-----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, Mh2qIufRl4yJAhXQjs8U6tADBDSLrAdtnK/3I9Tcqkcx+gl1pzIBBe5zAKvlfHbY e2iAt9jy4EQdPgXTjw8NHg== 0000012208-04-000004.txt : 20040315 0000012208-04-000004.hdr.sgml : 20040315 20040315154006 ACCESSION NUMBER: 0000012208-04-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 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: 1934 Act SEC FILE NUMBER: 001-07928 FILM NUMBER: 04669434 BUSINESS ADDRESS: STREET 1: 1000 ALFRED NOBEL DR CITY: HERCULES STATE: CA ZIP: 94547 BUSINESS PHONE: 5107247000 10-K 1 r10k2003.txt 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, 2003 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 (I.R.S. Employer of 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, 2004 of Stocks Title of Each Class on Which Registered March 1, 2004 Held by Non-Affiliates ------------------- --------------------- ------------------ ------------------------ Class A Common Stock Par Value $0.0001 per share American Stock Exchange 20,800,252 $918,616,460 Class B Common Stock Par Value $0.0001 per share American Stock Exchange 4,850,140 $ 29,207,664
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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act). Yes X No____ Documents Incorporated by Reference Document Form 10-K Parts _________________________________________ ____________________ (1) Annual Report to Stockholders for the fiscal year ended December 31, 2003 (specified portions) I, II, IV (2) Definitive Proxy Statement to be mailed to stockholders in connection with the registrant's 2004 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 production of specialty chemicals used in biochemical, pharmaceutical and other life science research applications. In 1967, the Company entered the field of clinical diagnostics with the development 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 has distribution channels in over thirty countries outside the United States through subsidiaries whose primary focus is customer service and product distribution. On October 1, 1999 Bio-Rad acquired the stock of Pasteur Sanofi Diagnostics (PSD) and the rights to certain ancillary assets for $210 million. PSD was founded by the Institut Pasteur to commercialize its diagnostic research, and holds certain exclusive licenses from the Institut Pasteur in the HIV and infectious disease diagnostic product market. PSD also expanded the geographic reach and market penetration for the Company's products particularly in Latin America, Africa and France. During 2000 and 2001, the Company sold substantially all of its analytical instruments product lines. These divestitures have allowed the Company to focus on its core segments of Life Science and Clinical Diagnostics. Bio-Rad manufactures and supplies the life science research, healthcare, analytical chemistry 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 two industry segments designated as Life Science and Clinical Diagnostics. Each operates in both the United States and international markets. For a description of business and financial information on industry and geographic segments, see Note 15 on pages 27 through 29 of Exhibit 13.1, which is incorporated herein by reference. 1 Life Science Segment. Life science is the study of the characteristics, behavior, and structure of living organisms and their component systems. Life science researchers use a variety of products and systems-- including reagents, instruments, software and apparatus-- to advance the study of life processes, drug discovery, biotechnology and food pathogen testing, primarily within a laboratory setting. We focus on selected segments of the life science market-- proteomics, genomics and cell biology -- for which we estimate 2003 worldwide sales totaled approximately $3.8 billion. The primary technological applications that we supply to these segments consist of electrophoresis, image analysis, molecular detection, chromatography, gene transfer, sample preparation and amplification. The primary end-users in our sectors of the market are universities and medical schools, industrial research organizations, government agencies, pharmaceutical manufacturers, biotechnology researchers and food testing laboratories. Clinical Diagnostics Segment. The clinical diagnostics industry encompasses a broad array of technologies incorporated into a variety of tests used to detect, identify and quantify substances in blood or other bodily fluids and tissues. The test results are used as aids for medical diagnosis, detection, evaluation, monitoring and treatment of diseases and other medical conditions. The bulk of tests are performed in vitro (outside the body), while the remainder consist of in vivo ("in the body") tests. The most common type of in vitro tests are routine chemistry tests that measure important health parameters, such as glucose, cholesterol or sodium, as part of routine blood checks. Other diagnostic tests are more specialized and require more sophisticated equipment and materials than do routine tests. These specialized tests are also lower-volume and higher-priced than routine tests. We estimate that in 2003 the global clinical diagnostics market totaled approximately $23.5 billion. The primary end-users in the areas of the clinical diagnostics industry we target are hospital laboratories, reference laboratories, physician office laboratories, government agencies and other diagnostics manufacturers. 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. 2 Patents and Trademarks We own numerous U.S. and international patents and patent licenses. We believe, however, that our ability to develop and manufacture our products depends primarily on our knowledge, technology and special skills. Under several patent license agreements, we pay royalties on the sales of certain products. We view these patents and license agreements as valuable assets. 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. 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, the Company website 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. Our customer base is broad and diversified. In 2003, no single customer accounted for more than 3% of our total net sales. Our sales are affected by certain external factors. For example, a number of our customers, particularly in the Life Science segment, are substantially dependent on government grants and research contracts for their funding. A significant reduction of government funding would have a detrimental effect on the results of this segment. The Company is the leading provider of BSE (Bovine Spongiform Encephalopathy or mad cow) tests throughout the world. Revenues from the sales of testing products for BSE within our Life Science segment represented approximately 11% and 12% of consolidated net revenue in 2003 and 2002, respectively. A large portion of the revenue for this product is from government agencies currently mandating the use of the test. Competition, pricing, changes in test standards, technology or a decrease in government demand could negatively impact the Company's future revenue from this product. Most of the Company's international sales are generated by wholly-owned subsidiaries and their branch offices in Australia, 3 Austria, Belgium, Brazil, Canada, the Czech Republic, Denmark, England, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Israel, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, People's Republic of China, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan and Thailand. 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 our product groups are competitive. Our competitors range in size from start-ups to large multinational corporations. Reliable independent information on sales and market share of products produced by our competitors is not generally available. We believe, however, based on our own marketing information, that while some competitors are dominant with respect to certain individual products, no one company, including us, is dominant with respect to a material portion of any segment of our business. Because of the breadth of its product lines, Life Science does not face the same competitor for all of its products. Competitors in this market include Amersham Biosciences, Invitrogen, Qiagen, Zeiss, Olympus, Leica, Nikon and Applied Biosystems. We compete primarily based on meeting performance specifications. Competitors in the Clinical Diagnostics segment range in size from small private companies to large multinational corporations. We compete mainly in specific market niches and do not attempt to pursue the most competitive general diagnostics markets. We compete based on our technological ability to provide customers with very specific tests and believe we are usually a significant competitor within our market niche. Competitors include Abbott Laboratories, bioMerieux, Inc., Roche Diagnostics, BioChem Pharma, Inova, diaSorin and Medical Analysis Systems. Product Research and Development The Company conducts extensive product research and development activities in all areas of our business, employing approximately 550 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. Our research teams are continuously developing new products and new applications for existing products. In our development and testing of new products and applications, we consult with scientific and medical professionals at universities, hospitals and medical schools, and in industry. We spent approximately $94.3 million, $82.9 million and $76.5 million on research and development activities during the years ended December 31, 2003, 2002 and 2001 respectively. 4 Regulatory Matters The manufacturing, marketing and labeling of certain of our 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 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, we 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 FDA must approve an export permit application before companies can market products outside the U.S. prior to the products' receipt of FDA approval. The requirements relating to testing and trials, product licensing, pricing and reimbursement vary widely among countries. Our operations are subject to federal, state, local and foreign environmental laws and regulations that govern such activities as emissions to air and discharges to water, as well as handling and disposal practices for solid, hazardous and medical wastes. In addition to environmental laws that regulate our operations, we are also subject to environmental laws and regulations that create liabilities and clean-up responsibility for spills, disposals or other releases of hazardous substances into the environment as a result of our operations or otherwise impacting real property that we own or operate. The environmental laws and regulations also subject us to claims by third parties for damages resulting from any spills, disposals or releases resulting from our operations or at any of our properties. Employees At December 31, 2003 Bio-Rad had approximately 4,800 full-time employees. Fewer than 10% of Bio-Rad's 2,200 U. S. employees are covered by a collective bargaining agreement which will expire on November 7, 2006. Many of Bio-Rad's non-U.S. full-time employees, especially in France, are covered by collective bargaining agreements. Bio-Rad considers its employee relations in general to be good. Available Information The Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by 5 calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company's website address is www.bio-rad.com. The Company makes available, free of charge through its Internet website, its Form 10-K's, 10-Q's and 8-K's, and any amendments to these forms, as soon as reasonably practicable after filing with the SEC. ITEM 2. PROPERTIES We own our Corporate headquarters located in Hercules, California. The principal manufacturing and research locations for each segment are as follows: Approximate Segment Location Square Ftg. Owned/Leased Life Science Richmond, California 201,000 Owned/Leased Hercules, California 346,800 Owned/Leased Hemel Hempstead, England 102,000 Leased Milan, Italy 50,000 Leased Riom, France 24,000 Owned/Leased Clinical Diagnostics Hercules, California 135,000 Owned/Leased Irvine, California 185,900 Leased Greater Seattle, Washington 127,600 Owned/Leased Lille, France 182,000 Owned Paris, France 162,000 Leased Munich, Germany 55,000 Leased Nazareth-Eke, Belgium 30,000 Leased Most manufacturing and research facilities also house administration, sales and distribution activities. In addition, we lease office and warehouse facilities in a variety of locations around the world. The facilities are used principally for sales, service, distribution and administration for both segments. The Marnes la Coquette facility near Paris, France which served as the corporate headquarters for PSD, as well as a significant manufacturing and research facility has been renewed until December 31, 2005. The Company recently completed building additional facilities at its Northern California headquarters. Historically, adequate space to expand sales and distribution channels has been available and we have leased space as needed. 6 ITEM 3. LEGAL PROCEEDINGS Note 14, "Legal Proceedings," appearing on page 27 of the 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 Information Concerning Common Stock The Company's Class A and Class B Common Stock are listed on the American Stock Exchange with the symbols BIO and BIO.B, respectively. The following sets forth, for the periods indicated, the high and low prices for the Company's Class A and Class B Common Stock. Class A Class B High Low High Low 2003 Fourth Quarter 65.00 48.81 65.10 47.95 Third Quarter 62.50 48.52 63.00 50.00 Second Quarter 62.85 35.35 61.00 35.00 First Quarter 39.11 33.20 44.35 32.00 2002 Fourth Quarter 45.90 36.25 44.35 37.00 Third Quarter 45.99 34.90 45.00 36.00 Second Quarter 51.00 36.30 50.25 38.50 First Quarter 38.00 27.45 37.50 27.50 On March 1, 2004 the Company had 1,308 holders of record of Class A Common Stock and 208 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. ITEM 6. SELECTED FINANCIAL DATA The table headed "Summary of Operations and Selected Financial Data" 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 34 through 44 of Exhibit 13.1 is incorporated herein by reference. 