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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to _______________________
Commission file number 000-21615 .
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BOSTON BIOMEDICA, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2652826
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 WEST STREET,
WEST BRIDGEWATER, MASSACHUSETTS 02379-1040
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(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code (508) 580-1900
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
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 be reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 26, 1999 was $10,151,102. The aggregate market value was
computed by reference to the closing price as of that date on NASDAQ.
The number of shares outstanding of the Registrant's only class of common
stock as of March 26, 1999 was 4,717,822.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's definitive Proxy Statement for its 1998
annual meeting, are incorporated by reference into Part III of this Report, and
portions of the Registrant's Registration Statement on Form S-1 (Registration
No. 333-10759) are incorporated by reference into Part IV of this Report.
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PART I
ITEM 1. BUSINESS
The Company is a worldwide provider of proprietary quality control
products for use with in vitro diagnostic test kits ("test kits") for the
detection, analysis and monitoring of infectious diseases, including AIDS,
Hepatitis and Lyme Disease. These products are used to develop test kits, to
permit the monitoring of laboratory equipment and personnel, and to help ensure
the accuracy of test results. The Company's products are derived from human
plasma and serum using proprietary manufacturing processes. The Company believes
its Quality Control Panel products are viewed as the current industry standard
for the independent assessment of the performance of HIV and Hepatitis test
kits. The Company also manufactures diagnostic test kit components, laboratory
instruments, and provides specialty laboratory services, including clinical
trials. It also provides contract instrument development and related repairs at
its service center in Garden Grove, CA. The Company's customers include test kit
manufacturers, regulatory agencies and end-users of test kits such as blood
banks, hospital laboratories and clinical reference laboratories. Currently the
Company's products are used in connection with the detection of more than 15
infectious diseases, and its specialty laboratory services are used in
connection with the detection of over 100 such diseases.
The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (i) capitalize on
the emerging end-user market, (ii) develop new products and services, (iii)
enhance technical leadership, (iv) capitalize on complementary business
operations, and (v) pursue strategic acquisitions and alliances.
Industry Overview
Infectious Disease Test Kits and Testing Methods. Test kits contain in one
compact package all of the materials necessary to run a test for an infectious
disease. These include the disposable diagnostic components, instructions, and
reaction mixing vessels (generally 96-well plates or test tubes) which are
coated with the relevant infectious disease antigens, antibodies or other
materials. To perform the test, either a technician or a specially designed
instrument typically mixes the solutions from the test kit with human blood
specimens in a specific sequence according to the test kit instructions. The
mixture must then "incubate" for up to 18 hours, during which time a series of
biochemical reactions trigger signals (including color, light and radioactive
count) which indicate the presence or absence and amount of specific markers of
the particular disease in the specimen.
Test kits generally employ one of three methods for infectious disease
testing: microbiology, immunology or molecular biology. Traditional microbiology
tests use a growth medium that enables an organism, if present, to replicate and
be detected visually. Immunology tests detect the antigen or antibody, which is
an indicator (marker) of the pathogen (e.g., virus, bacterium, fungus or
parasite). Molecular diagnostic methods, such as the polymerase chain reaction
("PCR"), test for the presence of nucleic acids (DNA or RNA) which are specific
to a particular pathogen.
Most infectious disease tests currently use microbiological or
immunological methods. However, molecular diagnostic methods are increasingly
being used in research and clinical laboratories worldwide. The Company believes
that the advent of molecular diagnostic methods will complement rather than
diminish the need to test by microbiological and immunological procedures,
because different test methods reveal different information about a disease
state. The Company anticipates that as new test methods become more widespread,
they will account for a larger portion of the Company's business.
Quality Control for In Vitro Diagnostic Test Kits. Customers employ
quality control products in order to develop and use test kits (both infectious
and non-infectious). Quality control products help ensure that test kits detect
the correct analyte (specificity), detect it the same way every time
(reproducibility or precision), and detect it at the appropriate levels
(sensitivity). The major element of this quality control process is the
continuous evaluation of test kits by the testing of carefully characterized
samples that resemble the donor or patient samples routinely used with the test.
Quality
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control is used in both the infectious and non-infectious disease markets,
although currently it is not as prevalent among end-users of infectious disease
test kits.
The market for quality control products consists of three main customer
segments: (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the manufacture and use of test kits and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.
Company Products and Services
Overview
The Company offers two broad product classes used in in vitro diagnostics
("IVD"): "Diagnostic Products" consisting of Quality Control Panels, Accurun(R)
Run Controls and Diagnostic Components, all used in connection with infectious
disease testing, and "Laboratory Instruments". Diagnostic Products are used
throughout the entire test kit life cycle, from initial research and
development, through the regulatory approval process and test kit production, to
training, troubleshooting and routine use by end-users. The Company's Quality
Control Panels, which combine human blood specimens with comprehensive
quantitative data useful for comparative analysis, help ensure that test kits
detect the correct analyte (specificity), detect it the same way every time
(reproducibility), and detect it at the appropriate levels (sensitivity). The
Company's Accurun(R) Run Controls enable end-users of test kits to confirm the
validity of results by monitoring test performance, thereby minimizing false
negative test results and improving error detection. In addition, the Company
provides Diagnostic Components, which are custom processed human plasma and
serum products, to test kit manufacturers.
Through its wholly owned subsidiary, BBI Source Scientific, Inc., the
Company designs, manufactures and markets Laboratory Instruments used in
hospitals, clinics, and research, environmental and food testing laboratories.
Utilizing a common hardware technology platform, these instruments are used in
connection with the performance of an IVD test, including reading the test
result.
The Company's specialty clinical laboratory services include both routine
and sophisticated infectious disease testing in microbiology, immunology and
molecular biology. The Company seeks to focus its specialty laboratory services
in advanced areas of infectious disease testing, and provides contract research
and clinical trials for the United States government and for domestic and
foreign test kit manufacturers.
Diagnostic Products
The Company manufactures its Diagnostic Products from human plasma and
serum which are obtained from nonprofit and commercial blood centers, primarily
in the United States. The Company has acquired and developed an inventory of
approximately 50,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
Within the Diagnostic Products class are two groups: Quality Control Products
(Panels and Accurun(R) Run Controls) and Diagnostic Components.
Quality Control Panels
Quality Control Panels consist of blood products characterized by the
presence or absence of specific disease markers and a Data Sheet containing
comprehensive quantitative data useful for comparative analysis. These Quality
Control Panels are designed for measuring overall test kit performance and
laboratory proficiency, as well as for training laboratory professionals. The
Company's Data Sheets, containing comprehensive quantitative data useful for
comparative analysis, are an integral part of its Quality Control Panels. These
Data Sheets are created as the result of extensive testing of proposed panel
components in both the Company's laboratories and at major testing laboratories
on behalf of the Company in the United States and Europe, including national
public health laboratories, research and clinical laboratories and regulatory
agencies. These laboratories are selected based on their expertise in performing
the appropriate tests on a large scale in an actual clinical setting; this
testing process provides the Company's customers with the benefit that the
-3-
Quality Control Panels they purchase from the Company have undergone rigorous
testing in actual clinical settings. In addition, the Company provides
information on its Data Sheets on the reactivity of panel components in all FDA
licensed test kits and all leading European test kits for the target pathogen,
as well as for all other appropriate markers of this pathogen. For example, the
Company's HIV panel Data Sheets include anti-HIV by IFA, ELISA and western blot;
HIV antigen by ELISA; and HIV RNA by several molecular diagnostic procedures.
The Company's Data Sheets require significant time and scientific expertise to
prepare. The following table describes the types of Quality Control Panel
products currently offered by the Company.
Quality Control Panels
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Product Line Description Use Customers
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Seroconversion Plasma samples collected Compare the clinical Test kit
Panels from a single individual sensitivity of manufacturers and
over a specific time competing regulators.
period showing conversion manufacturers' test
from negative to positive kits, enabling the
for markers of an user to assess the
infectious disease. sensitivity of a
test in detecting a
developing
antigen/antibody.
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Performance A set of 10 to 50 serum Determine test kit Test kit
Panels and plasma samples performance against manufacturers and
collected from many all expected levels regulators.
different individuals and of reactivities in
characterized for the the evaluation of
presence or absence of a new, modified and
particular disease marker. improved test
methods.
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Sensitivity Precise dilutions of human Evaluate the low-end Test kit
Panels plasma or serum human analytical manufacturers
plasma or serum containing sensitivity of a
a known amount of an test kit.
infectious disease marker
as calibrated against
international standards.
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Qualification Dilutions of human plasma Demonstrate the Clinical reference
Panels or serum manifesting a consistent laboratories, blood
full range of reactivities lot-to-lot banks, and hospital
in test kits for a performance of test laboratories
specific marker. kits, troubleshoot
problems, evaluate
proficiency, and
train laboratory
technicians.
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OEM Panels Custom-designed Train laboratory Custom designed with
Qualification Panels for personnel on new test kit
regulators and test kit test kits or manufacturers and
manufacturers for equipment. regulators as an
distribution to customers end-user product or
or for internal use. for internal use.
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The Company first introduced Quality Control Panels in 1987. The Company
currently offers a broad range of Quality Control Panels that address a variety
of needs of manufacturers and regulators of test kits as well as blood banks,
hospitals, clinical laboratories and other end-users. Prices for the Company's
quality control seroconversion, performance and sensitivity panels range from
$450 to $2,000 each, and its qualification and OEM panels range from $100 to
$200 per panel.
-4-
Seroconversion and Performance Panels are comprised of unique and rare
plasma specimens obtained from individuals during the short period of time when
the markers for a particular disease are converting from negative to positive.
As a result, the quantity of any such panel is limited, so that the Company must
replace these panels as they sell out with another panel comprised of different
specimens equally unique and rare. The Company believes that its inventory and
relationships with blood centers affords it a competitive advantage in acquiring
such plasma for replacement panels and developing new products to meet market
demand. There can be no assurance that the Company will be able to continue to
obtain such specimens.
Quality Control Panels currently span the immunologic markers for AIDS
(i.e., HIV), Hepatitis (A, B and C), Lyme Disease and ToRCH (Toxoplasma,
rubella, cytomegalovirus and herpes simplex virus). New introductions this year
include Performance Panels for HBsAg, molecular Qualification Panels for HIV,
HBV and HCV, and additional Seroconversion Panels for HIV, HBV and HCV.
Accurun(R) Run Controls
End-users of test kits utilize Run Controls to confirm the validity of
results by monitoring test performance, thereby minimizing false negative test
results and improving error detection. Run controls consist of one or more
specimens of known reactivity that are tested together with donor or patient
samples in an assay to determine whether the assay is performing within the
manufacturer's specifications. Clinical laboratories generally process their
patient specimens in a batch processing mode, and typically include 25 to 100
specimens to be tested in each batch (a "run"). Large laboratories may perform
several runs per day, while smaller laboratories may perform only a single run
each day, or sometimes only several runs per week. A clinical laboratory using a
Run Control will place the Run Control product in a testing well or test-tube,
normally used for a specimen, and will test it in the same manner that it tests
the donor or patient specimens. It will then compare the results generated to an
acceptable range, determined by the user, to measure whether the other specimens
are being accurately tested. The Run Control result must be within the
acceptable range to be considered valid. This is often tracked visually using a
Levey-Jennings chart. Depending upon a particular laboratory's quality control
practices, it may use several Run Controls on each run or it may simply use a
Run Control in a single run at the beginning and end of the day.
