company policy limits all derivative positions exclusively to reducing risk by hedging an underlying economic exposure that can be effectively correlated to the Company's chosen hedging vehicle. Changes in the value of the derivative are generally offset by reciprocal changes in Bio-Rad's underlying asset. Bio-Rad operates and conducts business in many foreign countries and is exposed to movements in foreign currency exchange rates. Additionally, Bio-Rad's consolidated net equity is impacted by the conversion of the net assets of international subsidiaries for which the functional currency is not the U.S. dollar. Foreign currency exposures are managed on a centralized basis by the Company's Treasury Department. This allows for the netting of natural offsets and lowers transaction costs and exposures. Bio-Rad currently makes approximately 50% of its sales outside the United States and weakening in one currency can often be offset by strengthening in another. Bio-Rad typically enters into forward exchange contracts to sell its foreign currency. Contracts are entered into typically for 30 to 60 days, primarily in British Sterling, Japanese Yen, Italian Lira and German Marks. The costs are recognized in income monthly and generally are the reciprocal of the change in underlying assets. Bio- Rad does not hold any derivative contracts that hedge its foreign currency denominated net asset exposures. Bio-Rad uses sensitivity analysis to assess the market risk associated with its foreign currency exchange risk. Market risk is the potential change in fair value of derivative positions from an adverse movement 31 in currency exchange rates. The forward foreign exchange contracts at December 31, 1998 had a net fair value of $46 million. A 10% adverse loss on quoted foreign currency exchange rates would result in a $4.6 million loss. This impact, of a change in exchange rates, excludes from the analysis the offset derived from the change in the Company's underlying assets and liabilities, which could reduce the effect to zero. The Company maintains a percentage of fixed and variable rate debt within parameters subject to review by the Board of Directors. The Treasury Department enters into swap agreements replacing a segment of its variable rate debt with fixed rate debt. At December 31, 1998, two swaps existed for $25 million. The agreements mature in December 2000, and June 2002 and have an interest rate of 6.3%. The debt swapped was borrowings under the Company's principal revolving credit agreement. The additional cost to fix $25 million of the Company's floating rate debt was expensed as incurred. New Financial Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999, with early adoption permitted. This statement establishes accounting and reporting standards requiring companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. The impact of SFAS No. 133 on the Company's financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not expect the effect of adopting SFAS No. 133 to have a material effect on its financial statements. Forward Looking Statements Other than statements of historical fact, statements made in this Annual Report include forward looking statements, such as statements with respect to the Company's future financial performance, operating results, plans and objectives. Actual results may differ materially from those currently anticipated depending on a variety of risk factors including increased competition, technological development, access to necessary intellectual property, the ability to achieve management objectives (especially related to SG&A and inventory), government regulation, the continued performance of business partners (particularly in relation to the Year 2000 issue), and the monetary policies of various countries. 32 EX-21 4 EXHIBIT 21.1 - LISTING OF SUBSIDIARIES EXHIBIT 21.1 - LISTING OF SUBSIDIARIES SUBSIDIARY JURISDICTION OF ORGANIZATION Bio-Rad Laboratories Pty. Limited Australia Bio-Rad Laboratories Ges.m.b.H. Austria Bio-Rad International, Inc. (FSC) Barbados Bio-Rad Laboratories S.A.-N.V. Belgium RSL N.V. Belgium Bio-Metrics Properties Limited California, USA Bio-Rad Laboratories (Israel) Inc. California, USA Bio-Rad Leasing, Inc. California, USA Bio-Rad Pacific Limited California, USA Bio-Rad Laboratories (Canada) Ltd. Canada Beijing Bio-Rad Analytical Biochemistry Instrument Co., Ltd. China SoftShell International Ltd. Colorado, USA Bio-Metrics Limited Delaware, USA Bio-Rad Export, Inc. (DISC) Delaware, USA Bio-Metrics (U.K.) Limited England Bio-Rad Laboratories Europe Limited England Bio-Rad Laboratories Limited England Bio-Rad Lasersharp Limited England Bio-Rad Limited England Bio-Rad Micromeasurements Limited England Bio-Rad Microscience Limited England Micromeasurements Limited England Sadtler Research Laboratories Ltd. England Bio-Rad S.A. France Bio-Rad Laboratories GmbH Germany Bio-Rad China Limited Hong Kong Bio-Rad Laboratories (India) Private Limited India Bio-Rad Laboratories Ltd. Israel Bio-Rad Laboratories S.r.l. Italy Nippon Bio-Rad Laboratories K.K. Japan Bio-Rad Korea Ltd. Korea Bio-Rad Micromeasurements Inc. Massachusetts, USA Bio-Rad Laboratories Mexico, S.A. de C.V. Mexico Bio-Rad Laboratories B.V. The Netherlands Sandia Systems, Inc. New Mexico, USA Polaron Instruments, Inc. Pennsylvania, USA Bio-Rad Laboratories Ltd. Russia Bio-Rad Laboratories (Singapore) Limited Singapore Bio-Rad Laboratories S.A. Spain Bio-Rad Laboratories AB Sweden Bio-Rad Laboratories AG Switzerland EX-23 5 EXHIBIT 23.1 - CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 - CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-53335 and 33-53337). It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP San Francisco, California, March 25, 1999 EX-27 6 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Bio-Rad Laboratories, Inc. Form 10-K for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 DEC-31-1998 10,081 0 109,639 3,629 92,411 235,389 198,175 116,045 367,299 97,244 42,339 0 0 12,427 201,907 367,299 441,942 441,942 202,438 202,438 0 0 3,731 34,228 9,926 24,302 0 0 0 24,302 1.98 1.97
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