7 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The section headed "Financial Risk Management" appearing on page 44 of Exhibit 13.1 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes thereto and the Reports of Independent Public Accountants appearing on pages 2 through 30 of Exhibit 13.1 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9a. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls are also designed that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Management is also required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to provide reasonable assurance that material information relating to the Company is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared. 8 There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. PART 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 2004 Annual Meeting of Stockholders ("the 2004 Proxy Statement") are incorporated herein by reference. The Company's Board of Directors has determined that Philip L. Padou is an "audit committee financial expert," as defined in Item 401(h) of Regulation S-K. Mr. Padou is also an "independent" director, as determined in accordance with the independence standards set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Section 121A of the American Stock Exchange Company Guide. The Company has adopted a code of business ethics and conduct that applies to its principal executive officer, principal financial officer, principal accounting officer or controller and all other employees. The Company will provide a copy of the code of ethics to any person, without charge, upon request, by writing to the Company at "Bio-Rad Laboratories, Inc., Investor Relations, 1000 Alfred Nobel Drive, Hercules, CA 94547". 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 2004 Proxy Statement are incorporated herein by reference. 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section labeled "Principal and Management Stockholders" of the 2004 Proxy Statement is incorporated herein by reference. (a) (b) (c) Number of Number of securities securities to be issued Weighted- remaining available upon exercise average for future issuance of exercise under equity outstanding price compensation plans Plan category options, of (excluding warrants and outstanding securities rights options, reflected in column warrants (a)) and rights Equity compensation plans approved by security holders (1) 1,582,915 $ 20.04 2,862,784 (2) Equity compensation plans not approved by stockholders -- -- -- ---------- ------- ---------- Total 1,582,915 $ 20.04 2,862,784 ========== ======= ========== (1) Consists of the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan, the 2003 Stock Option Plan and the Bio-Rad Laboratories, Inc. Amended and Restated 1988 Employee Stock Purchase Plan. (2) Consists of 918,545 shares available for issuance under the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan, 1,675,000 shares available under the 2003 Stock Option Plan and 269,239 shares available for issuance under the Bio-Rad Laboratories, Inc. Amended and Restated 1988 Employee Stock Purchase Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Certain Relationships and Related Party Transactions" and "Compensation of Directors" of the 2004 Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to the section entitled "Report of the Audit Committee of the Board of Directors" of the 2004 Proxy Statement. 10 P A R T IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements The following Consolidated Financial Statements are included in Exhibit 13.1 and are incorporated herein by reference pursuant to Item 8: Page in Exhibit 13.1 Consolidated Balance Sheets at December 31, 2003 and 2002 2-3 Consolidated Statements of Income for each of the three years in the period ended December 31, 2003 4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003 5 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2003 6 Notes to Consolidated Financial Statements 7-30 Independent Auditors' Report 31-32 Report of Independent Public Accountants 33 2. Index to Financial Statement Schedule Page in Form 10-K Schedule II Valuation and Qualifying Accounts 12 Independent Auditors' Report on Supplemental Schedule 13 Report of Independent Public Accountants on Schedule II 14 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 16 through 18 of this report are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K None. 11 BIO-RAD LABORATORIES, INC,. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2003, 2002 and 2001 (In thousands) Reserve for doubtful accounts receivable Additions Balance at Charged to Balance Beginning Costs and at End of Year Expenses Deductions Other of Year 2003 . . . $12,122 $4,687 $(3,831) -- $12,978 ======= ====== ======= ===== ======= 2002 . . . $11,509 $2,857 $(2,244) -- $12,122 ======= ====== ======= ===== ======= 2001 . . . $10,255 $5,200 $(3,946) -- $11,509 ======= ====== ======= ===== ======= Valuation allowance for deferred tax asset Deductions Balance at Charged to Balance Beginning Costs and at End of Year Additions Expenses Other(A) of Year 2003 . . . . $12,867 $1,965 $ (432) -- $14,400 ======= ====== ======= ======= ======= 2002 . . . . $17,302 $1,241 $(2,342) $(3,334) $12,867 ======= ====== ======= ======= ======= 2001 . . . . $20,620 $4,959 $(2,793) $(5,484) $17,302 ======= ====== ======= ======= ======= (A) Valuation arising from the acquisition of PSD. 12 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE To the Board of Directors and Shareholders of Bio-Rad Laboratories, Inc. We have audited the consolidated financial statements of Bio-Rad Laboratories, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and for the years then ended, and have issued our report thereon dated March 10, 2004 (which report expresses an unqualified opinion and includes explanatory paragraphs concerning the Company's change in it's method of accounting for goodwill and intangible assets and the application of procedures relating to certain disclosures and reclassifications of consolidated financial statement amounts related to the 2001 consolidated financial statements that were audited by other auditors who have ceased operations); such consolidated financial statements and report are included in the Company's 2003 Annual Report to the Shareholders and are incorporated herein by reference. Our audit also included the 2003 and 2002 consolidated financial statement schedule of the Company, listed in Item 15(a)2. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated 2003 and 2002 financial statement schedules, when considered in relation to the 2003 and 2002 basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein. The financial statement schedules for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an opinion, in their report dated February 4, 2002, (February 6, 2002, as to a subsequent event), that such 2001 financial statement schedules considered in relation to the 2001 basic financial statements taken as a whole (prior to the disclosures and reclassifications referred to above), presented fairly, in all material respects, the information set forth therein. /s/ DELOITTE & TOUCHE LLP San Francisco, California March 10, 2004 13 This report is a copy of the previously issued report covering 2001, 2000, and 1999. The predecessor auditors have not reissued their report. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II To Bio-Rad Laboratories, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, 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 4, 2002. Our audits were 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 the 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 audits 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. ARTHUR ANDERSEN LLP San Francisco, California February 4, 2002 14 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 12, 2004 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/ Norman Schwartz President and Director March 12, 2004 (Norman Schwartz) Principal Financial Officer Vice President, /s/ Christine A. Tsingos Chief Financial Officer March 12, 2004 (Christine A. Tsingos) Principal Accounting Officer: /s/ James R. Stark Corporate Controller March 12, 2004 (James R. Stark) Other Directors: /s/ James J. Bennett Director March 12, 2004 (James J. Bennett) /s/ Albert J. Hillman Director March 12, 2004 (Albert J. Hillman) /s/ Ruediger Naumann-Etienne Director March 12, 2004 (Ruediger Naumann-Etienne) /s/ Philip L. Padou Director March 12, 2004 (Philip L. Padou) /s/ Alice N. Schwartz Director March 12, 2004 (Alice N. Schwartz) /s/ David Schwartz Director March 12, 2004 (David Schwartz) 15 BIO-RAD LABORATORIES, INC. INDEX TO EXHIBITS ITEM 14(a)3 Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be "filed under the Securities Exchange Act of 1934." Exhibit No. ---------- 3.1 Restated Certificate of Incorporation, as of February 8, 2002. (1) 3.2 Bylaws of the Registrant, as amended February 19, 1980. (2) 4.1 Credit Agreement dated as of September 9, 2003 among Bio-Rad Laboratories, Inc., the lenders, Bank One, N.A., as Administrative Agent, Wells Fargo Bank, N.A. And Union Bank of California, N.A., as Syndication Agents and ABN AMRO Bank N.V. and BNP Paribas, as Documentation Agents. (3) 4.2 Pledge Amendment dated as of September 9, 2003 among Bio-Rad Laboratories, Inc., and Bank One, N.A., as contractual representative. (3) 4.3 Security Agreement dated as of September 9, 2003 among Bio- Rad Laboratories, Inc., as Grantor and Bank One N.A., as Administrative Agent. (3) 4.4 The Indenture dated as of August 11, 2003 for 7.50% Senior Subordinated Notes due 2013 among Bio-Rad Laboratories, Inc., as Issuer, and Wells Fargo Bank, N.A., as Trustee. (3) 4.5 The Exchange and Registration Rights Agreement dated as of August 11, 2003 for 7.50% Senior Subordinated Notes due 2013. (3) 10.4 1994 Stock Option Plan. (7) 10.4.1 Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated April 28, 1998. (8) 10.4.2 Second Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated December 6, 1999. (8) 10.4.3 Third Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated September 19, 2000. (8) 10.4.4 Fourth Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated April 25, 2001. 10.5 Amended and Restated 1988 Employee Stock Purchase Plan.(9) 10.5.1 Amendment to the Amended 1988 Employee Stock Purchase Plan. 16 10.6 Employees' Deferred Profit Sharing Retirement Plan (Amended and Restated effective January 1, 1997). (11) 10.7 2003 Stock Option Plan. (12) 10.10 Non-competition and employment continuation agreement with James J. Bennett. (11) 10.12 Split Dollar Life Insurance Agreement dated September 17, 1999 between the Schwartz Irrevocable Descendants Trust and Bio-Rad Laboratories, Inc. (4) 13.1 Excerpt from Annual Report to Stockholders' for the fiscal year ended December 31, 2003, (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. 31.1 Certification of Chief Executive Officer Required by Rule 13a(14(a) (17 CFR 240.13a-14(a)). 31.2 Certification of Chief Financial Officer Required by Rule 13a(14(a) (17 CFR 240.13a-14(a)). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ______________________________________________________________ (1) Incorporated by reference from Exhibits to the Company's Form 10-K filing for the fiscal year ended December 31, 2001, dated March 28, 2002. (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. (3) Incorporated by reference from Exhibits to the Company's Form S-4 dated September 19, 2003. (4) Incorporated by reference from the Exhibits to the Company's Form 10-K filing for the fiscal year ended December 31, 1999, dated March 28, 2000. (5) Incorporated by reference from Exhibits to the Company's September 30, 2002, Form 10-Q filing dated November 13, 2002. 17 (6) Incorporated by reference from Exhibits to the Company's June 30, 2000, Form 10-Q filing dated August 14, 2000. (7) Incorporated by reference from the Exhibits to the Company's Form S-8 filing, dated April 28, 1994. (8) Incorporated by reference from the Exhibits to the Company's Form 10-K filing for the fiscal year ended December 31, 2000, dated March 28, 2001. (9) Incorporated by reference from the Exhibits to the Company's September 30, 1998, Form 10-Q filing dated November 10, 1998. (10) Incorporated by reference from the Exhibits to the Company's September 30, 1997, Form 10-Q filing dated November 13, 1997. (11) 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. (12) Incorporated by reference from Exhibits to the Company's March 31, 2003, Form 10-Q filing dated May 13, 2003. 