The Company's AccuChart(TM) tracking and charting software, used as part
of a laboratory's quality assurance program, runs on a PC and is designed to
provide the data tracking capability needed to document laboratory performance.
The Company's Accurun(R) family of products is targeted at the emerging
market of end-users of infectious disease test kits. The Company believes that
it offers the most comprehensive line of Run Controls in the industry, and that
its Accurun(R) products, in combination with its Quality Control Panel products,
provide an extensive line of products for quality assurance in infectious
disease testing. The Company intends to continue to expand its line of
Accurun(R) products, thereby providing its customers with the convenience and
cost effectiveness of a single supplier for independent run controls.
The Company introduced its first four Accurun(R) Run Control products in
the fourth quarter of 1993 and has since developed and released for sale an
additional 40 Accurun(R) products, for a total of 44 Run Controls. The majority
of these products are available for diagnostic purposes; the others currently
are limited to research use. Current Accurun(R) Run Control products range in
price from $5 to $60 per milliliter and are described in the following table.
-5-
ACCURUN(R) RUN CONTROLS
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Product Line Description Current Number Primary Customers
of Products
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Accurun(R)1-99 Multi-marker Run 6 Blood Banks
Control for
immunological tests
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Accurun(R)100-199 Single-marker Run 23 Hospitals and
Control for clinical reference
immunological tests laboratories
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Accurun(R)200-299 Multi-marker Run 2 Research and
Control for molecular specialty
tests laboratories
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Accurun(R)300-399 Single-marker Run 8 Research and
Control for specialty
immunological tests laboratories
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Accurun(R)800-899 Negative Run Control 4 All laboratories
for immunological and
molecular tests
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All of the Company's Accurun(R) Run Controls require either FDA premarket
clearance (a 510(k)) or validation studies (if the products are exempt from FDA
submission requirements under the FDA Modernization Act of 1997), prior to being
marketed for diagnostic use. As of March 1, 1999, a total of 10 products in the
Accurun 1(R) line and 16 single analyte Accurun(R) controls have either received
510(k) clearance or have been validated. Two additional Accurun(R) single
analyte products have been submitted but have not yet received FDA approval.
Diagnostic Components
Diagnostic Components are the individual materials supplied to infectious
disease test kit manufacturers and combined (often after further processing by
the manufacturer) with other materials to become the various fluid components of
the manufacturer's test kit. The Company supplies Diagnostic Components in four
product lines: Normal Human Plasma, Normal Human Serum, Basematrix, and
Characterized Disease State Serum and Plasma. Normal Human Plasma and Serum are
both the clear liquid portion of blood which contains proteins, antibodies,
hormones and other substances, except that the Serum product has had the
clotting factors removed. Basematrix, the Company's proprietary processed serum
product that has been chemically converted from plasma, is designed to be a
highly-stable, lower cost substitute for most Normal Human Serum and Plasma
applications. Characterized Disease State Serum and Plasma are collected from
specific blood donors pre-selected because of the presence or absence of a
particular disease marker. The Company often customizes its Diagnostic
Components by further processing the raw material to meet the specifications of
the test kit manufacturer. The Company's Diagnostic Components range in price
from $0.25 to $60 per milliliter, with the majority selling between $0.50 and $5
per milliliter.
-6-
Laboratory Instruments
In 1997, the Company acquired the business and net assets of Source
Scientific, Inc., a laboratory instrument manufacturer in Garden Grove,
California. As a result of this acquisition, the Company through its wholly
owned subsidiary, BBI Source Scientific, Inc. ("BBI Source"), now has expertise
in IVD instruments, adding to its existing capability in IVD quality control
products. The Company hopes to capitalize on this common customer base by
expanding the products offered by both sales forces. See also Note 2 to the
Company's Notes to Consolidated Financial Statements in Item 8 hereunder
regarding the Company's purchase of the business and net assets of Source
Scientific, Inc.
BBI Source designs, manufactures and markets Laboratory Instruments used
in hospitals, clinics, and research, environmental and food testing
laboratories. They are generally sold on a private-label or OEM basis for other
companies utilizing a common hardware technology platform. The instruments
manufactured by the Company use advanced optical detection methods
(luminescence, fluorescence, reflectance, photometry), robotics, fluidics, and
unique software, which is desired by customer companies reselling the
state-of-the-art instrumentation systems to clinical distributors and
laboratories worldwide.
The Products currently being offered by BBI Source have been
commercialized since 1985, and were primarily developed in conjunction with IVD
test kit manufacturers. BBI Source hopes to attract development partners for its
newest prototype products. Management believes that products address important
market segments in biomedical and clinical diagnostic testing and environmental
monitoring and food testing research. The BBI Source product line includes the
following:
MicroChem(R) Photometer. A compact, low-cost, photometer designed for
immunoassay and general chemistry applications.
ChemStat(R) Automated Photometer. A high-speed, automated photometer with
a sample capacity of 95 tubes and a read rate of one sample per second. This
product is suited for high-volume processing.
ChemStat(R) Plus Automated Photometer. The ChemStat Plus is a second
generation photometer compatible with the EXEC-WASH Washing System that features
menu-driven software and optional on-board dispensers.
E/LUMINA(R) Luminescence Analyzer. A flexible luminometer for both "flash"
and "glow" luminescence methods, this automated system reads up to 114 samples
and reports final results.
E/LUMINA(R) 2E Automated Luminescence Analyzer. This detection system is
designed with the same features as the E/LUMINA Luminescence Analyzer that can
be used to detect faster "flash" luminescence techniques and adapts to various
formats, as well as to liquid phase assays.
EXEC-WASH(R) Washing System. An automated immunoassay washing system that
can be quickly configured by the user to wash different solid-phase assay
formats by a propriety manifold design. The EXEC-WASH is fully compatible with a
variety of other Company products, such as the ChemStat, the ChemStat Plus and
the E/LUMINA Luminescence Analyzer.
PlateMate(R) Reader. The Company shipped in 1998 the first PlateMate
Reader units to a potential distributor. PlateMate is a microfluidics
well-reading system combining robotics and fluidics. The current design of the
PlateMate Reader performs photometric assays in the 400 to 700 nm range for 96
samples at a time and prints out results directly on a built-in printer.
-7-
Protocol Design Software System. A development tool for researchers and
assay manufacturers, the program operates under Microsoft(R) Windows and serves
as the master programing center for EXEC-WASH systems to create fluid handling
protocols.
FOCUS(R) Florescence Polarization System. Fluorescence polarization ("FP")
is a technology that has dominated the clinical market for therapeutic and abuse
drug level testing for many years.
FluoroStat(R) Reader. The FluoroStat is a compact fluorometer that is
highly sensitive and provides a broad dynamic range for tube-based fluorometric
assays. The instrument was introduced in September 1995 and is currently
available for OEM manufacture.
Services
The Company seeks to focus its specialty laboratory services in both the
clinical reference laboratory testing and advanced research areas. The Company
concentrates its services in those areas of infectious disease testing which are
complementary to its quality control and diagnostic products businesses.
Specialty Clinical Laboratory Testing. Through its wholly owned
subsidiary, BBI Clinical Laboratories, Inc. the Company operates an independent
specialty clinical reference laboratory which performs both routine and
sophisticated infectious disease testing in microbiology, immunology and
molecular biology, with special emphasis in AIDS, Viral Hepatitis and Lyme
Disease. The Company's specialty clinical laboratory combines traditional
microbiology, advanced immunology, and current molecular diagnostic techniques,
such as PCR, to detect and identify microorganisms, their antigens and related
antibodies, and their nucleic acids (i.e., DNA and RNA). Customers include blood
banks, physicians, clinics, hospitals and other clinical/research laboratories.
Contract Research. The Company, through its wholly owned subsidiary, BBI
Biotech Research Laboratories, Inc. ("BBI Biotech"), offers a variety of
contract research services in molecular biology, cell biology and immunology to
governmental agencies, diagnostic test kit manufacturers and biomedical
researchers. Molecular biology services include DNA sequencing, recombinant DNA
support, probe labeling and custom PCR assays. Cell biology and immunology
services include sterility testing, virus infectivity assays, cultivations of
virus or bacteria from clinical specimens, preparation of viral or bacterial
antigens or nucleic acids, and production of antibodies. The Company is
currently providing contract research services under several contracts and
grants. These services primarily related to infectious diseases, and include the
following: assessment of the efficiency of candidate HIV vaccines in a monkey
model system; development of a multiplex RT PCR based test for HIV-1, HTLV I/II,
HCV, and HBV; DNA sequencing of human genes involved in neurological disorders;
plate assays for HIV-1 genotyping; eliciting neutralizing antibodies targeting
HIV, and support for a novel approach to an HIV vaccine developed by one of the
Company's scientists. In addition, since 1983, BBI Biotech, has provided blood
processing and repository services for the National Cancer Institute ("NCI"),
also a part of the National Institutes of Health ("NIH"). The repository stores
over 2,000,000 specimens and processes or ships up to several thousand specimens
per week in support of various NIH cancer and virus research programs. A one
year NCI repository contract was signed in February 1997 which includes four one
year renewal options exercisable by NCI. The total value of the contract
including all options, is $4.8 million. To date all renewal options have been
approved by the NCI although there can be no assurance that any subsequent
options will be exercised. In 1998, the Company was awarded a six year $2.9
million repository contract (including five one year extension options) with the
National Heart, Lung and Blood Institute of the NIH. There can be no assurance
that option years will be exercised.
Clinical Trials. The Company conducts clinical trials for domestic and
foreign test kit manufacturers. Test kit manufacturers must conduct such trials
to collect data for submission to the United States FDA and other regulatory
agencies. By providing this service, the Company is able to maintain close
contact with test kit manufacturers and regulators, and is able to evaluate new
technologies in various stages of development. The Company believes that the
reputation of its laboratory and scientific staff, its large number of Quality
Control Panels, and its inventory of characterized serum and plasma specimens
assist the Company in marketing its clinical trial services to its customers.
-8-
The Company has performed clinical trials for a number of United States and
foreign test kit manufacturers seeking to obtain FDA approval for their
infectious disease test kits.
Laboratory Instrumentation Services. BBI Source offers design, development
and manufacturing services to companies seeking to market biomedical products
manufactured under government-approved manufacturing practices. These services
range in complexity from consulting to full system development and distribution.
BBI Source also provides after-sales-service. Management believes that
after-sales service is a major marketing advantage in many of the Company's
markets, since many of the Company's customers do not maintain their own full
service departments. Servi-Trak(R), a proprietary software program, is a key
element of this after-sales service. The Company's service department is located
at BBI Source's facility in Garden Grove, California. A fully functional service
center located in Giessen, Germany, is contracted by the Company to provide
European service and support.