18 EX-10 2 exb1044.txt EXHIBIT 10.4.4 APPENDIX A FOURTH AMENDMENT TO THE BIO-RAD LABORATORIES, INC. 1994 STOCK OPTION PLAN This Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan (the "Amendment" is adopted by Bio-Rad Laboratories, Inc., a Delaware corporation (the "Company"), effective as of 25th of April, 2001. RECITALS A. The Company's 1994 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of Directors (the "Board") on February 2, 1994, and approved by the stockholders of the Company on April 26, 1994. B. The Stock Option Plan was amended in 1998 to increase the aggregate number of shares of Common Stock subject to the Stock Option Plan from 675,000 to 1,175,000. C. The Stock Option Plan currently states that shares of the Company's Class A common stock or Class B common stock (the "Common Stock") subject to the Stock Option Plan shall not exceed 1,175,000. This amendment increases the aggregate number of shares of Common Stock subject to the Stock Option Plan from 1,175,000 to 1,775,000. D. Section 9 of the Stock Option Plan provides that the Board may amend the Stock Option Plan, subject in certain instances to receipt of approval of the stockholders of the Company. E. Effective March 7, 2001, the Board unanimously recommended and adopted this Amendment in the form given below (the "Amendment"). F. The Amendment was approved by the stockholders of the Company at its Annual Meeting of Stockholders held on April 24, 2001. AMENDMENT 1. Section 4 of the Stock Option Plan is hereby amended to read in its entirety as follows: 4. Shares Subject to Plan Options may be granted by the Company from time to time to Key Employees to purchase an aggregate of up to 1,775,000 shares of Stock, which shares may be shares of either Class A or Class B Common Stock, and that number of shares of each such Class shall be reserved for options granted under the Plan (subject to adjustment as provided in paragraph 7 (g)); provided, that no officer or director of the Company shall be granted options to purchase an aggregate of more than 587,500 shares of Stock. If any option granted under that Plan terminates, expires or, with the consent of the optionee, is canceled, new options may thereafter be granted covering such shares. The undersigned, Sanford S. Wadler, Secretary of the Company, hereby certified that the Board and the stockholders of the Company adopted the foregoing Amendment as stated above. Executed at Hercules, California this 25th day of April, 2001. /s/ Sanford S. Wadler --------------------- Sanford S. Wadler, Secretary ): , EX-10 3 exb10p51.txt EXHIBIT 10.5.1 APPENDIX A AMENDMENT TO THE AMENDED 1988 EMPLOYEE STOCK PURCHASE PLAN This Amendment to the Bio-Rad Laboratories, Inc. Amended 1988 Employee Stock Purchase Plan (the "Amendment") is adopted by Bio-Rad Laboratories, Inc., a Delaware corporation (the "Company"), effective as of April 23, 2002. RECITALS: A. The Company's Amended 1988 Employee Stock Purchase Plan (the "ESPP") was adopted by the Board of Directors (the "Board") on March 2, 1988, and approved by the stockholders of the Company on April 26, 1988. B. The ESPP currently authorizes 1,490,000 shares of Common Stock for sale under the ESPP. This amendment increases the aggregate number of shares of Common Stock subject to the ESPP from 1,490,000 to 1,890,000. C. Section 19 of the ESPP provides that the Board may amend the ESPP, subject in certain instances to receipt of approval of the stockholders of the Company. D. Effective February 5, 2002, the Board unanimously recommended and the Board unanimously adopted this Amendment in the form given below (the "Amendment"). E. The Amendment was approved by the stockholders of the Company at its Annual Meeting of Stockholders held on April 23, 2002. AMENDMENT 1. The first paragraph of Section 3 of the ESPP is hereby amended to read in its entirety as follows: "3. Number of Shares The Company has authorized for sale under the Plan 1,890,000 shares of Common Stock, which shares may be newly issued, reacquired in private transactions or open market purchases." The undersigned, Sanford S. Wadler, Secretary of the Company, hereby certifies that the Board and the stockholders of the Company adopted the foregoing Amendment as stated above. Executed at Hercules, California this 23rd day of April,2002. /s/ Sanford S. Wadler --------------------- Sanford S. Wadler, Secretary EX-21 4 exb21p1.txt EXHIBIT 21.1 LISTING OF SUBSIDIARIES JURISDICTION OF SUBSIDIARY ORGANIZATION Bio-Rad Laboratories Pty. Limited Australia Bio-Rad Laboratories Ges.m.b.H. Austria Bio-Rad International, Inc. (FSC) Barbados Bio-Rad Laboratories N.V. - S.A. Belgium RSL N.V. Belgium Bio-Rad Laboratorios Brasil Ltda. Brazil Bio-Metrics Properties, Limited California, USA Bio-Rad Laboratories (Israel) Inc. California, USA Bio-Rad Pacific Limited California, USA Bio-Rad Laboratories (Canada) Limited Canada Bio-Rad Laboratories (Shanghai) Ltd. China Bio-Rad spol. sr.o. Czech Republic Bio-Rad France Holding France Bio-Rad Pasteur France ADIL Instruments France Bio-Rad Laboratories S.A.S. France Bio-Rad Verdot France Bio-Rad Laboratories G.m.b.H. Germany Bio-Rad G.m.b.H. Germany Bio-Rad Laboratories E.P.E. Greece Bio-Rad China Limited Hong Kong Bio-Rad Hungary Trading Ltd. Hungary Bio-Rad Laboratories(India)Private Limited India Bio-Rad Laboratories Israel (1996) Limited Israel Bio-Rad Laboratories S.r.l. Italy Nippon Bio-Rad Laboratories K.K. Japan Bio-Rad Fujirebio Inc. Japan Bio-Rad Korea Ltd. Korea International Marketing Ventures, LTD. Maryland, USA Bio-Rad S.A. Mexico Bio-Rad Laboratories B.V. The Netherlands Bio-Rad Polska Sp. z o.o. Poland Bio-Rad Laboratoires-Aparelhos e Reagentes Hospitalares, LDA Portugal Bio-Rad Laboratorii OOO Russia Bio-Rad Laboratories (Singapore) Pte. Limited Singapore Bio-Rad Laboratories (Pty) Limited South Africa Bio-Rad Laboratories S.A. Spain Bio-Rad Laboratories AB Sweden Bio-Rad Laboratories AG Switzerland Bio-Rad Laboratories Taiwan Limited Taiwan Fortune Diagnostics Ltd. Thailand Bio-Rad Laboratories Limited Thailand Bio-Rad Laboratories Europe Limited United Kingdom Bio-Rad Laboratories Limited United Kingdom Bio-Rad Micromeasurements Limited United Kingdom Bio-Rad Microscience Limited United Kingdom EX-23 5 exb23p1.txt EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-53335 and 33-53337 of Bio-Rad Laboratories, Inc. and subsidiaries on Form S-8 of our reports dated March 10, 2004, relating to the consolidated financial statements of Bio-Rad Laboratories, Inc. as of and for the years ended December 31, 2003 and 2002 (which reports express unqualified opinions and include explanatory paragraphs as to the Company's change in its method of accounting for goodwill and intangible assets and to the application of procedures relating to certain disclosures of financial statement amounts related to the 2001 financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures) appearing in and incorporated by reference in the Annual Report on Form 10-K of Bio-Rad Laboratories, Inc. for the year ended December 31, 2003. /s/ DELOITTE & TOUCHE LLP ------------------------- San Francisco, California March 12, 2004 EX-31 6 exb31p1.txt Exhibit 31.1 Certification of Chief Executive Officer Required By Exchange Act Rules 13a-14(a) and 15d-14(a) I, Norman Schwartz, certify that: 1. I have reviewed this annual report on Form 10-K of Bio-Rad Laboratories, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report fairly present, in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ Norman Schwartz (Norman Schwartz) Chief Executive Officer EX-31 7 exb31p2.txt Exhibit 31.2 Certification of Chief Financial Officer Required By Exchange Act Rules 13a-14(a) and (17 CFR 240.13a-14(a)and 15d-14(a) I, Christine A. Tsingos, certify that: 1. I have reviewed this annual report on Form 10-K of Bio-Rad Laboratories, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report fairly present, in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ Christine A. Tsingos Christine A. Tsingos Vice President, Chief Financial Officer EX-32 8 exb32p1.txt Exhibit 32.1 Certification Pursuant To 18 U.S.C.Section 1350 As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Bio-Rad Laboratories, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Norman Schwartz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 12, 2004 /s/ Norman Schwartz Norman Schwartz Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bio-Rad Laboratories, Inc. and will be retained by Bio-Rad Laboratories, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 9 exb32p2.txt Exhibit 32.2 Certification Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Bio-Rad Laboratories, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Christine A. Tsingos, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company Dated: March 12, 2004 /s/ Christine A. Tsingos Christine A. Tsingos Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bio-Rad Laboratories, Inc. and will be retained by Bio-Rad Laboratories, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-13 11 exb13p1.txt EXHIBIT 13.1 Bio-Rad Laboratories, Inc. SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA (in thousands, except per share data)
Year Ended December 31, 2003 2002 2001 2000 1999 Net sales $ 1,003,382 $ 892,720 $ 817,509 $ 725,884 $ 555,399 Cost of goods sold 437,990 383,235 362,140 348,450 259,573 --------- ------- ------- ------- ------- Gross profit 565,392 509,485 455,369 377,434 295,826 Selling, general and administrative expense 325,360 289,175 264,745 245,866 195,944 Product research and development expense 94,270 82,935 76,543 68,140 66,710 Goodwill amortization -- -- 7,746 8,109 3,813 Loss (gain) on divestitures -- -- 5,150 (21,845) -- Interest expense 31,006 28,207 24,088 30,612 12,741 Foreign exchange losses 4,080 5,441 2,097 420 886 Other, net (3,012) (678) 10,031 689 (684) --------- ------- ------- ------- ------- Income before taxes and cumulative effect of change in accounting principle 113,688 104,405 64,969 45,443 16,416 Provision for income taxes (37,517) (36,542) (20,790) (13,633) (4,695) --------- ------- ------- ------- ------- Income before cumulative effect of change in accounting principle 76,171 67,863 44,179 31,810 11,721 Cumulative effect of change in accounting principle (1) -- -- -- (710) -- --------- ------- ------- ------- ------- Net income $ 76,171 $ 67,863 $ 44,179 $ 31,100 $ 11,721 ========= ======= ======= ======= ======= Basic earnings per share before cumulative effect of change in accounting principle (2) $3.00 $2.70 $1.79 $1.30 $0.48 Cumulative effect of change in accounting principle (1) (2) -- -- -- (0.03) -- --------- ------- ------- ------- ------- Basic earnings per share (2) $3.00 $2.70 $1.79 $1.27 $0.48 ========= ======= ======= ======= ======= Diluted earnings per share before cumulative effect of change in accounting principle (2) $2.90 $2.61 $1.74 $1.30 $0.48 Cumulative effect of change in accounting principle (1) (2) -- -- -- (0.03) -- --------- ------- ------- ------- ------- Diluted earnings per share (2) $2.90 $2.61 $1.74 $1.27 $0.48 ========= ======= ======= ======= ======= Cash dividends paid per common share -- -- -- -- -- Total assets $ 986,858 $ 720,703 $ 684,028 $ 646,278 $ 668,862 Long-term debt, net of current maturities $ 225,835 $ 105,768 $ 188,423 $ 203,360 $ 239,211 (1) Cumulative effect of accounting change per SEC Staff Accounting Bulletin 101, on Revenue Recognition. (2) Restated to give effect to a stock split in the form of a 100% stock dividend in 2002.
1 CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS December 31, 2003 2002 Current assets: Cash and cash equivalents $ 148,642 $ 27,733 Accounts receivable less allowance of $12,978 in 2003 and $12,122 in 2002 234,085 209,282 Inventories, net: Raw materials 38,783 40,559 Work in process 38,798 30,790 Finished goods 112,677 95,023 -------- -------- Total inventories 190,258 166,372 Deferred tax assets 46,536 37,052 Prepaid expenses and other current assets 51,357 26,175 -------- -------- Total current assets 670,878 466,614 Property, plant and equipment: Land and improvements 9,882 9,572 Buildings and leasehold improvements 105,963 80,531 Equipment 273,121 239,404 -------- -------- Total property, plant and equipment 388,966 329,507 Accumulated depreciation (209,843) (187,272) -------- -------- Property, plant and equipment, net 179,123 142,235 Goodwill, net of accumulated amortization of $21,736 in 2003 and 2002 69,503 69,519 Other assets 67,354 42,335 -------- -------- TOTAL ASSETS $ 986,858 $ 720,703 ======== ======== The accompanying notes are an integral part of these statements. 2 (in thousands, except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 2003 2002 Current liabilities: Accounts payable $ 53,995 $ 50,233 Accrued payroll and employee benefits 71,650 62,800 Notes payable 10,215 6,726 Current maturities of long-term debt 208 760 Sales, income and other taxes payable 20,833 17,019 Other current liabilities 77,425 71,392 -------- -------- Total current liabilities 234,326 208,930 Long-term debt, net of current maturities 225,835 105,768 Deferred tax liabilities 13,991 9,839 Other long-term liabilities 16,899 13,079 -------- -------- Total liabilities 491,051 337,616 -------- -------- Commitments and contingent liabilities -- -- Stockholders' equity: Preferred stock, $0.0001 par value, 7,500,000 shares authorized; none outstanding -- -- Class A common stock, $0.0001 par value, 50,000,000 shares authorized; outstanding 2003- 20,709,127; 2002 - 20,402,462 2 2 Class B common stock, $0.0001 par value, 20,000,000 shares authorized; outstanding 2003 - 4,834,290; 2002 - 4,846,942 1 1 Additional paid-in capital 42,164 36,141 Retained earnings 421,012 344,841 Accumulated other comprehensive income: Currency translation and other 32,628 2,102 -------- -------- Total stockholders' equity 495,807 383,087 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 986,858 $ 720,703 ======== ======== 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, 2003 2002 2001 Net sales $ 1,003,382 $ 892,720 $ 817,509 Cost of good sold 437,990 383,235 362,140 --------- -------- -------- Gross profit 565,392 509,485 455,369 Selling, general and administrative expense 325,360 289,175 264,745 Product research and development expense 94,270 82,935 76,543 Goodwill amortization -- -- 7,746 Loss on divestitures -- -- 5,150 Interest expense 31,006 28,207 24,088 Foreign exchange losses 4,080 5,441 2,097 Other, net (3,012) (678) 10,031 --------- -------- -------- Income before taxes 113,688 104,405 64,969 Provision for income taxes (37,517) (36,542) (20,790) --------- -------- -------- Net income $ 76,171 $ 67,863 $ 44,179 ========= ======= ======== Basic earnings per share: Net income $ 3.00 $ 2.70 $ 1.79 ====== ====== ====== Weighted average common shares 25,416 25,104 24,648 ====== ====== ====== Diluted earnings per share: Net income $ 2.90 $ 2.61 $ 1.74 ====== ====== ====== Weighted average common shares 26,310 26,021 25,442 ====== ====== ====== 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, 2003 2002 2001 Cash flows from operating activities: Cash received from customers $ 1,020,135 $ 885,835 $ 787,179 Cash paid to suppliers and employees (826,055) (711,341) (665,572) Interest paid (17,088) (25,832) (22,064) Income tax payments (51,280) (43,016) (5,253) Miscellaneous receipts 1,928 112 5,248 --------- -------- -------- Net cash provided by operating activities 127,640 105,758 99,538 Cash flows from investing activities: Capital expenditures, net (69,003) (42,224) (43,228) Payments for acquisitions and investments (16,375) (8,568) (4,650) Purchases of marketable securities and investments (8,228) (1,887) (567) Sales of marketable securities and investments 1,610 493 497 Foreign currency hedges, net (14,998) (2,270) 410 --------- -------- -------- Net cash used in investing activities (106,994) (54,456) (47,538) Cash flows from financing activities: Net borrowings (payments) on notes payable 435 5,031 (1,884) Long-term borrowings 249,335 44,025 74,250 Payments on long-term debt (132,012) (133,517) (97,209) Debt retirement costs on 11-5/8% bonds (9,467) -- -- Debt issuance costs on 7.5% bonds (5,431) -- -- Proceeds from issuance of common stock 5,309 3,047 532 Purchase of treasury stock -- -- (261) Reissuance of treasury stock -- 2,287 4,367 --------- -------- -------- Net cash provided by (used in) financing activities 108,169 (79,127) (20,205) Effect of exchange rate changes on cash (7,906) 8,429 1,380 --------- -------- -------- Net increase (decrease) in cash and cash equivalents 120,909 (19,396) 33,175 Cash and cash equivalents at beginning of year 27,733 47,129 13,954 --------- -------- -------- Cash and cash equivalents at end of year $ 148,642 $ 27,733 $ 47,129 ========= ======== ======== __________________________________________________________________________________________________