Drug Screening Program. As a subcontractor for an NIH AIDS grant held by
the University of North Carolina at Chapel Hill, the Company has established an
anti-HIV drug screening program to test a large number of natural products
(largely plant derivatives) to determine whether they inhibit HIV replication in
an in vitro assay system. These in vitro assays are also offered as a service to
researchers and pharmaceutical companies who wish to test various candidate
anti-viral agents for anti-HIV activity.
Research and Development
On September 30, 1998 the Company acquired the remaining common stock
outstanding of BioSeq, Inc. that it did not previously own. BioSeq is a
development stage company with patent pending technology based on pressure
cycling technology ("PCT"). PCT research is focused in two areas: nucleic acid
extraction and purification of target pathogens in connection with sample
preparation for PCR or other molecular testing; and pathogen inactivation of
blood plasma for transfusion. See Note 2 to the Company's Notes to Consolidated
Financial Statements in Part 8 hereunder for further transaction details.
In August 1998, the Company hired a Vice President, Biotheraputics to
direct its drug discovery and development efforts. In collaboration with Dr.
K.H. Lee of the School of Pharmacy, University of North Carolina at Chapel Hill,
this segment conducts research relating to compounds, pharmaceutical
compositions, therapeutic methods, and vaccine preparation. The Company owns,
jointly with UNC, five United States patents related to this drug discovery
program. Two additional United States applications and foreign applications for
all five of the joint patents are pending.
The Company's research and development effort is focused on the (i)
development of new and improved Quality Control Products (Panels and Accurun(R))
for the emerging end-user market, (ii) expansion of its infectious disease
testing services using PCR and other amplification assays, (iii) development of
PCT for nucleic acid purification and pathogen inactivation, (iv) determining
the mechanism of action and performing initial toxicity studies on its lead
compounds in the Company's drug discovery program; and (v) new laboratory
instruments and mechanical and optical detection techniques. The Company has
approximately 32 full or part-time employees involved in its research and
development effort. For 1998 the Company increased spending on research and
development as a percentage of revenue compared to 1997 and expects to increase
such expenditures as a percentage of revenue next year as well. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." The Company's research scientists work
closely with sales, marketing, manufacturing, regulatory and finance personnel
to identify and prioritize the development of new products and services.
In the area of Quality Control Products, the Company's product development
activities center on the identification and characterization of materials for
the manufacture of new products and the replacement of sold-out products. During
1998, the Company introduced 18 new Seroconversion, Performance, and
Qualification Panel products, as well as 11 new Accurun(R) Run Controls, and 43
OEM Panels. The Company is developing new Quality Control Products for use with
both immunological and molecular diagnostic tests for subtypes and variants of
HIV, HCV and HBV, and a variety of controls targeted for leading instrument
platforms. The Company has increased the number of off-the-shelf Quality Control
Products it offers from approximately 20 products in 1990 to approximately 186
in 1998.
-9-
The Company's product development activities related to Laboratory
Instruments are centered on additional configurations for its PlateMate(R)
microtiter plate reader and the development of a "reflectance" reader to produce
qualitative results from rapid IVD tests using dry chemistry (strip) technology.
In addition, the Company continues to work on applications for existing products
to broaden their utilization.
The Company is also developing new and improved infectious disease tests
which offer potential for above average profit for use in its specialty
laboratory business. This includes emphasis on additional applications of PCR
and other amplification technologies to infectious disease diagnostics, beyond
its current assays for the pathogens of AIDS, Viral Hepatitis, Lyme Disease and
Herpes, and for the direct detection of other infectious agents in blood,
tissues and other body fluids.
From time to time in the past, the Company has funded a portion of its
research and development activities from grants provided by various agencies and
departments of the United States government. See also "--Services-Contract
Research."
Strategic Alliance
University of North Carolina at Chapel Hill ("UNC"). The Company is
directly supporting a drug discovery program at UNC, in which a full-time
research scientist is working to develop synthetic derivatives of anti-HIV
compounds that have been discovered pursuant to the Company's joint
collaboration with UNC. This research scientist is also working to introduce
modifications to these derivatives that would make them more soluble, less
toxic, or otherwise enhance their anti-viral properties. UNC has licensed to the
Company exclusive worldwide rights to three series of patent applications filed
by the Company and UNC with respect to three classes of anti-HIV compounds. Two
such compounds have exhibited therapeutic indices in in vitro test model systems
in excess of those recorded for AZT under comparable test conditions. Under this
license, the Company will also have the rights to any new anti-HIV compounds or
derivatives developed in the course of this sponsored research, provided the
Company obtains certain regulatory approvals from the FDA. See also
"--Services-Drug Screening program."
-10-
Sales and Marketing
The Company's sales and marketing efforts are directed by a Senior Vice
President, who is responsible for a group consisting of 29 sales people and 9
other full-time marketing and customer services employees.
The Company's marketing strategy is focused upon addressing the needs of
its customers in the infectious disease testing market throughout the entire
test kit life-cycle, from initial research and development, through the
regulatory approval process and test kit production, to training,
troubleshooting and routine use by end-users such as clinical laboratories,
hospitals and blood banks.
The Company continues to focus its sales and marketing efforts on the
emerging end-user market for quality control products for infectious disease
test kits. To promote this objective, the Company implemented a major marketing
platform, known as "Total Quality System" ("TQS"). TQS is a package of Quality
Control Products, including the Company's Accurun(R) Run Controls and AccuChart
Quality Control Software, which is designed to provide test kit end-users with
the products needed in an overall quality assurance program. These products
enable laboratories to evaluate each of the key elements involved in the testing
process: the test kit, laboratory instrument and laboratory personnel. The
Company believes that TQS effectively addresses the need for end-users to ensure
the accuracy of their test results. The Company intends to continue to expand
its sales and marketing activities with respect to its Accurun(R) line of run
control products.
The Company's products are currently sold through a combination of
telephone, mail, third party distributors and direct sales efforts.
Domestically, Diagnostic Products are sold through a direct sales force
consisting of a sales group manager, two regional managers and twelve sales
representatives. Internationally, the Company distributes its Diagnostic
Products both directly and through 21 independent distributors located in Japan,
Australia, South America, Southeast Asia, Israel and Europe. The Company's
international sales manager oversees the Company's foreign distributors. The
Company's Laboratory Instruments are sold through a direct domestic and
international sales force consisting of one director and one sales
representative. Export sales, including sales to distributors, for the years
ended December 31, 1998, 1997, and 1996 were $4.1 million, $4.6 million, and
$4.3 respectively. See also Note 8 to the Company's Notes to Consolidated
Financial Statements in Part 8 hereunder.
The Company's Specialty Clinical Laboratory Testing services are marketed
primarily through a direct domestic sales force consisting of eight sales
representatives managed by one regional manager and a sales director. The sales
representatives are located throughout the eastern, mid-western and western
United States. They are supported internally by a client services
representative.
The Company emphasizes high quality products and services, technical
knowledge, and responsiveness to customer needs in its marketing activities for
both products and services. The Company educates its distributors, customers and
prospective customers about its products through a series of detailed marketing
brochures, technical bulletins and pamphlets, press releases and direct mail
pieces. These materials are supplemented by advertising campaigns in major
industry publications, technical presentations, and exhibitions at local,
national and international trade shows and expositions.
-11-
Customers
The Company's customers for Diagnostic Products comprise three major
groups: (i) international diagnostics and pharmaceutical manufacturing
companies, such as Abbott Diagnostics, Behring, Boehringer Mannheim, Chiron,
Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson and Johnson), Sanofi
Diagnostics and Sorin Biomedica; (ii) regulatory agencies such as the United
States FDA, the British Public Health Laboratory Service, the French Institut
National de la Transfusion Sanguine, and the German Paul Ehrlich Institute; and
(iii) end-users of diagnostic test kits, such as hospital and independent
clinical laboratories, including LabCorp, Quest and SmithKline Beecham, public
health laboratories and blood banks, including the American Red Cross, Swiss Red
Cross, United Blood Services and Kaiser Permanente. The Company's customers for
Laboratory Instruments consist of international diagnostic and pharmaceutical
manufacturing companies and are generally sold on an OEM basis, for use by
hospitals, and clinical and research laboratories. In addition, Laboratory
Instruments are sold directly to environmental and food testing laboratories,
and wineries. Customers include Mast Immuno Systems, Hybritech Inc., Vicam, and
Toray Fuji Bionics Inc. The Company's Specialty Clinical Laboratory Testing
services are sold to hospital and clinical laboratories, physicians, blood
banks, researchers and other health care providers. The Company's Contract
Research services are typically offered under contracts to governmental
agencies, diagnostic test kit manufacturers and biomedical researchers.
The Company does not have long-term contracts with its customers for
Quality Control Products and Diagnostic Components, which are generally sold
pursuant to purchase orders for discrete purchases. Laboratory Instrumentation
are generally sold on an OEM basis under short term contracts with monthly
delivery dates. Although the Company believes that its relationships with
customers are satisfactory, termination of the Company's relationship with any
one of its customers could have a material adverse effect on the Company.
During the fiscal years 1998, 1997 and 1996, sales to the Company's three
largest customers accounted for an aggregate of approximately 20% of the
Company's net sales, although the customers were not identical in each period.
During the fiscal years 1998, 1997 and 1996, the combined revenues to all
branches of the National Institutes of Health, a United States Government
agency, accounted for approximately 13% of total consolidated revenues of the
Company. While the Company believes that the loss of any one customer would have
an adverse effect on its results, this risk is partially mitigated by the
diversity of its customer base within the IVD industry and the different
diseases and instrument platforms on which they focus.
Manufacturing and Operations
The Company manufactures and assembles Diagnostic Products at its facility
in West Bridgewater, Massachusetts. Raw materials (primarily plasma and serum)
are acquired from a variety of vendors and through a program of donor
recruitment, screening, management, and plasma/serum collection and
characterization. All important materials have multiple sources of supply.
Laboratory Instruments are manufactured and assembled at the Company's facility
in Garden Grove, California. Raw materials and subassemblies are acquired from a
variety of vendors with multiple sources of supply.
The Company also operates a specialty clinical laboratory in New Britain,
Connecticut, and a research and development laboratory in Gaithersburg,
Maryland. See "Item 2 -- PROPERTIES."
Competition
The market for the Company's products and services is highly competitive.
Many of the Company's competitors are larger than the Company and have greater
financial, research, manufacturing, and marketing resources. Important
competitive factors for the Company's products include product quality, price,
ease of use, customer service and reputation. In a broader sense, industry
competition is based upon scientific and technical capability, proprietary
know-how, access to adequate capital, the ability to develop and market products
and processes, the ability to attract and retain qualified personnel, and the
availability of patent protection. To the extent that the Company's products and
services do
-12-
not reflect technological advances, the Company's ability to compete in those
products and services could be adversely affected.
In the area of Quality Control Products, the Company competes in the
United States with NABI (formerly North American Biologicals, Inc.) in run
controls and quality control panel products, with Dade International, Bio-Rad
Laboratories, Inc., and Blackhawk Biosystems Inc. in run controls, and with a
number of smaller, privately held companies in quality control panels. In
Europe, in addition to the above, the Netherlands Red Cross offers several run
control and panel products. The Company believes that all of these competitors
currently offer a more limited line of panel and run control products than the
Company, although there can be no assurance these companies will not expand
their product lines.
In the Diagnostic Components area, the Company competes against integrated
plasma collection and processing companies such as Serologicals, Inc. and NABI,
as well as smaller, independent plasma collection centers and brokers of plasma
products. In the Diagnostic Components area, the Company competes on the basis
of quality, breadth of product line, technical expertise and reputation.
The laboratory instrument manufacturing industry is diverse and highly
competitive. The Company believes its technology base, reputation for
reliability, systems integration and service capabilities provide it with a
competitive advantage over its competitors which include: Dynatech Corp,
Kollsman Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part
of Colorado Medtech, Inc.), as well as numerous, smaller companies, such as
Awareness Technology Inc.
In the Specialty Clinical Laboratory Testing services portion of the
Company's business, it competes with large national reference laboratories, such
as LabCorp of America, Quest Laboratories and SmithKline Beecham Clinical
Laboratories, as well as several independent regional laboratories, hospital
laboratories, government contract laboratories and large research institutions.
The Company believes that by focusing on the specialty clinical laboratory
market, it is able to offer its customers a higher value-added service on the
more complex diagnostic tests than the larger national reference laboratories.
Intellectual Property
The Company holds as trade secrets current technology used to prepare
Basematrix and other blood-based products. None of the Company's Quality Control
Products or Diagnostic Components has been patented. The Company relies
primarily on a combination of trade secrets and non-disclosure and
confidentiality agreements to establish and protect its proprietary rights in
its technology and products. There can be no assurance that others will not
independently develop or otherwise acquire the same, similar or more advanced
trade secrets and know-how.
BBI Source has also relied on trade secrets and proprietary know-how for
its Laboratory Instruments which it protects in part by entering into
confidentiality agreements with persons or parties deemed appropriate by
management. In addition, the Company currently has six issued United States
patents, covering significant aspects of the Company's core instrument
technology and techniques, as well as several electronic and mechanical designs
employed in the Company's existing products.
The Company owns two United States patents related to its contracts and
services work, and, jointly with UNC, has five additional United States patents
relating to compounds, pharmaceutical compositions, therapeutic methods, and
vaccine preparation in connection with the Company's drug discovery program. Two
additional United States applications and foreign applications for all five of
the joint patents are pending.
The Company has fifteen pending patent applications for the Pressure
Cycling Technology acquired from BioSeq in 1998. Several of these have been
followed up with foreign applications, and the Company expects to file
additional foreign applications in 1999.
The Company has no reason to believe that its products and proprietary
methods infringe the proprietary rights of any other party. There can be no
assurance, however, that other parties will not assert infringement claims in
the future.
-13-
Government Regulation
The manufacture and distribution of medical devices, including products
manufactured by the Company that are intended for in vitro diagnostic use, are
subject to extensive government regulation in the United States and in other
countries.
In the United States, the Food, Drug, and Cosmetic Act ("FDCA") prohibits
the marketing of most in vitro diagnostic products until they have been cleared
or approved by the FDA, a process that is time-consuming, expensive, and
uncertain. In vitro diagnostic products must be the subject of either a
premarket notification clearance (a "510(k)") or an approved premarket approval
application ("PMA"). With respect to devices reviewed through the 510(k)
process, a company may not market a device for diagnostic use until an order is
issued by the FDA finding the product to be substantially equivalent to a
legally marketed device. A 510(k) submission may involve the presentation of a
substantial volume of data, including clinical data, and may require a
substantial period of review. With respect to devices reviewed through the PMA
process, a company may not market a device until FDA has approved a PMA
application, which must be supported by extensive data, including preclinical
and clinical trial data, literature, and manufacturing information to prove the
safety and effectiveness of the device.
The Company's Accurun(R) Run Controls, when marketed for diagnostic use,
have been classified by the FDA as medical devices that until 1998 required
clearance under the 510(k) process. In 1998, new rules took effect which exempt
unassayed controls from 510(k) clearance. BBI may label these products "For in
vitro diagnostic use" if they are validated according to the Company's protocols
and manufactured according to cGMP (current Good Manufacturing Practices, which
is FDA guidance for manufacturing processes for medical devices). The FDA still
requires 510(k) clearance for assayed controls, and could, in addition, require
that some products be reviewed through the PMA process, which generally involves
a longer review period and the submission of more information to FDA. There can
be no assurance that the Company will obtain regulatory approvals on a timely
basis, if at all. Failure to obtain regulatory approvals in a timely fashion or
at all could have a material adverse effect on the Company.
As of March 1, 1999, a total of 10 products in the Accurun 1(R) line and
16 single analyte Accurun(R) controls have either received 510(k) clearance or
have been validated. Two additional Accurun(R) single analyte products have been
submitted but have not yet received FDA approval. Certain of the Company's
Accurun(R) run controls are currently marketed "for research use only." Such
products do not currently require FDA premarket clearance or approval. The
labeling of these products limits their use to research. It is possible,
however, that some purchasers of these products may use them for diagnostic
purposes despite the Company's intended use. In these circumstances, the FDA
could allege that these products should have been cleared or approved by the FDA
prior to marketing, and initiate enforcement action against the Company, which
could have a material adverse effect on the Company. The FDA has recently issued
a Draft Policy Compliance Guideline, which, if it takes effect as written, will
strictly limit the sale of products labeled "for research use only." The Company
is monitoring this situation, and will adapt its policies as required.
BBI Source generally obtains 510(k) approval for all laboratory
instrumentation designed and manufactured in its Garden Grove facility.
The Company's Diagnostic Products and Laboratory Instruments product
groups are both registered as medical device manufacturers with the FDA, and
file listings of their products semi-annually. The Company's facilities in West
Bridgewater, Massachusetts for Diagnostic Products and Garden Grove, California
for Laboratory Instruments are FDA Good Manufacturing Practices (FDA/GMP)
facilities, and, as such, maintain high standards of quality in manufacturing,
testing and documentation, and implement strict GMP guidelines governing reagent
and instrument manufacturing.
Once cleared or approved, medical devices are subject to pervasive and
continuing regulation by the FDA, including, but not limited to, GMP regulations
governing testing, control, and documentation; and reporting of adverse
experiences with the use of the device. Ongoing compliance with GMP and other
applicable regulatory requirements is monitored through periodic inspections.
FDA regulations require agency clearance or approval for certain changes if they
do or could affect the safety and effectiveness of the device, including, for
example, new indications for use, labeling
-14-
changes or changes in design or manufacturing methods. In addition, both before
and after clearance or approval, medical devices are subject to certain export
and import requirements under the FDCA. Product labeling and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. Products may be promoted by the Company only for their
approved use. Failure to comply with these and other regulatory requirements can
result, among other consequences, in failure to obtain premarket approvals,
withdrawal of approvals, total or partial suspension of product distribution,
injunctions, civil penalties, recall or seizures of products and criminal
prosecution.
The Company believes that its Quality Control Panels are not regulated by
the FDA because they are not intended for diagnostic purposes. The Company
believes that its Diagnostic Components, which are components of in vitro
diagnostic products, may be subject to certain regulatory requirements under the
FDCA and other laws administered by the FDA, but do not require that the Company
obtain a premarket approval or clearance. There can be no assurance, however,
that the FDA would agree or that the FDA will not adopt a different
interpretation of the FDCA or other laws it administers, which could have a
material adverse effect on the Company.
The Company's Diagnostic Products and Laboratory Instruments groups are
both ISO9001 certified, with registration by TUV Rheinland in the Diagnostic
Products group and British Standard Institute for the Laboratory Instruments
group. The Laboratory Instrument group is also certified to EN46001, a set of
supplementary requirements applicable to their products.
Laws and regulations affecting some of the Company's products are in
effect in many of the countries in which the Company markets or intends to
market its products. These requirements vary from country to country. Member
states of the European Economic Area (which is composed of the European Union
members and the European Free Trade Association members) are in the process of
adopting various product and service "Directives" to address essential health,
safety, and environmental requirements associated with the subject products and
services. The "Directives" cover both quality system requirements (ISO Series
9000 Standards and the EN46001 Requirements) and product and marketing related
requirements. In addition, some jurisdictions have requirements related to
marketing of the Company's products. There can be no assurance that the Company
will be able to obtain any regulatory approvals required to market its products
on a timely basis, or at all. Delays in receipt of, or failure to receive such
approvals, or the failure to comply with regulatory requirements in these
countries or states could lead to compliance action, which could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
The Company's service-related business (clinical trials, infectious
disease testing, and contract research) is subject to other national and local
requirements. The Company's facilities are subject to review, inspection,
licensure or accreditation by some states, national professional organizations
(College of American Pathologists), and other national regulatory agencies
(Health Care Financing Administration). Studies to evaluate the safety or
effectiveness of FDA regulated products (primarily human and animal drugs or
biologics) must also be conducted in conformance with relevant FDA requirements,
including Good Laboratory Practice ("GLP") regulations, investigational new drug
or device regulations, Institutional Review Board ("IRB") regulations and
informed consent regulations.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") prohibits
laboratories from performing in vitro tests for the purpose of providing
information for the diagnosis, prevention or treatment of any disease or
impairment of, or the assessment of, the health of human beings unless there is
in effect for such laboratories a certificate issued by the US Department of
Health and Human Services ("HHS") applicable to the category of examination or
procedure performed.
The Company currently holds permits issued by HHS (CLIA license), Centers
for Disease Control and Prevention (Importation of Etiological Agents or Vectors
of Human Diseases), the US Department of Agriculture (Importation and
Transportation of Controlled Materials and Organisms and Vectors) and the US
Nuclear Regulatory Commission (in vitro testing with byproduct material under
general license, covering the use of certain radioimmunoassay test methods).
-15-
The Company is also subject to government regulation under the Clean Water
Act, the Toxic Substances Control Act, the Resource Conservation and Recovery
Act, the Atomic Energy Act, and other national, state and local restrictions
relating to the use and disposal of biohazardous, radioactive and other
hazardous substances and wastes. The Company is an exempt small quantity
generator of hazardous waste and has a US Environmental Protection Agency
identification number. The Company is also registered with the US Nuclear
Regulatory Commission for use of certain radioactive materials. The Company is
also subject to various state regulatory requirements governing the handling of
and disposal of biohazardous, radioactive and hazardous wastes. The Company has
never been a party to any environmental proceeding.
Internationally, some of the Company's products are subject to additional
regulatory requirements, which vary significantly from country to country. Each
country in which the Company's products and services are offered must be
evaluated independently to determine the country's particular requirements. In
foreign countries, the Company's distributors are generally responsible for
obtaining any required government consents.
Employees
As of December 31, 1998 the Company employed 264 persons, all of whom were
located in the United States. Of these, 101 persons were employed in
Massachusetts, 72 by the New Britain, Connecticut company, 54 by the
Gaithersburg, Maryland company, and 37 by the Garden Grove, California company.