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, 2003 2002 2001 Common Stock, $0.0001 par value: Balance at beginning of year $ 3 $ 2 $ 2 Issuance of common stock -- 1 -- -------- -------- -------- Balance at end of year 3 3 2 Additional Paid-In Capital: Balance at beginning of year 36,141 32,171 31,596 Issuance of common stock 5,309 3,047 532 Tax benefit from exercise of stock options 714 923 43 -------- -------- -------- Balance at end of year 42,164 36,141 32,171 Treasury Stock: Balance at beginning of year -- (1,863) (5,415) Purchase of treasury stock -- -- (261) Reissuance of treasury stock -- 1,863 3,813 -------- -------- -------- Balance at end of year -- -- (1,863) Retained Earnings: Balance at beginning of year 344,841 276,554 231,821 Net income 76,171 67,863 44,179 Reissuance of treasury stock at more than cost -- 424 554 -------- -------- -------- Balance at end of year 421,012 344,841 276,554 Accumulated Other Comprehensive Income (Loss): Balance at beginning of year 2,102 (22,987) (13,386) Other comprehensive income (loss) 30,526 25,089 (9,601) -------- -------- -------- Balance at end of year 32,628 2,102 (22,987) -------- -------- -------- Total Stockholders' Equity $ 495,807 $ 383,087 $ 283,877 ======== ======== ======== Comprehensive Income, net of tax: Net income $ 76,171 $ 67,863 $ 44,179 Currency translation adjustments 28,620 25,241 (9,458) Net unrealized holding gains (losses) 2,137 (59) (12) Reclassification adjustments for gains included in net income (231) (93) (131) -------- -------- -------- Total Comprehensive Income $ 106,697 $ 92,952 $ 34,578 ======== ======== ======== 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. Actual results could differ from those estimates. CHANGES IN PRESENTATION Certain prior year amounts have been reclassified to conform to current year presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less which are readily convertible into cash. Cash equivalents are stated at cost, which approximates fair market value. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are placed with major financial institutions. The Company performs credit evaluation procedures and with the exception of certain developing countries, generally does not require collateral. As a result of increased risk in these countries, some 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. 7 INVENTORY VALUATION Inventories are valued at the lower of actual cost or market and include material, labor and overhead costs. Management periodically reviews the need for an inventory obsolescence reserve. In evaluating this reserve, technology changes, competition, customer demand and manufacturing quality are considered. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at historical cost. Included in property, plant and equipment is reagent rental equipment. The Company provides these instruments to its customers for use with the Company's reagents. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Buildings and leasehold improvements are amortized over 15-30 years or the lives of the leases or improvements, whichever is shorter. With the exception of reagent rental equipment, which is amortized over a 1-5 year period, equipment is depreciated over 3-12 years. GOODWILL Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost and through December 31, 2001 has been amortized on a straight-line basis over the estimated future periods to be benefited, typically ten to fifteen years. Beginning January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" which provides that goodwill is no longer subject to amortization over its useful life. Goodwill is assessed annually for impairment applying a fair-value based test or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable (see Note 5). INCOME TAXES The Company accounts for income taxes under the asset and liability method which recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between carrying amounts and tax bases of assets and liabilities (see Note 7). REVENUE RECOGNITION For products, revenue is recognized when shipped and risk of loss is inconsequential, when persuasive evidence of an arrangement exists, the price to the buyer is fixed and determinable and 8 collectibility is reasonably assured. When a customer enters into a reagent rental agreement (operating-type lease), revenue is recognized over the life of the agreement. Service revenues on extended warranty contracts are recognized ratably over the life of the service agreement or as service is performed, if not under contract. For those equipment sales that necessitate installation, we recognize revenue when installation is complete and customer acceptance has occurred. SHIPPING AND HANDLING The Company classifies all freight billed to customers as net sales. Related freight costs are included in cost of goods sold. SALES RETURNS AND WARRANTY At the time the related revenue is recognized, a provision is recognized for estimated product returns. The Company warrants certain equipment against defects in design, materials and workmanship, generally for one year. Upon shipment of that equipment, the Company establishes, as part of cost of goods sold, a provision for the expected costs of such warranty. Components of the warranty accrual, included in Other current liabilities and Other long-term liabilities, were as follows (in millions): 2003 2002 ------------------------------------------------- January 1 $ 7.1 $ 6.1 Provision for warranty 12.0 9.0 Actual warranty costs (10.0) (8.0) ----- ----- December 31 $ 9.1 $ $7.1 ===== ===== RESEARCH AND DEVELOPMENT Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. FOREIGN CURRENCY TRANSLATION Balance sheet accounts of international subsidiaries are trans lated at the current exchange rate as of the end of the account ing period. Income statement items are translated at average exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. 9 FORWARD EXCHANGE CONTRACTS 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. The Company does not use derivative financial instruments for speculative or trading purposes. In accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," the Company does not seek hedge accounting treatment for these contracts. As a result, these contracts, generally with maturity dates of 90 days or less and related primarily to currencies of industrial countries, are marked to market at each balance sheet date. Exchange gains and losses on these contracts are net of premiums and discounts. The resulting gains or losses offset exchange losses or gains on the related receivables and payables. The cash flows related to these contracts are classified as cash flows from investing activities in the Statement of Cash Flows. EMPLOYEE STOCK COMPENSATION PLANS The Company maintains incentive and non-qualified stock option plans for officers and certain other key employees. The Company also has an employee stock purchase plan that provides that eligible employees may contribute toward the purchase of the Company's Class A common stock. These plans are described more fully in Note 9. The Company applies the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for the Company's stock option and stock purchase plans been accounted for under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's proforma net income and earnings per share would have been as follows (in millions, except per share data): 10 ---------------------------- Year Ended December 31, 2003 2002 2001 ---------------------------- Net income, as reported $ 76.2 $ 67.9 $ 44.2 Deduct: Total stock-based employee compensation expense determined under fair value methods for all awards, net of related tax effects (2.1) (1.8) (1.3) ----- ----- ----- Pro forma net income $ 74.1 $ 66.1 $ 42.9 ===== ===== ===== Earnings per share: Basic-as reported $ 3.00 $ 2.70 $ 1.79 ===== ===== ===== Basic-pro forma $ 2.91 $ 2.63 $ 1.74 ===== ===== ===== Diluted-as reported $ 2.90 $ 2.61 $ 1.74 ===== ===== ===== Diluted-pro forma $ 2.82 $ 2.55 $ 1.69 ===== ===== ===== EARNINGS PER SHARE The Company calculates basic earnings per share (EPS) and diluted EPS in accordance with SFAS No. 128, "Earnings per Share." Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, and uses the average share price for the period in determining the number of common stock equivalents that are to be added to the weighted average number of shares outstanding. Common stock equivalents are excluded from the diluted earnings per share calculation if the effect would be anti-dilutive. Treasury stock is not considered outstanding for purposes of calculating weighted average shares. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. Estimates are not necessarily indicative of the amounts that could be realized in a current market exchange as considerable judgment is required in interpreting market data used to develop estimates of fair value. The use of different market assumptions or estimation techniques could have a material effect on the estimated fair value amounts. 11 The estimated fair value of Bio-Rad's financial instruments were as follows(in millions): Year Ended December 31, ------------------------------------------- 2003 2002 ------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------- Notes receivable and other $ 52.9 $ 58.3 $ 36.0 $ 37.2 Total long-term debt $ 226.0 $ 256.2 $ 106.5 $ 131.8 Financial instruments (e.g., notes receivable) that have fair values based on discounted cash flows, market quotations, and other appropriate valuation techniques are included in Other assets. Long- term debt has an estimated fair value based on quoted market prices for the same or similar issues. For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, marketable securities, notes payable, and accounts payable, the carrying amounts approximate fair value. NEW FINANCIAL ACCOUNTING STANDARDS In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. The Company adopted SFAS No. 145 as of January 1, 2002 and will follow APB 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in determining whether such extinguishment of debt may be classified as extraordinary. As a result of adoption, the expenses incurred in the 2003 repurchase of outstanding debt on the open market has been included in interest expense. No other impact from adoption was recognized. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in June 2002 and addresses accounting for restructuring and similar costs. SFAS No. 146 requires that the liability for costs associated with an exit cost or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that were initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the consolidated financial statements of the Company. 12 During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and did not have a material impact on the Company's financial position or results of operations. 2. ACQUISITIONS See Note 17 regarding an acquisition which took place subsequent to year-end. On March 31, 2003, the Company acquired the outstanding shares of Verdot Industrie of Riom, France for approximately $6 million. The Company has included these operations in its Life Science segment. The Company has completed its evaluation of purchased assets, including intangible assets, and liabilities and has not assigned any value to goodwill. On June 28, 2002, the Company purchased for cash the microarray and robotics technologies business of Virtek Biotech Inc., a subsidiary of Virtek Vision International Inc. of Waterloo, Ontario, Canada. Bio-Rad acquired the assets, including intangible assets, for approximately $7 million and has included these operations in its Life Science segment. The Company did not assign any value to goodwill. In July 2001, the Company acquired all the outstanding shares of Helix, Inc., a manufacturer of diagnostic products for the autoimmune market. The business combination was recorded using the purchase method. The acquisition cost was not material but did include a premium in excess of the net assets acquired. 3. DIVESTITURE In October 2001, the Company sold the assets and certain liabilities of the Company's spectroscopy business to Digilab LLC. In 2001, the Company recorded a $4.5 million non-cash pre-tax charge reflecting the estimated impact of its intent to sell the spectroscopy instrument business and the Company had a write-down of $0.7 million on the value of a related production facility. 