None of the Company's employees is covered by a collective bargaining agreement.
The Company believes that it has a satisfactory relationship with its employees.
-16-
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
current executive officers of the Registrant as of December 31, 1998:
Name Age Position
Richard T. Schumacher 48 President; Chief Executive Officer and Chairman
of the Board
Kevin W. Quinlan 48 Senior Vice President, Finance; Chief Financial
Officer; Treasurer and Director
Patricia E. Garrett, 55 Senior Vice President, Regulatory Affairs &
Ph.D. Strategic Programs
Mark M. Manak, Ph.D. 47 Senior Vice President, Research and Development
David Petersen 52 Vice President, Laboratory Instrumentation
Richard C. Tilton, Ph.D. 62 Senior Vice President, Specialty Laboratory
Services
Barry M. Warren 51 Senior Vice President, Sales & Marketing
Ronald V. DiPaolo, Ph.D. 54 Vice President, Manufacturing
Richard H. Newhouse, 55 Vice President, Materials Management
Ph.D.
Mr. Schumacher, the founder of the Company, has been the President and a
Director since 1986, and Chief Executive Officer and Chairman since 1992. Mr.
Schumacher served as the Director of Infectious Disease Services for Clinical
Science Laboratory, a New England-based medical reference laboratory, from 1986
to 1988. From 1972 to 1985, Mr. Schumacher was employed by the Center for Blood
Research, a nonprofit medical research institute associated with Harvard Medical
School. Mr. Schumacher received a B.S. in zoology from the University of New
Hampshire.
Mr. Quinlan, a Director of the Company since 1986, has been Senior Vice
President, Finance, Chief Financial Officer and Treasurer since January 1993.
From 1990 to December 1992, he was the Chief Financial Officer of ParcTec, Inc.
a New York-based leasing company. Mr. Quinlan served as Vice President and
Assistant Treasurer of American Finance Group, Inc. from 1981 to 1989 and was
employed by Coopers & Lybrand from 1975 to 1980. Mr. Quinlan is a certified
public accountant and received a M.S. in accounting from Northeastern University
and a B.S. in economics from the University of New Hampshire.
Dr. Garrett has been Senior Vice President, Regulatory Affairs & Strategic
Programs since 1988. From 1980 to 1987, Dr. Garrett served as the Technical
Director of the Chemistry Laboratory, Department of Laboratory Medicine at the
Lahey Clinic Medical Center. Dr. Garrett earned her Ph.D. from the University of
Colorado and was a postdoctoral research associate at Harvard University, Oregon
State University, Massachusetts Institute of Technology and the University of
British Columbia.
Dr. Manak has served as Senior Vice President, Research and Development
since 1992. From 1980 to 1992, he served as Senior Research Scientist, Molecular
Biology, of Biotech Research Laboratories. Dr. Manak received his Ph.D. in
biochemistry from the University of Connecticut and completed postdoctoral
research work in biochemistry/virology at Johns Hopkins University.
Mr. Petersen has over 22 years in operations management and materials
planning. Before joining the Company in November of 1988, he was the Manager of
Manufacturing for Matrix Instruments from 1985 to 1988; and previously was
Manager of Production and Inventory Control for Farr Company, Inc. from 1977 to
1985. He is certified in production and inventory management (CPIM) by the
American Production and Inventory Control Society (APICS). As Assistant
Professor at California State University Dominguez Hills, he instructs upper
division courses in manufacturing techniques and material resource planning. He
holds a B.S. in business management from the University of LaVerne in LaVerne,
California.
Dr. Tilton has served as Senior Vice President, Specialty Laboratory
Services since the Company's acquisition of BBI Clinical Laboratories, Inc.
("BBICL") in 1993 and was one of the founders of BBICL, where he served as
President from 1989 to 1993. Dr. Tilton has 25 years of experience in university
hospital clinical microbiology laboratories and is
-17-
board certified in medical and public health microbiology. Dr. Tilton received
his Ph.D. in microbiology from the University of Massachusetts.
Mr. Warren has served as Senior Vice President, Sales & Marketing since
1993. From 1985 to 1993, Mr. Warren served as Group Director of Marketing of
Organon Teknika, a manufacturer of infectious disease reagents. Mr. Warren
received an M.A. in political science from Loyola University of Chicago and a
B.A. from Loyola University.
Dr. DiPaolo has served as Vice President, Manufacturing since 1997. Prior
to that he served as Vice President of Operations from 1993 to 1997. Prior to
joining the Company, Dr. DiPaolo served as Vice President and General Manager of
the Biomedical Products Division of Collaborative Research, a medical research
products company from 1986 to 1989. From 1975 to 1986 he was employed by DuPont
New England Nuclear, an in vitro test kit manufacturer. Dr. DiPaolo received his
Ph.D. in biochemistry from Massachusetts Institute of Technology and later
completed postdoctoral research at the Eunice Shriver Center in Waltham,
Massachusetts.
Dr. Newhouse has been Vice President of Materials Management since 1997.
Prior to joining the Company, Dr. Newhouse served as Vice President of
Laboratory Services for Serologicals Corporation, an Atlanta, Georgia based
biopharmaceutical company from 1989 to 1997. Prior to that he was employed for
20 years in several medical diagnostics companies holding titles such as Vice
President Operations, Laboratory Director, and Director of Manufacturing. Dr.
Newhouse received his Ph.D. in clinical pathology from the University of
Maryland.
Officers are elected by, and serve at the pleasure of, the Board of
Directors.
ITEM 2. PROPERTIES.
The Company owns its corporate offices and Diagnostic Products
manufacturing facility located in a two story, 32,000 square foot building in
West Bridgewater, Massachusetts. The Company has been renovating and expanding
this facility during the past year, and believes that upon completion of
renovations in mid 1999, its facility in West Bridgewater will be sufficient to
meet its foreseeable needs.
The Company leases 41,000 square feet of space in Garden Grove, California
where it manufactures Laboratory Instruments. The lease continues until February
1, 2002 and the Company has an option to renew at market rates.
The Company leases its laboratory facilities in Gaithersburg, Maryland and
New Britain, Connecticut. The Gaithersburg facility contains 36,500 square feet
of custom built laboratory space, and is occupied under a ten-year lease that is
due to expire on October 31, 2007. The New Britain facility has 15,000 square
feet, most of which is dedicated to laboratory space. The lease is for five
years and is due to expire on July 30, 2000; the Company has an option to renew
for an additional five years.
The Company leases approximately 2,500 square feet of laboratory space in
Woburn, MA through August 1999, assumed through the BioSeq Acquisition.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company or its
subsidiaries.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 1998 to a vote
of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company completed an initial public offering of its Common Stock, $.01
par value, (the "Common Stock") on October 31, 1996. The Common Stock is listed
on the NASDAQ National Market under the symbol "BBII".
The following table sets forth the high and low closing price, by quarter,
since the Company's initial public offering.
Q1 Q2 Q3 Q4
------------- ------------- ------------ ------------
High Low High Low High Low High Low
------ ------ ------- ----- ------ ----- ------ -----
1998 8.063 5.125 7.313 4.500 5.125 2.500 4.375 2.000
1997 10.250 6.063 11.375 7.750 8.875 6.000 8.000 4.875
1996 --- --- --- --- --- --- 8.500 6.750
As of December 31, 1998, there were 20,000,000 shares of Common Stock
authorized of which 4,667,816 shares were outstanding, held of record by
approximately 1,500 stockholders.
The Company has not declared or paid any dividends on its Common Stock. In
accordance with the terms of the Company's loan agreement with its bank, payment
of dividends on Common Stock requires bank approval. The Company does not expect
to recommend the payment of a dividend as it plans to continue to reinvest
profits to expand its business.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The statement of income data for each of the fiscal years in the five year
period ended December 31, 1998, and the balance sheet data as of December 31,
1998, 1997, 1996, 1995 and 1994, have been derived from the consolidated
financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. This data should be read in
conjunction with Item 8--Consolidated Financial Statements and Supplementary
Data, and Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere herein.
Year Ended December 31,
----------------------------------------------------------
1998 (1) 1997 (2) 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Consolidated Statement of Income Data: (In thousands, except per share data)
REVENUE:
Products ............................................... $ 13,075 $ 11,711 $ 8,470 $ 6,622 $ 5,982
Services ............................................... 13,006 10,588 7,039 5,649 4,741
-------- -------- -------- -------- --------
Total revenue ..................................... 26,081 22,299 15,509 12,271 10,723
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products ....................................... 7,180 5,773 4,252 3,564 3,194
Cost of services ....................................... 8,897 7,239 4,856 4,168 3,416
Research and development ............................... 2,461 1,311 797 375 469
Acquired research and development (3) .................. 4,231 -- -- -- --
Selling and marketing .................................. 3,939 3,241 2,188 1,340 1,192
General and administrative ............................. 4,275 3,343 2,401 2,316 2,047
-------- -------- -------- -------- --------
Total operating costs and expenses ................ 30,983 20,907 14,494 11,763 10,318
-------- -------- -------- -------- --------
(Loss) income from operations ..................... (4,902) 1,392 1,015 508 405
Interest (expense) income, net ............................. (51) 283 (213) (336) (244)
-------- -------- -------- -------- --------
(Loss) income before income taxes and extraordinary item (4,953) 1,675 802 172 161
Benefit from (provision for) income taxes .................. 564 (670) (321) (69) (64)
-------- -------- -------- -------- --------
Net (loss) income ...................................... $ (4,389) $ 1,005 $ 481 $ 103 $ 97
-------- -------- -------- -------- --------
Net (loss) income per share, basic ......................... $ (0.94) $ 0.23 $ 0.17 $ 0.04 $ 0.04
Net (loss) income per share, diluted ....................... $ (0.94) $ 0.21 $ 0.14 $ 0.03 $ 0.03
Number of shares used to calculate net income per share
Basic .................................................. 4,655 4,438 2,916 2,570 2,552
Diluted ................................................ 4,655 4,780 3,340 3,040 3,019
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Consolidated Balance Sheet Data: (In thousands, except per share data)
Working capital ....................... $ 9,095 $ 9,633 $12,836 $ 4,688 $ 4,686
Total assets .......................... 24,082 23,650 19,798 9,928 8,076
Long term debt, less current maturities 3,989 26 41 4,216 3,180
Total stockholders' equity ............ 14,069 18,067 16,290 3,187 3,041
Dividends ............................. -- -- -- -- --
- ------------
(1) Effective September 30, 1998, the Company acquired all classes of stock of
BioSeq, Inc., a development stage company with no revenue, for a total
purchase price of $4,226,000.
(2) Effective July 1, 1997, the Company acquired the business and net assets
of Source Scientific, Inc. for $1,994,000 which increased 1997 revenue by
$2,608,000.
(3) Consists of $3,381,000 of in-process research and development related to
the BioSeq acquisition, and a charge of $850,000 related to the purchase
of license technology in the first quarter of 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company generates revenue from products and services provided
primarily to the in vitro diagnostic infectious disease industry. There are two
broad product classes: Diagnostic Products and Laboratory Instruments.
Diagnostic Products consist of three groups: Quality Control Panels, Accurun(R)
Run Controls, and Diagnostic Components. Services consist of Specialty Clinical
Laboratory Testing, Contract Research, Clinical Trials, Laboratory
Instrumentation Services, and Drug Screening.
The Company's gross profit margin increased from 33.9% in 1993 to 38.4% in
1998 principally as a result of the increased percentage of higher margin
product revenues. Within products, the Company's Quality Control Products
(Accurun(R) Run Controls and Quality Control Panels) have higher margins than
the Company's Laboratory Instruments and Diagnostic Components. Within services,
Contract Research gross margins are lower than other services. However, such
contracts enable the Company to retain certain scientific staff and maintain
capability that it could not otherwise afford. The Company intends to continue
to concentrate on the growth in sales of its Quality Control Products and
Specialty Clinical Laboratory testing.
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, primarily customer
purchasing patterns, driven by end-of-year expenditures, and seasonal demand
during the summer months for certain laboratory testing services. In particular,
the Company's sales of its Quality Control Products and Diagnostic Components
typically have been highest in the fourth quarter and lowest in the first
quarter of each fiscal year, whereas Specialty Clinical Laboratory Testing has
generally reached a seasonal peak during the third quarter, coinciding with the
peak incidence of Lyme Disease. Research Contracts are generally for large
dollar amounts spread over a one to five year periods, and upon completion,
frequently do not have renewal phases. As a result they can cause large
fluctuations in revenue and net income. In addition to staff dedicated to
internal research and development, certain of the Company's technical staff work
on both Contract Research for customers and Company sponsored research and
development. The allocation of certain technical staff to such projects depends
on the volume of Contract Research. As a result, research and development
expenditures fluctuate due to increases or decreases in contract research
performed.
With the acquisition of Pressure Cycling Technology, and the hiring of a
Vice President for Drug Discovery and Development program, the Company expects
to increase its rate of research and development spending, while continuing to
develop new Quality Control Products and new tests for its clinical laboratory.
Additional sales and support will be added as needed with the expectation of
continued future revenue growth.
The Company does not have any foreign operations. However, the Company
does have significant export sales in Europe, the Pacific Rim countries and
Canada to agents under distribution agreements, as well as directly to test kit
manufacturers. All sales are denominated in US dollars. Export sales for the
years ended December 31, 1998, 1997, and 1996 were $4.1 million, $4.6 million,
and $4.3 million, respectively. The Company expects that export sales will
continue to be a significant source of revenue and gross profit.
-21-
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenue represented by certain items reflected in the Company's
consolidated statements of operations:
Year Ended December 31
----------------------
1998 1997 1996
-------- -------- --------
Revenue:
Products 50.1% 52.5% 54.6%
Services 49.9 47.5 45.4
-------- -------- --------
Total revenue 100.0 100.0 100.0
Gross profit 38.4 41.6 41.3
Operating expenses:
Research and development 9.4 5.9 5.1
Acquired Research and development 16.2 - -
Selling and marketing 15.1 14.5 14.1
General and administrative 16.4 15.0 15.5
-------- -------- --------
Total operating expenses 57.1 35.4 34.7
-------- -------- --------
Income from operations (18.8) 6.2 6.5
Interest income (expense) (0.2) 1.3 (1.4)
-------- -------- --------
Income before income taxes (19.0) 7.5 5.1
Net income (16.8) 4.5 3.1
======== ======== ========
Product gross profit 45.1% 50.7% 49.8%
Services gross profit 31.6% 31.6% 31.0%
Years Ended December 31, 1998 and 1997
In July 1997 the Company acquired the business of Source Scientific, Inc.
The acquisition was completed by a wholly owned subsidiary of the Company, BBI
Source Scientific, Inc., ("BBI Source") and was accounted for as an asset
purchase. The income statement for 1997 includes the results of BBI Source for
the last six months of the year, effecting comparability of results with 1998.
See the Company's financial statement footnotes for further details on this
acquisition.
Total revenue increased 17.0%, or $3,782,000, to $26,081,000 in 1998 from
$22,299,000 in 1997. The increase in revenue was the result of a 11.6% increase
in product revenue of $1,364,000 to $13,075,000 from $11,711,000, and a 22.8%
increase in service revenue of $2,418,000 to $13,006,000 from $10,588,000 in
1997. Most of the product increase was attributable to increased sales of
Quality Control Products, particularly Accurun(R) which doubled in sales over
last year, and the inclusion of BBI Source for the full year in 1998 versus a
half year in 1997. Quality Control Panel sales declined from 1997 as sales fell
short of expectations due to consolidation in the in vitro diagnostic test kit
industry. This shortfall was partially offset by increased sales of custom (OEM)
panels. Service revenue increased as a result of a 49.8% increase in contract
research due to new contracts, and a 19.5% increase in specialty clinical
laboratory testing revenue. The Company experienced continued pricing pressure
from competitors in its testing business which resulted in lower gross margins.
Overall gross profit increased 7.7%, or $717,000, to $10,004,000 in 1998
from $9,287,000 in 1997. Product gross profit decreased (0.7)%, or $(43,000), to
$5,895,000 in 1998 from $5,938,000 in 1997 and product gross margin decreased to
45.1% in 1998 from 50.7%. The 1997 product gross margin benefited from
significant one time sales of two "world-wide panels". These panels sold out in
the first quarter of 1998, with minimal impact on 1998. The remaining product
gross margin decrease was the result of lower capacity utilization at BBI
Source. Services gross profit increased 22.7%, or $759,000, to $4,109,000 in
1998 from $3,350,000 in 1997 and gross margin remained steady at 31.6% in 1998
and 1997, as higher margins on contracts and at BBI Source offset lower margins
in its clinical laboratory testing services.
-22-
Research and development expenditures increased 87.7%, or $1,150,000, to
$2,461,000 in 1998 from $1,311,000 in 1997. The increase resulted primarily from
new laboratory instrument development expenditures at BBI Source, increased
development expenditures for Accurun(R) molecular and immunological Run
Controls, new specialized molecular assays for use at BBI Clinical Laboratories,
and fourth quarter research activities related to pressure cycling technology.
There were two accounting charges during the twelve months ended December
31, 1998 which were classified as acquired in-process research and development.
In the first quarter there was an accounting charge of $850,000 related to the
acquisition of the worldwide exclusive rights to BioSeq Inc's immunodiagnostic
research and development technology. In the third quarter, the Company recorded
a charge of $3,381,000 related to in-process technology as a result of the
Company's $4,226,000 acquisition of BioSeq, Inc.
Selling and marketing expenses increased 21.5%, or $698,000, to $3,939,000
in 1998 from $3,241,000 in 1997. The increase was attributable primarily to
inclusion for a full year in 1998 of the expanded TQS sales, marketing, and
technical support staff added in the Spring of 1997. The Company also expanded
its presence at tradeshows, resulting in higher expenditures in this category.
General and administrative costs increased 27.9%, or $933,000, to
$4,276,000 in 1998 from $3,343,000 in 1997. This increase was attributable
primarily to additional support staff, and increased information systems
consulting and investor relations activities. In addition, the inclusion of BBI
Source for a full year added $412,000 of expense to this category.
As a result of all of the above, the Company experienced an operating loss
of ($4,902,000) versus income of $1,392,000 in 1997. This decrease was primarily
a result of the acquired in-process research and development expense, a higher
operating loss at BBI Source, increased research and development expenditures,
and lower profitability at its Diagnostic Products and Clinical Laboratory
Testing operating segments.
The Company had net interest expense of $(51,000) in 1998 versus interest
income of $283,000 in 1997. The Company has productively employed its proceeds
from its initial public offering and, at the end of the second quarter of 1998,
began to borrow funds from its revolving line of credit to continue its
infrastructure investments.
Based on current tax planning, the Company provided taxes at the combined
federal and state statutory rate of 38% for 1998 versus 40% in the prior year.
There was no tax benefit associated with the acquired in-process technology from
BioSeq, Inc. as the acquisition was structured as a stock purchase. Therefore,
the effective benefit rate for 1998 was approximately 11%.
The Company had a net loss of ($4,389,000) in 1998 versus net income of
$1,005,000 in 1997 as a result of the operating loss described above and a shift
to interest expense in 1998 versus interest income in 1997.
Years Ended December 31, 1997 and 1996
The most significant event in 1997 effecting comparability of results with
1996 was the acquisition of the business of Source Scientific, Inc. effective
July 1, 1997. The acquisition was completed by a wholly owned subsidiary of the
Company, BBI Source Scientific, Inc., ("BBI Source") and was accounted for as an
asset purchase. This effected every line of the income statement.
Total revenue increased 43.8%, or $6,790,000, to $22,299,000 in 1997 from
$15,509,000 in 1996. The increase in revenue was the result of a 38.3% increase
in product revenue of $3,241,000 to $11,711,000 from $8,470,000, and a 50.4%
increase in service revenue of $3,549,000 to $10,588,000 from $7,039,000 in
1996. Approximately $1,416,000 of the product increase was attributable to the
inclusion of BBI Source for the first time. The balance of the increase was a
result of a 34.0% increase in sales of Quality Control Products, particularly
Accurun(R) from a higher volume of both new and existing products, offset in
part by price decreases. Service revenue included $1,192,000 from inclusion of
BBI Source, a 49.1% increase in contract research revenue as a result of new
contracts, and a 32.6% increase in specialty clinical laboratory testing revenue
as the Company's HIV PCR test introduced in September 1996, was offered for a
full year in 1997. Overall for both products and services, prices declined
slightly in 1997 versus 1996. In summary, even after excluding BBI Source, the
Company's total revenue increased 27.0% in 1997 compared to 1996 with a 21.5%
increase in
-23-
product revenue, and a 33.5% increase in service revenue on strong volume
performance by Quality Control Products, contract research, and specialty
clinical laboratory testing.
Gross profit increased 45.1%, or $2,886,000, to $9,287,000 for 1997 from
$6,401,000 in 1996. Product gross profit increased 40.8%, or $1,720,000, to
$5,938,000 in 1997 from $4,218,000 in 1996 and product gross profit margin
increased to 50.7% in 1997 from 49.8%. The products gross margin increase was a
result of a favorable shift in product mix towards Accurun sales and overall
volume increase, thereby spreading fixed costs over a larger base, and despite a
lower gross profit margin in BBI Source's instrument sales. Services gross
profit increased 53.5%, or $1,167,000, to $3,350,000 in 1997 from $2,183,000 in
1996 as the testing volume increased at a faster rate than laboratory headcount,
thereby causing the services gross profit margin to increase to 31.6% in 1997
from 31.0% in 1996. BBI Source's service gross profit margin was slightly higher
than the Company above average, which is expected to continue.
Research and development expenditures increased 64.6%, or $514,000, to
$1,311,000 in 1997 from $797,000 in 1996. The increase resulted primarily from
new Laboratory Instrument development activities at BBI Source, as well as
increased development expenditures for Accurun(R), molecular and immunological
Run Controls, and specialized molecular assays.