4. INVESTMENTS The Company purchased shares of ordinary voting stock of Sartorius AG, of Goettingen, Germany, a process technology supplier to the biotechnology, pharmaceutical, chemical and food and beverage industries for approximately $10.4 million in 2003. The Company accounts for this investment on the cost method. 13 In December 1997, Bio-Rad began investing in Instrumentation Laboratory, S.p.A. (IL), an Italian based clinical diagnostics company. At December 31, 2003, Bio-Rad held approximately 13% of the outstanding stock of IL. A privately held company based in Spain controls approximately 84% of the outstanding stock of IL. The most recently filed financial statements for IL are as of November 30, 2002. Based on a combination of many factors, including the lack of current financial information and IL's continued losses, the Company has determined that its investment has been other than temporarily impaired. The Company recorded a $9.4 million write-down of its investment in IL during 2001. As of December 31, 2002, the Company valued its investment in IL at $6.4 million. This amount reflects a $3.0 million write-down from December 31, 2001, which has been recorded in Other, net. As of December 31, 2003 the value of $6.4 million remains the Company's expected value of its investment. Although management believes that this investment is realizable, there is a possibility that future events may cause further impairment of this investment. 5. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of goodwill and other intangible assets subsequent to their acquisition, provides that intangible assets with finite useful lives will be amortized, and that goodwill and intangible assets with indefinite lives will not be amortized. The provisions of the standard also require goodwill to be tested at least annually for impairment. The Company adopted SFAS No. 142 on January 1, 2002. At that date, the Company stopped the amortization of goodwill, with a net carrying value of $77.7 million, and annual amortization of approximately $8 million that had resulted from purchases of businesses completed prior to the adoption of SFAS No. 141. The transition impairment test for goodwill was performed as of January 1, 2002. No impairment loss was recorded in fiscal 2003 or 2002. Additionally, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified to goodwill. As a result of the Company's analysis, no reclassification of intangible assets to goodwill was required. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net income and net income per 14 share would have been as follows (in millions, except per share data): ------------------------------------- Year Ended December 31, 2003 2002 2001 (as reported) (as reported) (pro forma) ---------- ---------- ---------- Reported net income $ 76.2 $ 67.9 $ 44.2 Add back goodwill amortization, net of tax -- -- 5.3 ----- ----- ----- Pro forma adjusted net income $ 76.2 $ 67.9 $ 49.5 ===== ===== ===== Basic earnings per share: Reported basic earnings per share $ 3.00 $ 2.70 $ 1.79 Goodwill amortization, net of tax -- -- 0.21 ----- ----- ----- Pro forma adjusted basic earnings per share $ 3.00 $ 2.70 $ 2.00 ===== ===== ===== Diluted earnings per share: Reported diluted earnings per share $ 2.90 $ 2.61 $ 1.74 Goodwill amortization, net of tax -- -- 0.21 Pro forma adjusted diluted ----- ----- ----- earnings per share $ 2.90 $ 2.61 $ 1.95 ===== ===== ===== The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2002 are as follows (in millions): ------------------------------------- Life Clinical Other Science Diagnostics Operations ------------------------------------- December 31, 2001 $ 29.7 $ 46.6 $ 1.4 Tax adjustments (3.9) (4.3) -- ---- ---- ---- December 31, 2002 $ 25.8 $ 42.3 $ 1.4 ==== ==== ==== December 31, 2003 $ 25.8 $ 42.3 $ 1.4 ==== ==== ==== Goodwill balances and goodwill amortization have been included in corporate for segment reporting purposes in Note 15. 15 The Company has no intangible assets with indefinite lives. Information regarding the Company's identifiable purchased intangible assets is as follows (in millions): December 31, 2003 -------------------------------------------------- Average Carrying Accumulated Useful Life Amount Amortization Net -------------------------------------------------- Patents 16 years $ 4.2 $ 0.4 $ 3.8 Other 6 years 9.9 1.4 8.5 ---- ---- ---- Total $ 14.1 $ 1.8 $ 12.3 ==== ==== ==== December 31, 2002 -------------------------------------------------- Average Carrying Accumulated Useful Life Amount Amortization Net -------------------------------------------------- Patents 16 years $ 3.5 $ 0.1 $ 3.4 Other 5 years 2.3 0.2 2.1 ---- ---- ---- Total $ 5.8 $ 0.3 $ 5.5 ==== ==== ==== Recorded intangible asset amortization expense for the years ended December 31, 2003 and 2002 was $1.3 million and $0.3 million, respectively. Estimated intangible asset amortization expense (based on existing intangible assets) for the years ended December 31, 2004, 2005, 2006, 2007, and 2008 is $1.6 million, $1.6 million, $1.6 million, $1.7 million and $1.3 million, respectively. 6. NOTES PAYABLE AND LONG-TERM DEBT Notes payable include local credit lines maintained by the Company's subsidiaries aggregating approximately $40.4 million, of which $30.2 million was unused at December 31, 2003. At December 31, 2002 these lines aggregated approximately $30.9 million, of which $24.2 million was unused. The weighted average interest rate on these lines was 8.1% and 9.1% at December 31, 2003 and 2002, respectively. Bio-Rad Laboratories, Inc. guarantees most of these credit lines. 16 The principal components of Long-term debt are as follows (in millions): December 31, 2003 2002 -------------------- Senior Subordinated Notes $ 225.0 $ 105.3 Other debt -- 1.1 Capitalized leases 1.0 0.2 ----- ----- 226.0 106.6 Less current maturities (0.2) (0.8) ----- ----- Long-term debt $ 225.8 $ 105.8 ===== ===== In August 2003, the Company sold $225.0 million principal amount of Senior Subordinated Notes due 2013. The notes pay a fixed rate of interest of 7.5% per year. The Company has the option to redeem any or all of the notes at any time prior to August 15, 2008 at a redemption price equal to 100% of the principal amount of the notes plus the "applicable premium" (as defined by the indenture) plus accrued and unpaid interest and certain other charges. The notes may be redeemed in whole or in part after August 15, 2008 and before August 15, 2009 at a redemption price of 103.75%; after August 15, 2009 and before August 15, 2010 at a redemption price of 102.50%; for the interim period to August 15, 2011 at 101.25%; thereafter at 100%. The Company's obligations under the notes are not secured and rank junior to all the Company's existing and future senior debt. Through July 2003, the Company repurchased in the open market $17.3 million (par value) of its Senior Subordinated Notes due in 2007 at an expense, including interest, unamortized issue costs and unamortized original issue discount of $2.5 million. The remaining $88.7 million (par value) of Senior Subordinated Notes due in 2007 were tendered and repurchased with a portion of the proceeds from the sale of the 7.5% Senior Subordinated Notes at an expense, including interest, unamortized issue costs and unamortized original discount of $11.6 million. This expense is included in interest expense. During 2003, the Company also negotiated a new five-year $150.0 million revolving credit facility to replace its $100.0 million revolving credit facility. The new credit facility is secured by substantially all of the Company's personal property assets and the assets of its domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. It is guaranteed by all of its existing and future domestic subsidiaries (other than immaterial domestic subsidiaries as defined for purposes of the new credit facility). The Company terminated its existing credit facility simultaneously with 17 the closing of its new facility. Interest varies upon a number of factors including the duration of the specific borrowing and is based upon either the Eurodollar, the Federal Funds effective or the Company corporate based rate. The new credit facility and the Senior Subordinated Notes require the Company, among other things, to comply with certain financial ratios and covenants. These covenants include a leverage ratio test, an interest coverage test and a consolidated net worth test. There are also restrictions on the Company's ability to declare or pay dividends, incur debt, guarantee debt, enter into transactions with affiliates, merge or consolidate, sell assets, make investments, create liens and prepay subordinated debt. The Company was in compliance with all financial ratios as of December 31, 2003. Maturities of long-term debt at December 31, 2003, are as follows: 2004 - $0.2 million; 2005 - $0.3 million; 2006 - $0.2 million; 2007 - $0.2 million; 2008 - $0.1 million; thereafter - $225.0 million. 7. INCOME TAXES The U.S. and international components of income (loss) before taxes are as follows (in millions): ----------------------------- Year Ended December 31, 2003 2002 2001 ----------------------------- U.S. $ 42.8 $ 37.6 $ (4.8) International 70.9 66.8 69.8 ----- ----- ----- Income before taxes $ 113.7 $ 104.4 $ 65.0 ===== ===== ===== The provision (benefit) for income taxes consists of (in millions): ----------------------------- Year Ended December 31, 2003 2002 2001 ----------------------------- Current: U.S. Federal $ 8.3 $ 11.8 $ 2.8 International 33.5 30.8 23.7 U.S. State 1.1 1.0 0.4 ----- ----- ----- 42.9 43.6 26.9 Deferred: U.S. Federal $ (3.0) $ (2.3) $ 0.2 International (1.8) (4.2) (5.3) U.S. State (0.6) (0.6) (1.0) ----- ----- ----- (5.4) (7.1) (6.1) ----- ----- ----- Provision for income taxes $ 37.5 $ 36.5 $ 20.8 ===== ===== ===== 18 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, 2003 2002 2001 ----------------------------- U. S. statutory tax rate 35% 35% 35% State taxes, net of federal income tax benefit -- -- (1) Foreign Sales Corporation/EIE tax benefit (2) (2) (4) Difference between U.S. and foreign tax rates (net of foreign tax credits) (1) 2 (10) Loss carryforwards utilized -- (1) (1) Amortization of goodwill -- -- 4 Foreign losses not benefited 1 2 1 Capital loss not benefited -- 1 5 Increase(decrease) in tax reserves (1) (1) 3 Other 1 (1) -- ---- ---- ---- Provision for income taxes 33% 35% 32% ==== ==== ==== 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 millions): Year Ended December 31, -------------------- 2003 2002 -------------------- Deferred tax assets: Reserves for obsolete inventory, warranty, royalty and bad debts $ 17.7 $ 11.5 Elimination of intercompany profit 9.4 7.8 Retirement reserve and vacation pay 7.8 5.5 Tax benefit of loss carryforwards 8.4 8.5 Basis difference in investment 4.1 4.1 State tax credit carryforward 5.2 4.5 Other 8.3 8.1 ----- ----- 60.9 50.0 Valuation allowance (14.4) (12.9) ----- ----- Deferred tax assets $ 46.5 $ 37.1 ===== ===== 19 Deferred tax liabilities: Deferred gain on condemnation $ 6.1 $ 2.9 Foreign exchange unrealized gain 3.4 -- Development cost of Hercules facility 1.3 1.5 Other 3.2 5.4 ----- ----- Deferred tax liabilities $ 14.0 $ 9.8 ===== ===== At December 31, 2003, Bio-Rad's international subsidiaries had combined net operating loss carryforwards of $12.1 million. A portion of these loss carryforwards will expire in the following years: 2007 - $0.1 million; and 2008 - $0.1 million. 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. At December 31, 2003, Bio-Rad had an unutilized domestic net operating loss carryforward of $14.7 million. The loss carryforward will expire in the year 2018. The utilization of the loss carryforward is limited to Bio-Rad's domestic taxable income. At December 31, 2003, Bio-Rad had a California tax credit carryforward of $5.2 million. The credit carryforward has no expiration date. The utilization of the tax credit carryforward is limited to the extent Bio-Rad has California taxable income. 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 2003 was an increase of $1.5 million, primarily resulting from an increase in foreign loss carryforwards whose utilization is uncertain. The net change in 2002 was a decrease of $4.4 million primarily resulting from the utilization of tax loss carryforwards. Bio-Rad does not provide for taxes which would be payable if the cumulative undistributed earnings of its international subsidiaries, approximately $163 million at December 31, 2003, 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. 20 8. STOCKHOLDERS' EQUITY 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 Class A has limited voting rights. Each share of Class A is entitled to one-tenth of a vote on most matters, and each share of Class B is entitled to one vote. Additionally, Class A stockholders are entitled to elect 25% of the Board of Directors and Class B stockholders are entitled to elect the balance of the directors. 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. Class B shares are convertible at any time into Class A shares on a one-for-one basis at the option of the stockholder. 9. STOCK OPTION AND PURCHASE PLANS STOCK OPTION PLANS The Company maintains stockholder approved incentive and non-qualified stock option plans for officers and certain other key employees. No options have been issued to non-employees. Under the Amended 1994 Stock Option Plan, the Company may grant options to its employees for up to 3,550,000 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. Generally, options granted have a term of 10 years and vest in increments of 25% per year over a four-year period on the yearly anniversary date of the grant. For options granted after January 1, 2001, options vest in increments of 20% over a five-year period on the yearly anniversary date of the grant. At December 31, 2003, 918,545 shares remain available to be granted. In April of 2003, stockholders approved the 2003 Stock Option Plan of Bio-Rad Laboratories, Inc. (the Plan). The Plan authorizes the grant to employees of incentive stock options and non-qualified stock options. A total of 1,675,000 shares have been reserved for issuance and may be of either Class A or Class B Common Stock. No options have been granted from this plan during 2003. 21 Pro forma compensation costs are calculated for the fair value of the employees' purchase rights, which was estimated using the Black- Scholes method. For purposes of the pro forma disclosures, the estimated fair value of the options granted is amortized to expense over the options' vesting period. There were no options granted in 2001. The fair value of options granted was estimated using the Black- Scholes model with the following weighted average assumptions: ------------------- Year Ended December 31, ------------------- 2003 2002 ------------------- Expected volatility 37% 35% Risk-free interest rate 2.65% 3.99% Expected life (in years) 4.2 4.2 Expected dividend -- -- See Note 1 for a description of the effect of the pro forma compensation expense derived using the fair value method on the Company's results. 22 Activity under the 1994 Plan is summarized below (amounts reported in the Price columns represent the weighted average exercise price): Year Ended December 31, 2003 2002 2001 ------------------------------------------------------------- Shares Price Shares Price Shares Price ------------------------------------------------------------- Outstanding at beginning of year 1,591,832 $ 15.84 1,572,701 $ 11.80 1,921,778 $ 11.90 Granted 302,993 35.71 379,500 28.8 -- -- Exercised (222,699) 12.58 (350,549) 11.67 (287,622) 12.81 Forfeited (89,211) 16.57 (9,820) 10.90 (36,385) 10.61 Expired -- -- -- -- (25,070) 13.06 --------- --------- --------- Outstanding at end of year 1,582,915 $ 20.04 1,591,832 $ 15.84 1,572,701 $ 11.72 Options exercisable at year-end 780,415 $ 13.22 677,149 $ 12.39 672,266 $ 12.60 ========= ========= ========= Weighted average fair value of options granted during the year $11.85 $9.75 $ -- ====== ===== =====
The following summarizes information about stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable --------------------------------------------------------------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Exercise Price - -------------------------------------------------------------------------------------------------- $ 9.50 - $11.31 453,561 5.87 years $ 10.72 319,192 $ 10.69 $ 11.57 - $15.82 459,691 4.33 12.71 378,540 12.85 $ 16.32 - $35.50 585,530 8.08 30.67 82,283 24.65 $ 36.00 $39.60 84,133 8.74 36.30 400 37.23 --------- ------- 1,582,915 6.39 20.04 780,415 13.22 ========= =======
23 EMPLOYEE STOCK PURCHASE PLAN The Company has an employee stock purchase plan that provides that eligible employees may contribute up to 10% of their compensation up to $25,000 annually toward the quarterly purchase of the Company's Class A common stock. The employees purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of each calendar quarter. No compensation expense is recorded in connection with the plan. The Company has authorized the sale of 1,890,000 shares of common stock under the plan. The Company sold 71,314 shares for $2.4 million, 66,992 shares for $1.8 million and 88,982 shares for $1.2 million under the plan to employees in 2003, 2002 and 2001, respectively. The weighted average fair value of purchase rights granted in 2003, 2002 and 2001 was $9.76, $8.41 and $4.48, respectively. At December 31, 2003, 269,239 shares remain authorized under the plan. The fair value of the employees' purchase rights was estimated using the Black-Scholes model with the following assumptions: Year Ended December 31, ---------------------------- 2003 2002 2001 ---------------------------- Expected volatility 41.86% 44.19% 44.44% Risk-free interest rate .93% 1.58% 3.99% Expected life (in years) .25 .25 .25 Expected dividend -- -- -- See Note 1 for a description of the effect of the pro forma compensation expense derived using the fair value method on the Company's results. 10. EARNINGS PER SHARE Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 894,000, 917,000 and 794,000 shares for the years ended December 31, 2003, 2002 and 2001, respectively. There were no anti-dilutive shares for 2003 and 2002 and 2001. 24 11. OTHER INCOME AND EXPENSE Other, net includes the following income and (expense) components (in millions): Year Ended December 31, ---------------------------- 2003 2002 2001 ---------------------------- Write-down of investments $ -- $ (5.0) $ (10.9) Interest income 2.1 4.0 1.3 Miscellaneous other items .9 1.7 (0.4) ---- ---- ---- Other, net $ 3.0 $ 0.7 $ (10.0) ==== ==== ==== 12. SUPPLEMENTAL CASH FLOW INFORMATION The reconciliation of net income to net cash provided by operating activities is as follows (in millions): Year Ended December 31, ---------------------------- 2003 2002 2001 ---------------------------- Net income $ 76.2 $ 67.9 $ 44.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 40.0 36.9 32.6 Amortization 2.0 1.1 8.7 Foreign currency hedge transactions, net 15.0 2.3 (0.4) Gains on dispositions of marketable securities (0.3) (0.1) (0.2) Decrease(increase)in accounts receivable, net 10.0 (0.7) (22.6) Increase in inventories, net (8.2) (16.2) (14.0) Increase in other current assets (14.2) (12.1) (3.6) Increase (decrease) in accounts payable and other current liabilities (1.6) 13.0 11.9 Increase (decrease) in income taxes payable (5.6) (6.9) 17.6 Increase (decrease) in deferred taxes (8.0) 13.7 (1.7) Loss on sale of spectroscopy business and write-down of investments -- 5.0 15.4 Debt retirement costs on 11-5/8% bonds 9.5 -- -- Other 12.8 1.9 11.6 ----- ----- ----- Net cash provided by operating activities $ 127.6 $105.8 $99.5 13. COMMITMENTS AND CONTINGENT LIABILITIES RENTS AND LEASES Net rental expense under operating leases was $23.0 million in 2003, $19.5 million in 2002 and $15.8 million in 2001. Leases are principally for facilities and automobiles. 25 Annual future minimum lease payments at December 31, 2003, under operating leases are as follows: 2004 - $18.7 million; 2005 - $13.5 million; 2006 - $8.4 million; 2007 - $6.1 million; 2008 - $3.2 million; subsequent to 2008 - $2.9 million. 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 $6.5 million, $4.8 million and $4.7 million in 2003, 2002 and 2001, respectively. FOREIGN EXCHANGE CONTRACTS The Company enters into forward foreign exchange contracts as an economic hedge against foreign currency denominated intercompany receivables and payables. At December 31, 2003, the Company had contracts maturing in January through March 2004 to sell foreign currency with a nominal value of $96.7 million and an unrealized loss of $0.1 million. Contracts to purchase foreign currency had a nominal value of $26.9 million with an unrealized loss of $0.1 million. INSURANCE The Company carries a deductible for workers' compensation and a portion of its group health insurance cost. Accruals for losses are based on the Company's claims experience and actuarial assumptions followed in the insurance industry. Should a greater amount of claims occur compared to the Company's estimates or cost of medical care increase beyond what has been anticipated, reserves recorded may not be sufficient and additional charges to income may be required. LETTERS OF CREDIT In the ordinary course of business, the Company is at times required to post letters of credit. These letters of credit are required by certain insurance companies to ensure payments of certain charges. The Company was contingently liable for approximately $4.6 million of standby letters of credit with banks as of December 31, 2003. TAXES Settlement of open tax years, as well as tax issues in other countries where the Company conducts its business, are not expected to have a material effect on the consolidated financial position or liquidity of the Company and, in the opinion of management, adequate provision has been made for income and franchise taxes for all years under examination or subject to future examination. 26 14. LEGAL PROCEEDINGS The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. The Company does not believe that any ultimate liability resulting from any of these lawsuits will have a material adverse effect on its results of operations, financial position or liquidity. However, the Company cannot give any assurance regarding the ultimate outcome of these lawsuits and their resolution could be material to the Company's operating results for any particular period, depending upon the level of income for the period. 15. SEGMENT INFORMATION Bio-Rad is a multinational manufacturer and worldwide distributor of life science research products and clinical diagnostics products. Bio-Rad has two reportable segments: Life Science and Clinical Diagnostics. 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 reagents, apparatus and instruments used for biological research. These products are sold to university and medical school laboratories, pharmaceutical and biotechnology companies, food testing laboratories 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, transfusion laboratories, and insurance and forensic testing laboratories. The remainder of the Company's former Analytical Instruments segment is included in Other Operations. The material product lines of this segment have been sold. 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. Segments are expected to manage only assets completely under their control. Accordingly, segment assets include primarily accounts receivable, inventories and gross machinery and equipment. Goodwill balances and goodwill amortization have been included in corporate for segment reporting purposes. 27 Information regarding industry segments at December 31, 2003, 2002 and 2001 and for the years then ended is as follows (in millions): Life Clinical Other Science Diagnostics Operations ------------------------------------------ Segment net sales 2003 $ 480.0 $ 514.8 $ 8.6 2002 429.5 455.4 7.8 2001 379.2 417.9 20.4 Allocated interest expense 2003 $ 6.7 $ 9.6 $ 0.1 2002 8.8 12.4 0.1 2001 9.3 14.3 0.5 Depreciation and amortization 2003 $ 10.3 $ 29.2 $ 0.3 2002 8.3 27.4 0.2 2001 7.2 26.2 0.4 Segment profit (loss) 2003 $ 71.5 $ 59.8 $ (0.2) 2002 75.2 41.9 (1.6) 2001 72.8 27.3 (5.3) Segment assets 2003 $ 252.7 $ 379.5 $ 5.0 2002 225.1 336.4 4.7 2001 194.2 302.2 3.4 Capital expenditures 2003 $ 36.2 $ 30.7 $ 0.1 2002 10.9 29.7 0.1 2001 10.0 23.9 0.1 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 to consolidated income before taxes (in millions): Year Ended December 31, -------------------------------- 2003 2002 2001 -------------------------------- Total segment profit $ 131.1 $ 115.5 $ 94.8 Other, net 3.0 0.7 (10.0) Loss on divestitures -- -- (5.2) Goodwill amortization -- -- (7.7) Foreign exchange losses (4.1) (5.4) (2.1) Costs related to bond redemption (14.6) (6.9) -- Net corporate operating, interest and other income and expense not allocated to segments (1.7) 0.5 (4.8) ------ ------ ------ Consolidated income before taxes $ 113.7 $ 104.4 $ 65.0 28 The following reconciles total segment assets to consolidated total assets (in millions): December 31, -------------------- 2003 2002 -------------------- Total segment assets $ 637.2 $ 566.2 Cash and other current assets 247.1 87.6 Net property, plant and equipment excluding segment specific gross machinery and equipment (34.3) (45.8) Goodwill 69.5 69.5 Other long-term assets 67.4 43.2 ----- ----- Total assets $ 986.9 $ 720.7 ===== ===== The following presents sales to external customers by geographic area based primarily on the location of the use of the product or service (in millions): Year Ended December 31, -------------------------------- 2003 2002 2001 -------------------------------- Europe $ 441.4 $ 368.6 $ 341.7 Pacific Rim 167.0 151.9 127.5 United States 344.6 320.4 296.9 Other(primarily Canada and Latin America) 50.4 51.8 51.4 ------- ------- ------ Total sales $ 1,003.4 $ 892.7 $ 817.5 ======= ======= ====== The following presents long-lived assets by geographic area based upon the location of the asset (in millions): Year Ended December 31, ------------------------------ 2003 2002 2001 ------------------------------ Europe $ 48.4 $ 31.8 $ 25.3 Pacific Rim 7.5 7.2 6.4 United States 254.4 216.2 217.0 Other(primarily Canada and Latin America) 5.7 5.2 4.5 ----- ----- ----- Total long-lived assets $ 316.0 $ 260.4 $ 253.2 ===== ===== ===== 29 16. QUARTERLY FINANCIAL DATA - (UNAUDITED) Summarized quarterly financial data for 2003 and 2002 are as follows (in millions, except per share data): ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter 2003 ------------------------------------------- ---- Net sales $ 246.0 $ 243.5 $ 247.7 $ 266.2 Gross profit 142.7 136.4 137.4 148.9 Net income 26.4 21.0 9.7 19.1 Basic earnings per share $ 1.04 $ 0.83 $ 0.38 $ 0.75 Diluted earnings per share $ 1.01 $ 0.80 $ 0.37 $ 0.73 2002 ---- Net sales $ 210.2 $ 214.6 $ 224.9 $ 243.0 Gross profit 121.3 122.3 129.0 136.9 Net income 18.8 16.2 16.6 16.3 Basic earnings per share $ 0.75 $ 0.65 $ 0.66 $ 0.64 Diluted earnings per share $ 0.73 $ 0.62 $ 0.64 $ 0.62 17. SUBSEQUENT EVENT On March 4, 2004, the Company purchased for cash the controls business of Hematronix, Inc. of Plano, Texas. Bio-Rad acquired tangible and intangible assets of approximately $17 million and assumed certain liabilities. 30 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BIO-RAD LABORATORIES, INC. We have audited the accompanying consolidated balances sheets of Bio-Rad Laboratories, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. 