Selling and marketing expenses increased 48.1%, or $1,053,000, to
$3,241,000 in 1997 from $2,188,000 in 1996. The increase was attributable
primarily to an eleven person expansion of the TQS sales, marketing, and
technical support staff and related increased trade show and travel expenses. In
addition, the inclusion of BBI Source added $167,000 of expense to this
category.
General and administrative costs increased 39.2%, or $942,000, to
$3,343,000 in 1997 from $2,401,000 in 1996. This increase was attributable
primarily to: the addition of a Director of Human Resources and wide area
network systems analyst; higher expenditures for accounting and legal
professionals and investor relations activities in our first full year as a
public company; increased travel associated with the BBI Source acquisition; and
non-recurring moving costs of $40,000 associated with moving BBI Biotech
Research Laboratories to a new facility in Gaithersburg, Maryland. These
increases were partially offset by a lower provision for doubtful accounts as a
result of improved accounts receivable collections from patients at the
Company's clinical reference testing laboratory. In addition, the inclusion of
BBI Source added $442,000 of expense to this category.
Operating income increased 37.1%, or $377,000, to $1,392,000 in 1997 from
$1,015,000 in 1996. This increase was primarily a result of continued strong
performance in the Company's Quality Control Products business and clinic
reference testing laboratory, partially offset by a loss at BBI Source of
$189,000.
The Company had net interest income of $283,000 in 1997 versus net
interest expense of ($213,000) in 1996 as substantially all of the Company's
debt was repaid in November 1996 with a portion of the proceeds from its IPO.
The Company had positive cash balances to invest for all of 1997.
Net income increased 108.9%, or $524,000, to $1,005,000 in 1997 from
$481,000 in 1996. Of this increase, 43% was attributable to higher operating
income, and the balance was due to the shift from net interest expense in 1996
to net interest income in 1997. Diluted earnings per share increased 50% to
$0.21 for 1997 versus $0.14 in 1996. This increase was achieved even though
weighted average diluted shares outstanding increased 43%. Basic earnings per
share increased 35% to $0.23 for 1997 versus $0.17 in 1996.
-24-
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and cash equivalents of
approximately $147,000 and working capital of $9,095,000. Trade accounts
receivable increased $705,000 or 11.7% primarily as a result of temporary delays
in collections on government contracts. Inventory increased $787,000 or 13.3%,
due to increased work-in-process activity for both panels and Accurun.
The Company has financed its operations to date through cash flow from
operations, borrowings from banks and the sale of its common stock. The Company
expects its cash flow, working capital, and available borrowings under its
revolving line of credit to meet existing operational needs in 1999. The Company
has recently received approval for an increased revolving line of credit with
more liberal financial covenants, which it expects to meet existing operational
needs for the foreseeable future.
Net cash used in operations for 1998 was $(1,215,000) as compared to
$727,000 provided by operations in 1997. As discussed above, this decrease in
cash flow was primarily attributable to carrying additional accounts receivable
and inventory as of year end.
Cash used in investing activities for 1998, 1997 and 1996 amounted to
$5,462,000, $5,396,000, and $1,412,000, respectively. In addition to normal
capital expenditures, three items accounted for most of the 1998 investing
activities. First, effective September 30, 1998, the Company completed the
acquisition of the remaining common stock of BioSeq, Inc. and technology
acquisition for a cash expenditure of $2,557,000. Second, $1,460,000 was
expended for additional improvements at the Company's Massachusetts and Maryland
facilities. Finally, $437,000 has been expended so far on software, hardware and
implementation costs for a new fully integrated business information system
("ERP") to improve operational efficiency. In 1997, four items accounted for
most of the investing activities. First, the Company exercised its option to
purchase an additional 165,000 shares of BioSeq, Inc. stock at an aggregate cost
of $750,000, thereby increasing its ownership of BioSeq to 19.9%. Second, in May
1997, the Company's BBI Biotech subsidiary signed a ten year lease for new
laboratory space in Gaithersburg, Maryland and spent $566,000 on leasehold
improvements for new laboratory space for its contract research and product
development activities. Third, the expansion and renovation of its Diagnostic
Products manufacturing facility in West Bridgewater, Massachusetts commenced
construction and approximately $920,000 was expended. Finally, effective on July
1, 1997, the Company completed the acquisition of the business and net assets of
Source Scientific, Inc. at a purchase price of $1,994,000 including acquisition
costs. The Company has accounted for the acquisition as an asset purchase, and
is amortizing goodwill of approximately $2.2 million over 15 years. See Note 3
to the Company's Notes to Consolidated Financial Statements in Item 8 hereunder.
The cash used in investing activities in 1996 included the initial investment in
BioSeq, Inc. of $732,500.
During 1998, net cash provided by financing activities was $4,052,000 from
a combination of net borrowings of $3,963,000 under the revolving line of
credit, and proceeds of $89,000 from the exercise of stock options. During 1997,
net cash generated from financing activities included $300,000 from the exercise
of warrants, and $182,000 from exercising stock options. Also in 1997,
$1,124,000 was used to pay down debt acquired in connection with the Source
acquisition. In 1996, net cash generated from common stock issued, including the
IPO, approximated $12,600,000. This was used to pay down net debt of $4,577,000.
In 1998, 1997 and 1996 capital expenditures amounted to $2,930,000,
$2,613,000, and $669,000, respectively and are described above under investing
activities.
On March 9, 1998, the Company announced plans to modify the a previously
announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent
company, ABX Hematologie, SA (France). Under the contract, the Company provided
technical, customer and field services for instruments sold by ABX in the United
States. Under the modified agreement, individual customer service contracts were
assigned to ABX and ABX assumed responsibility for its United States
instruments. The Company has provided certain consulting services through March
1999 to assist ABX in establishing a sales, customer service, technical support,
and field service operation in the United States for its hematology instrument
and reagent business. In addition, the Company sublet space at its California
facility to ABX during the period of the agreement. The Company's personnel
associated with this contract, including the nationwide field service
organization and hotline technical support, were offered employment by ABX.
-25-
The Company anticipates significant capital expenditures in 1999 to
continue as it plans to compete renovations to its manufacturing facility in
Massachusetts, as well as install the ERP system at all of its locations. The
Company believes that existing cash balances, the borrowing capacity available
under the revolving line of credit, and cash generated from operations are
sufficient to fund operations and anticipated capital expenditures in 1999.
Except for purchase orders in connection with the manufacturing expansion and
the ERP system, there were no material financial commitments for capital
expenditures as of December 31, 1999.
Year 2000 Readiness
The following disclosure is a Year 2000 ("Y2K") readiness disclosure
statement pursuant to the Year 2000 Readiness and Disclosure Act.
Boston Biomedica's Year 2000 program is designed to minimize the
possibility of serious Year 2000 interruption. Possible Year 2000 worst case
scenarios include the interruption of significant parts of the Company's
business as a result of internal business system failure or the failure of the
business systems of its suppliers, distributors or customers. Any such
interruption may have a material adverse impact on the future results of the
Company.
In 1997 the Company decided to significantly upgrade its "business
systems" (all computer hardware and software used to run its businesses
including its operations management, administration and financial systems).
Specifications were developed for desired capabilities, including Year 2000
compliance. In 1998 the Company began assessing its Year 2000 exposure and
commenced implementation of a plan to achieve Year 2000 readiness. Based on its
review to date, the Company believes that its products are Year 2000 compliant.
During the third quarter of 1998, after investigating several
alternatives, implementation of an enterprise resource planning system ("ERP
system") was started at two of the Company's four sites. The vendor has
certified that the system is Year 2000 compliant. As of the filing date of this
Form 10-K, business systems at the other two sites have been upgraded to Y2K
compliant versions of their existing software at a combined cost of
approximately $5,000.
A task force with participants and a site leader at each BBI location has
begun reviewing all other infrastructure areas including communications systems,
building security systems, and embedded technologies in areas such as laboratory
instruments and manufacturing equipment. The Company has also begun to survey
major suppliers, distributors, and customers to determine the status and
schedule for their Year 2000 compliance. To date, no significant issues have
been identified, and the survey is expected to be completed in the third quarter
of 1999. Where it believes that a particular supplier's situation poses
unacceptable risks, the Company plans to identify an alternative source.
The costs of the readiness program for business systems, other
infrastructure areas, and suppliers and distributors are a combination of
incremental external spending and use of existing internal resources. In total,
the Company expects to spend less than $150,000 to achieve readiness, of which
approximately 40% has been expended to date. This amount is based on the costs
to upgrade the existing business systems to Y2K compliant versions, and excludes
the costs of implementing the ERP system which is being implemented for reasons
beyond Y2K compliance.
Milestones and implementation dates and the costs of BBI's Year 2000
readiness program are subject to change based on new circumstances that may
arise or new information becoming available that may change the underlying
assumptions or requirements.
-26-
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. It is effective for all fiscal years beginning after June 15, 1999. The
new standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company does not currently engage in derivative trading or hedging activity.
The Company will adopt SFAS 133 in the fiscal year ending December 31, 1999,
although no impact on operating results or financial position is expected.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company is currently assessing the impact that
adoption of this statement will have on consolidated financial position and
results of operations.
Forward - Looking Information
The Annual Report on Form 10-K contains forward-looking statements
concerning the Company's financial performance and business operations. The
Company wishes to caution readers of this Annual Report on Form 10-K that actual
results might differ materially from those projected in the forward-looking
statements contained herein.