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. The consolidated financial statements of the Company for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 4, 2002, (February 6, 2002, as to a subsequent event). We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of Bio-Rad Laboratories, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 5 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and intangible assets to conform to Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." As discussed above, the consolidated financial statements of the Company for the year ended December 31, 2001 were audited by other auditors who have ceased operations. As described in Note 5, these consolidated financial statements have been revised to include the transitional disclosures required by SFAS No. 142, "Goodwill and Other Intangible Assets", which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 5 with respect to 2001 included (i) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill to the Company's underlying records obtained from management, and (ii) testing 31 the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per share amounts. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole. /s/ DELOITTE & TOUCHE LLP ------------------------- San Francisco, California March 10, 2004 32 THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT COVERING 2001, 2000 AND 1999. THE PREDECESSOR AUDITORS HAVE NOT REISSUED THEIR REPORT. 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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Francisco, California February 4, 2002, except for Note 7, as to which the date is February 6, 2002 33 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. 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 that involve risk and uncertainties. We have based these forward looking statements on our current expectations and projections about future events. However, actual results may differ materially from those currently anticipated depending on a variety of risk factors including among other things: our ability to successfully develop and market new products; our reliance on and access to necessary intellectual property; our substantial leverage and ability to service our debt; competition in and government regulation of the industries in which we operate; and the monetary policies of various countries. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. Overview. We are a multinational manufacturer and worldwide distributor of Life Science research and Clinical Diagnostics products. Our business is organized into two primary segments, Life Science and Clinical Diagnostics, with the mission to provide scientists with specialized tools needed for biological research and clinical diagnostics. We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, industry, education and government customers worldwide. We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. Because our customers require replication of results from experiments and tests, we estimate that approximately 70% of our revenues are recurring. Approximately 34% of our 2003 consolidated net sales are from the United States and approximately 66% are international sales largely denominated in local currency with the majority of these sales in Euros, Yen and British Sterling. As a result, our consolidated sales expressed in dollars benefit when the US dollar weakens and suffers when the dollar strengthens in relation to other currencies. Currency fluctuations benefited our consolidated sales expressed in U.S. dollars in 2003 and, to a lesser extent, 2002 sales as well. The market for reagents and apparatus remains good as growth rates have slowed in the global economic downturn but have not turned negative. The market for large capital equipment in 2002 and 2003 declined from prior periods, as many 34 pharmaceutical and biotechnology customers delayed or reduced their capital spending. Bio-Rad is generally less impacted by capital spending as lower cost reagents and apparatus comprise more than 70% of product sales. The following shows gross profit and expense items as a percentage of net sales: Year Ended December 31, 2003 2002 2001 -------------------------- Net sales 100.0 100.0 100.0 Cost of goods sold 43.7 42.9 44.3 ----- ----- ----- Gross profit 56.3 57.1 55.7 Selling, general and administrative expense 32.4 32.4 32.4 Product research and development expense 9.4 9.3 9.4 Net income 7.6 7.6 5.4 We intend that the discussion of our financial condition and results of operations that follow will assist you in understanding how accounting principles, policies and estimates effect our results, and the significant factors that caused changes in our operations and financial position for the years ended December 31, 2003 and 2002. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The accompanying discussion and analysis of the Company's financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. The Company evaluates its estimates on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, future events are subject to change and the best current estimates and assumptions routinely require adjustment. Actual results could differ from these estimates. Accounting for Income Taxes. As part of the process of preparing Bio-Rad's consolidated financial statements management is required to estimate the Company's income taxes in each of the jurisdictions in which the Company operates. This process involves estimating Bio-Rad's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that the deferred tax 35 assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent management establishes a valuation allowance or increases this allowance in a period, an expense within the tax provision in the statement of operations must be included. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. The Company has recorded a valuation allowance of $14.4 million and $12.9 million as of December 31, 2003, and 2002 respectively due to uncertainties related to the Company's ability to utilize some of the deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. The valuation allowance is based on management's current estimates of taxable income by jurisdiction in which Bio-Rad operates and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these estimates are adjusted in future periods an additional valuation allowance may need to be established which would increase the tax provision, lowering income and impacting Bio-Rad's financial position. Should realization of these deferred assets previously reserved occur, the tax provision would decrease, raising income and positively impacting Bio-Rad's financial position. Valuation of Long-lived and Intangible Assets and Goodwill. The Company assesses the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Projected future operating results and cash flows of the reporting units were used to establish the fair value used in evaluating the carrying value of the associated goodwill. Factors the Company considers important which could trigger an impairment review include the following: - significant under-performance relative to expected historical or projected future operating results; - significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business; - significant negative industry or economic trends. When the Company determines that the carrying value of intangibles, long- lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in Bio-Rad's current business model. In 2002, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) became effective. The Company adopted SFAS No. 142 and ceased to amortize approximately $77.7 million of goodwill. The Company had recorded approximately $7.7 36 million of amortization on these amounts during 2001. In lieu of amortization, the Company is required to perform an annual impairment review of goodwill. For the years 2002 and 2003 that review indicated no impairment had taken place. However, there can be no assurance that a material impairment charge will not be recorded in future periods. Valuation of Inventories. The Company values inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on an estimated forecast of product demand and production requirements for the next twelve months. In addition, our industry is characterized by technological change, frequent new product development and product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, the Company's estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. In the future, if inventory is determined to be overvalued, the Company would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if inventory is determined to be undervalued, the Company may have over-reported cost of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes efforts to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and reported operating results. CORPORATE RESULTS -- SALES, MARGINS AND EXPENSES Bio-Rad net sales for the year 2003 were $1,003.4 million, an increase of 12.4% over the prior year. The impact of a weakening US dollar throughout the year provided growth from net foreign currency denominated sales of approximately 8.7% for the full year. The Life Science segment had sales growth of 11.8% in 2003, benefiting from an approximate 8.8% increase due to foreign exchange. Sales declined on a currency neutral basis for food safety as our competitors significantly lowered their average per test sales asking price necessitating Bio-Rad to also lower its average per test sales price. The microscopy product line sales declined as Bio-Rad entered into an agreement to sell its product line to a competitor. The sale is currently being reviewed by the United Kingdom's Competition Commission and their ruling is presently not expected for several months. 37 The Clinical Diagnostics segment had sales growth of 13.0% in 2003, benefiting from an approximate 8.6% increase due to foreign exchange. Product lines providing the 4.4% of currency neutral sales growth were quality control products and blood virus products. Quality control products grew particularly well in North America and Europe. Blood virus products grew in Europe. Bio-Rad net sales for the year 2002 were $892.7 million, an increase of 9% over the prior year. The impact of a weakening US dollar provided growth from foreign currency denominated sales of less than 1% for the full year. Overall growth for Bio-Rad exceeded 11% on a currency neutral basis when adjusted for the spectroscopy product line divestiture. The Life Science segment had sales growth of 13% in 2002, benefiting 1% due to foreign exchange. The majority of growth was provided by consumables. Modest growth was achieved by apparatus, and instrument sales declined year over year. The Clinical Diagnostics segment achieved sales growth of 9% in 2002, again benefiting 1% due to foreign exchange. Contributing product lines included diabetes, autoimmune, quality control products, and blood virus products. The 2003 consolidated gross margins declined to 56.3% from 57.1% in the prior year. The decline in gross margin for the Life Science segment accounted for the entire decline for the Company as a whole. The food safety product line accounted for the majority of the decline as average selling price declined and costs to automate customer testing procedures were not recovered in an attempt to protect the Company's existing market share. Life Science manufacturing overhead costs also increased as planned spending levels exceeded the planned activity levels resulting in less efficient overhead absorption. Life Science management plans to limit the growth in overhead costs in the near term, but during early 2004 may incur some additional costs involved in both the relocation of facilities and installation of new manufacturing systems. Clinical Diagnostic gross margins improved by approximately one-half of one percent. Spending increases below the rate of sales growth have generally aided the small improvement in Clinical Diagnostic margins. The 2002 consolidated gross margins improved to 57.1% from 55.7% in the prior year. Life Science gross margins improved over 2001 approximately 0.3% based largely on sales mix as consumables and apparatus with higher margins than instruments comprised a greater portion of the total sales volume. Clinical Diagnostics gross margins improved over 2001 from lower manufacturing overhead spending and a decrease in provisions for obsolete inventory. The divestiture of the spectroscopy product line also helped contribute as it historically operated at a much lower gross margin than the Company as a whole. Consolidated selling, general and administrative (SG&A) expense increased in line with the rate of sales growth, to end the year at 38 32.4% of sales, the same percentage as for the years ended 2002 and 2001. The Life Science segment added expenses at a rate of growth higher than sales. Areas of emphasis were selling and marketing efforts in the segment's protein function, protein separation and gene expression product lines. SG&A expenses were not reduced in food safety as a means to respond in the short term to competitive pressures maintaining Bio-Rad's market leading position. The Clinical Diagnostics segment grew SG&A at a lower rate than sales growth and accounts in large part for their improved segment profitability. The Company also made investments in financial and tax compliance to improve future profitability. The Company anticipates some additional expenses related to Financial Reporting and its annual audits as 2004 will be the first year of mandatory external auditor certification for compliance with Section 404 of the Sarbanes-Oxley Act. In 2002, consolidated selling, general and administrative expense remained unchanged from the prior year at 32.4% of sales. Spending increased in absolute dollars in both Life Science and Clinical Diagnostics. The areas where increases were the largest were in Europe to support the growth that began in 2001 through the current year. The Company also increased its involvement in Eastern Europe. Asia, excluding Japan, was a second area of emphasis in 2002 for Bio-Rad. The Company sees an opportunity to increase sales through greater penetration and increasing its direct involvement with the customer. Product research and development expense (R&D) in 2003 rose to 9.4% of sales. In absolute dollars each segment had growth with Life Science increasing slightly more than Clinical Diagnostics. Increased efforts in Life Science concentrated on proteomics, process chromatography, food testing and microarray technology. Clinical Diagnostics efforts are concentrating on automation for the serology, autoimmune and blood virus product lines as well as the expansion and enhancement of the segment's quality control products and blood virus diagnostic tests. Bio-Rad plans to reinvest between 9% and 10% of sales in research and development annually to support continued sales growth. Product research and development expense in 2002 increased by 8.4% just below the rate of sales (9.2%). The majority of the increase in absolute dollar spending was in the Life Science segment to support development activities in the areas of proteomics, amplification, food testing, microarray technology and process chromatography. In 2002, Clinical Diagnostics R&D remained unchanged. Areas of emphasis for Clinical Diagnostics included blood screening, autoimmune testing, genetic disorders and expanded offerings for the quality control product line. CORPORATE RESULTS - NON-OPERATING ITEMS Interest expense increased to $31.0 million in the year 2003. Included in the current year's interest cost is $14.6 for the open market repurchase and tendering of $106.0 million of Bio-Rad's 11-5/8% Senior Subordinated Notes due 2007 and the refinancing of the Company's primary 39 credit facility. These costs include a premium to repurchase the notes, and the expensing of unamortized debt issue costs and original issue discount. When compared to 2001, interest expense increased to $28.2 million in 2002 and included $6.9 million of costs associated with the open market repurchase of $43.9 million of the Company's Senior Subordinated Notes. Over the two year period Bio-Rad has seen a decline in borrowing rates on its variable rate debt. During the period January 2002 through August 2003, Bio-Rad had a consistent general decline in borrowed funds as it repaid debt that originated from its acquisition of Pasteur Sanofi Diagnostics in October 1999. Foreign exchange losses for 2003 decreased by $1.4 million when compared to the year 2002. During 2002 Bio-Rad had atypical currency losses on unhedged intercompany receivables from Brazil and Russia. For the full year 2003 Bio-Rad hedged a substantial portion of its Brazilian intercompany receivable which successfully avoided exposure to currency changes. As a result, the additional cost of hedging was greater than 2002, offsetting a significant portion of the improvement. All years include the net cost of Bio-Rad's hedging program for the established European, Asian and North America currencies. Bio-Rad's consolidated effective tax rate was 33%, 35% and 32% in 2003, 2002 and 2001, respectively. The tax rate for all years reflects the utilization of loss carryforwards, foreign sales corporation benefits, and foreign tax credits. The effective tax rate declined in 2003, primarily as a result of the utilization of unbenefited tax loss carryforwards, most notably in Brazil. FINANCIAL CONDITION Historically, the Company's principal capital requirement was for working capital to fund its internal growth. As a result of the obligations undertaken in relation to the acquisition of Pasteur Sanofi Diagnostics, the Company became highly leveraged with a debt to equity ratio at year-end 1999 of 119%. Since that time and up to Bio-Rad's decision in August 2003 to secure $225 million in long-term capital in the form of 7.5% debentures, the Company had improved its overall liquidity reducing its debt to equity ratio at July 31, 2003 to 22%. At December 31, 2003, the Company had available $148.6 million in cash and cash equivalents, $30.2 million under the international lines of credit and $150.0 million under the restated and amended Revolving Credit Facility signed September 5, 2003. Management believes that this availability, together with cash flow from operations, will be adequate to meet the Company's current objectives for operations, research and development, capital additions for plant, equipment and systems and an acquisition or acquisitions with an accumulated value of approximately $200 million. 40 CASH FLOW FROM OPERATIONS Net cash provided by operations was $127.6 million, $105.8 million and $99.5 million in 2003, 2002 and 2001 respectively. The integration of the Pasteur Sanofi Diagnostics acquisition, the introduction of new products (most notable the BSE test) and improved profitability in the Clinical Diagnostics segment have all contributed to the improved cash flow from operations for the Company. Consolidated net accounts receivable increased by $24.8 million or 11.9% over 2002. The impact of strengthening foreign currencies, in particular, the Euro versus the U.S. dollar, accounts for the majority of the increase. From December 31, 2002 to December 31, 2003 the Euro strengthened approximately 20%. European accounts receivable approximated 59% of the Company's year-end 2003 balance of total receivables. Overall, the Company experienced better collections as the number of days sales outstanding dropped slightly. Bio-Rad's management regularly reviews the allowance for uncollectable accounts receivable and believes net accounts receivable are fully realizable. Consolidated net inventory increased $23.9 million or 14.4% over 2002. Again, strengthening foreign currencies accounted for a majority ($15.2 million) of the increase in inventory value. Inventory growth in 2003 over 2002, unrelated to the foreign currency increase, was principally the result of inventory builds associated with a product distribution agreement starting more slowly than anticipated, a facility relocation completed in January 2004 and a purchase commitment for certain automated equipment which should begin shipping to customers in the second quarter of 2004. Inventory in the quality controls and process chromatography area are characterized by large batch sizes to meet customer specifications and pose an increased risk should either manufacturing processes or customer commitments change. Management routinely reviews the impact of obsolescence and market prices on current inventory caused by the introduction of new products, technologies and various pricing regulations. CASH FLOW FROM INVESTING ACTIVITIES Net capital expenditures in 2003 totaled $69.0 million compared to $42.2 million and $43.2 million in 2002 and 2001, respectively. The Company completed construction in January 2004 of the new facilities for manufacturing, laboratory, and general office use on Company owned land in the business park where Corporate headquarters, Life Science and Clinical Diagnostics group operations are now located. The estimated current cost of the facility is $25 million and complete occupancy will occur by the end of the first quarter of 2004. To December 31, 2003, approximately $24.8 million has been capitalized on this project of which $23.1 million was capitalized in the current year. A principal expenditure in all years was clinical diagnostic equipment placed with customers to be used with the Company's diagnostic reagents. For 2003 the amount represents $14.5 million of capital additions. The Company continues to invest in business systems to standardize distribution software and enhance data communication. Other expenditures were made 41 for the replacement and improvement of production equipment and facilities to meet the necessary Good Manufacturing Practices, (GMP) mandated by the Food and Drug Administration (FDA) for Clinical Diagnostics and other regulatory bodies as well as many customers of the Life Science group. It is anticipated that the European In Vitro Diagnostic Directive will increase the burden of compliance for the Company in Europe and will necessitate continued compliance expenditures of a capital nature. CASH FLOW FROM FINANCING ACTIVITIES The Company completed three significant financing transactions during 2003. These transactions were the completion of a new $150.0 million revolving credit facility, the placement of $225.0 million aggregate principal amount of Senior Subordinated Notes in a private offering and completion of a cash tender offer to retire all of its outstanding 11-5/8% Senior Subordinated Notes due in 2007. The new $150.0 million revolving credit facility is secured by substantially all of the Company's personal property assets and the assets of its domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries, and is guaranteed by all of its existing and future domestic subsidiaries (other than immaterial domestic subsidiaries as defined for purposes of the new credit facility). The Company terminated its existing $100.0 million revolving credit facility prior to the closing of the new revolving credit facility. The interest rate varies due to a number of factors including the duration of the specific borrowing and is based upon either the Eurodollar, the Federal Funds effective or the Company corporate based rate. The Company will pay a commitment fee annually on the daily unused portion of the revolving credit facility. On August 11, 2003 the Company completed the sale of $225 million aggregate principal amount of its 7.5% Senior Subordinated Notes due 2013 in a private offering. The Company used $98.2 million of the net proceeds from this offering to fund the purchase of the outstanding 11-5/8% Senior Subordinated Notes due 2007 pursuant to a tender offer completed on September 30, 2003 with the remainder available for general corporate purposes, which may include acquisitions. The new Senior Subordinated Notes have been exchanged for the new 7.5% Exchange Notes that have been registered under the Securities Act of 1933, as amended, or applicable state securities laws. This transaction was completed on October 30, 2003, with the new Exchange Notes being virtually identical in all material respects to the 7.5% Senior Subordinated Notes originally issued only to qualified institutional buyers in reliance of Rule 144A and in offshore transactions pursuant to Regulation S under the Securities Act as amended. The Company completed a cash tender and consent solicitation for all of its outstanding 11-5/8% Senior Subordinated Notes due 2007. Holders received consideration of 110.625% of the principal amount of notes, which included a consent payment of 1.5% of the principal amount of the notes. In accordance with the terms of the indenture governing the notes, any notes 42 not tendered were called for redemption, redeemed and the notes retired. This closes the last of the financings originally used to primarily fund the 1999 acquisition by Bio-Rad of Pasteur Sanofi Diagnostics from Sanofi Synthelabo and the Institut Pasteur. The Company continues to review possible acquisitions to expand both its Life Science and Clinical Diagnostics segments. The Company routinely meets with the principals or brokers of the subject companies. Currently no discussions involving a material acquisition have progressed beyond the most initial phases. Should the Company make a material acquisition it would most likely require an increase in borrowed funds. The Board of Directors has authorized the Company to repurchase up to $18 million of the Company's common stock over an indefinite period of time. Through December 31, 2003, the Company has cumulatively repurchased 1,179,272 shares of Class A Common Stock and 60,000 shares of Class B Common Stock for a total of $14.7 million. The Company's credit agreements restrict the Company's ability to repurchase its own stock. There were no share repurchases made during 2002 or 2003. The repurchase is designed to improve shareholder value and to satisfy the Company's obligations under the employee stock purchase and stock option plans. CONTRACTUAL OBLIGATIONS The following summarizes certain of our contractual obligations as of December 31, 2003 and the effect such obligations are expected to have on our cash flows in future periods (in millions): Less than More One 1-3 3-5 than 5 Contractual Obligations Total Year Years Years Years ----------------------------------------------------------------------- Long-term debt, including current portion (1) 226.0 0.2 0.5 0.3 225.0 Operating lease obligations (2) 52.8 18.7 21.9 9.3 2.9 Purchase obligations (3) 10.9 7.3 1.3 0.8 1.5 Long-term liabilities 16.9 -- 2.7 0.9 13.3 (1) These amounts represent expected cash payments, include capital lease obligations and are included in our Consolidated Balance Sheets. See Note 6 of the Consolidated Financial Statements for additional information about our debt. (2) Operating lease obligations are described in Note 13 of the Consolidated Financial Statements. (3) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms. Purchase obligations exclude agreements that are cancelable without penalty. 43 FINANCIAL RISK MANAGEMENT Bio-Rad uses derivative financial instruments to reduce the Company's exposure to fluctuations in foreign exchange rates and, on occasion, 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. These derivative investments do not qualify for hedge accounting treatment under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Derivative instruments used in these transactions will be valued at fair value and changes in fair value will be included in reported earnings. Bio-Rad operates and conducts business in many 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 more than 60% 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 primarily in British Sterling, Japanese Yen and the Euro, are entered into typically for 30 to 60 days. 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 in currency exchange rates. As of December 31, 2003, the Company's market risk was not significant. The Company's long-term debt consists mostly of fixed rate instruments. While the Company has used derivative instruments in the past, it did not hold any interest rate derivative contracts at December 31, 2003. 44 -----END PRIVACY-ENHANCED MESSAGE-----