Factors which might cause actual results to differ materially from those
projected in the forward-looking statements contained herein include the
following: finalization of SEC guidelines for valuation of in process research
and development as it relates to purchase accounting; inability of the Company
to develop the end user market for quality control products; inability of the
Company to integrate the business of Source Scientific, Inc. into the Company's
business; inability of the Company to grow the sales of Source Scientific, Inc.
to the extent anticipated; the renewal and full funding of contracts with
National Institutes of Health (NIH), National Heart, Lung and Blood Institute
(NHLBI) and other government agencies; the inability of the Company to develop
the technology recently acquired as part of its purchase of BioSeq, Inc. to the
level of commercial utilization; inability of the Company to obtain an adequate
supply of the unique and rare specimens of plasma and serum necessary for
certain of its products; significant reductions in purchases by any of the
Company's major customers; the interruption of significant parts of the
Company's business as a result of internal business system failure or the
failure of the business systems of its suppliers, distributors or customers due
to the inability of such systems to properly interpret dates subsequent to
December 31, 1999; and the potential insufficiency of Company resources,
including human resources, plant and equipment and management systems, to
accommodate any future growth. Certain of these and other factors which might
cause actual results to differ materially from those projected are more fully
set forth under the caption "Risk Factors" in the Company's Registration
Statement on Form S-1 (SEC File No. 333-10759).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
-27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
1998 1997
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 146,978 $ 2,772,360
Accounts receivable, less allowances of $623,710 in 1998 and
$446,517 in 1997 .......................................... 6,086,693 5,558,710
Inventories .................................................. 6,689,768 5,902,821
Prepaid expense and other .................................... 479,983 288,481
Deferred income taxes ........................................ 847,268 328,562
------------ ------------
Total current assets ............................. 14,250,690 14,850,934
------------ ------------
Property and equipment, net ...................................... 6,925,423 4,980,164
OTHER ASSETS:
Long term investment ......................................... -- 1,482,500
Goodwill and other intangibles, net .......................... 2,809,825 2,212,220
Notes receivable and other ................................... 96,447 124,178
------------ ------------
2,906,272 3,818,898
------------ ------------
TOTAL ASSETS ....................................... $ 24,082,385 $ 23,649,996
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 2,369,495 $ 2,218,685
Accrued compensation ......................................... 1,284,162 1,103,837
Accrued income taxes ......................................... -- 132,802
Other accrued expenses ....................................... 795,642 498,247
Current maturities of long term debt ......................... 15,569 14,878
Deferred revenue ............................................. 690,760 1,249,024
------------ ------------
Total current liabilities ........................ 5,155,628 5,217,473
------------ ------------
LONG-TERM LIABILITIES:
Long term debt, less current maturities ...................... 3,988,602 26,820
Other liabilities ............................................ 730,138 189,117
Deferred income taxes ........................................ 139,363 149,333
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 20,000,000 shares in
1998 and 1997; issued and outstanding 4,667,816 in 1998 and
4,622,566 in 1997 ......................................... 46,678 46,226
Additional paid-in capital ................................... 16,418,717 16,029,049
Retained earnings ............................................ (2,396,741) 1,991,978
------------ ------------
Total stockholders' equity ....................... 14,068,654 18,067,253
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ............ $ 24,082,385 $ 23,649,996
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
-28-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
REVENUE:
Products ................................................ $ 13,075,085 $ 11,711,026 $ 8,469,890
Services ................................................ 13,005,991 10,588,311 7,039,406
------------ ------------ ------------
Total revenue .................................... 26,081,076 22,299,337 15,509,296
COSTS AND EXPENSES:
Cost of product sales ................................... 7,179,920 5,773,417 4,252,068
Cost of services ........................................ 8,897,046 7,238,527 4,856,630
Research and development ................................ 2,461,316 1,311,190 796,805
Acquired research and development ....................... 4,230,812 -- --
Selling and marketing ................................... 3,938,753 3,241,422 2,188,152
General and administrative .............................. 4,275,627 3,342,829 2,400,681
------------ ------------ ------------
Total operating costs and expenses ............... 30,983,474 20,907,385 14,494,336
(Loss) income from operations .................... (4,902,398) 1,391,952 1,014,960
Interest income .............................................. 27,901 295,998 72,144
Interest expense ............................................. (78,621) (13,227) (285,113)
------------ ------------ ------------
(Loss) income before income taxes ................ (4,953,118) 1,674,723 801,991
Benefit from (provision for) income taxes .................... 564,399 (669,889) (320,771)
------------ ------------ ------------
Net (loss) income ................................ $ (4,388,719) $ 1,004,834 $ 481,220
============ ============ ============
Net (loss) income per share, basic ............... $ (0.94) $ 0.23 $ 0.17
Net (loss) income per share, diluted ............. $ (0.94) $ 0.21 $ 0.14
Number of shares used to calculate net (loss) income per share
Basic ............................................ 4,654,609 4,437,801 2,915,522
Diluted .......................................... 4,654,609 4,780,070 3,340,236
The accompanying notes are an integral part of these consolidated financial
statements
-29-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Additional Retained Total
--------------------------
$.01 Par Paid-In Earnings Treasury Stockholders'
Shares Value Capital (Deficit) Stock Equity
------------ ------------ ------------ ----------- ----------- -------------
BALANCE, December 31, 1995 ......................... 2,640,417 $ 26,404 $ 2,798,620 $ 505,924 $ (144,000) $ 3,186,948
Issuance of common stock, net of issuance costs .. 1,637,647 16,377 12,371,469 144,000 12,531,846
Stock options and warrants exercised ............. 85,760 858 67,210 68,068
Conversion of note payable ....................... 14,333 143 21,357 21,500
Net income ....................................... 481,220 481,220
------------ ------------ ------------ ----------- ----------- ------------
BALANCE, December 31, 1996 ......................... 4,378,157 43,782 15,258,656 987,144 -- 16,289,582
Stock options and warrants exercised ............. 244,409 2,444 480,032 482,476
Tax benefit of stock options exercised ........... 290,361 290,361
Net income ....................................... 1,004,834 1,004,834
------------ ------------ ------------ ----------- ----------- ------------
BALANCE, December 31, 1997 ......................... 4,622,566 46,226 16,029,049 1,991,978 -- 18,067,253
Stock options and warrants issued with acquisition 236,327 236,327
Stock options exercised .......................... 45,250 452 88,697 89,149
Tax benefit of stock options exercised ........... 64,644 64,644
Net (loss) ....................................... (4,388,719) (4,388,719)
------------ ------------ ------------ ----------- ----------- ------------
BALANCE, December 31, 1998 ......................... 4,667,816 $ 46,678 $ 16,418,717 $(2,396,741) -- $ 14,068,654
============ ============ ============ =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements
-30-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ..................................... $ (4,388,719) $ 1,004,834 $ 481,220
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization ......................... 1,280,049 858,434 600,495
Provision for doubtful accounts ....................... 154,335 174,925 247,080
Deferred rent ......................................... 117,911 (71,381) (87,152)
Deferred income taxes ................................. (528,676) 2,391 (155,495)
Tax benefit of stock options exercised ................ 64,644 290,361 --
Acquired research and development ..................... 4,230,812 -- --
Changes in operating assets and liabilities:
Accounts receivable ................................... (675,171) (1,907,413) (587,204)
Other assets .......................................... -- (13,930) 14,188
Inventories ........................................... (786,947) (640,301) (503,483)
Prepaid expenses and other ............................ (144,199) 2,546 14,249
Accounts payable ...................................... 105,122 797,690 246,623
Accrued compensation and other expenses ............... (86,054) (102,199) 883,063
Deferred revenue ...................................... (558,264) 330,855 306,076
------------ ------------ ------------
Net cash (used in) provided by operating activities (1,215,157) 726,812 1,459,660
------------ ------------ ------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Acquired research and development ..................... (850,000) -- --
Payments for additions to property and equipment ...... (2,929,568) (2,612,697) (669,154)
Purchase of intangible assets ......................... (3,470) (39,625) (9,999)
Return of deposits and other........................... 27,731 -- --
Purchase of long term investment ...................... -- (750,000) (732,500)
Acquisitions, net of cash aquired ..................... (1,706,540) (1,993,722) --
------------ ------------ ------------
Net cash used in investing activities ............. (5,461,847) (5,396,044) (1,411,653)
------------ ------------ ------------
CASH FLOWS FOR FINANCING ACTIVITIES:
Proceeds from issuance of debt ........................ 3,977,351 -- 226,300
Repayments of long-term debt .......................... (14,878) (1,123,526) (4,803,042)
Proceeds from issuance of common stock ................ 89,149 482,476 13,581,315
Offering costs associated with issuance of common stock -- -- (981,401)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,051,622 (641,050) 8,023,172
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: ......... (2,625,382) (5,310,282) 8,071,179
Cash and cash equivalents, beginning of year .......... 2,772,360 8,082,642 11,463
------------ ------------ ------------
Cash and cash equivalents, end of year ................ $ 146,978 $ 2,772,360 $ 8,082,642
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Conversion of note payable to common stock ............ -- -- $ 21,500
Noncash exercise of warrants to stockholder ........... -- -- $ 180,650
SUPPLEMENTAL INFORMATION:
Income taxes paid ..................................... $ 113,287 $ 662,304 $ 85,460
Interest paid ......................................... $ 72,755 $ 5,731 $ 300,587
The accompanying notes are an integral part of these consolidated financial
statements
-31-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies
Boston Biomedica, Inc. ("BBI") and Subsidiaries (together, the "Company")
provide infectious disease diagnostic products, laboratory instrumentation,
contract research and specialty infectious disease testing services to the
in-vitro diagnostic industry, government agencies, blood banks, hospitals and
other health care providers worldwide. The Company is subject to risks common to
companies in the biotechnology, medical device and diagnostic industries,
including but not limited to, development by the Company or its competitors of
new technological innovations, dependence on key personnel, protection of
proprietary technology, and compliance with governmental regulations.
Significant accounting policies followed in the preparation of these
consolidated financial statements are as follows:
(i) Principles of Consolidation
The consolidated financial statements include the accounts of BBI and its
wholly-owned subsidiaries, BBI Biotech Research Laboratories, Inc. ("BBI
Biotech"), BBI Clinical Laboratories, Inc. ("BBICL"), BBI Source Scientific,
Inc. ("BBI Source"), and BBI BioSeq, Inc. ("BBI BioSeq"). BBI consists primarily
of the Diagnostic Products segment as well as executive corporate officers. All
significant intercompany accounts and transactions have been eliminated in the
consolidation. Certain amounts included in the prior year's financial statements
may have been reclassified to conform to the current presentation.
(ii) Use of Estimates
To prepare the financial statements in conformity with generally accepted
accounting principles, management is required to make significant estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In particular, the Company records reserves for estimates
regarding the collectability of accounts receivable, the value and realizability
of intangible assets, as well as the net realizable value of its inventory.
The valuation methodology applied to the acquisition of BioSeq, Inc. (see
Note 2) was based on estimated discounted future cash flows. The purchase price
accounting is based on this valuation. Significant assumptions include gross and
operating profit margins, and future tax, discount, and royalty rates.
Actual results could differ from the estimates and assumptions used by
management.
(iii) Revenue Recognition
Products revenue are recognized as sales upon shipment of the products or,
for specific orders at the request of the customer, on a bill and hold basis
after completion of manufacture. All bill and hold transactions meet specified
revenue recognition criteria which include normal billing, credit and payment
terms, and transfer to the customers of all risks and rewards of ownership.
Services are recognized as revenue upon completion of tests for specialty
laboratory services. Revenue from service contracts and research and development
contracts for the Company's laboratory instrumentation business is recognized as
the service and research and development activities are performed under the
terms of the contracts.
Revenue under long-term contracts, generally from one to five years,
including funded research and development contracts, is recorded under the
percentage of completion method, wherein costs plus profit, are recorded as
service revenue and billed monthly as the work is performed. Certain customers
make advance payments that are deferred until revenue recognition is
appropriate. When the current contract estimates indicate a loss, provision is
made for the total anticipated loss. The Company does not believe there are any
material collectability issues associated with these receivables.
Total revenue related to long-term contracts was approximately $4,175,000,
$3,125,000, and $2,224,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Total contract costs associated with these agreements were
approximately $3,950,000, $2,782,000, and $2,042,000 for the years ended
December 1998, 1997 and 1996, respectively.
-32-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies -- (Continued)
(iv) Cash and cash equivalents
The Company's policy is to invest available cash in short-term, investment
grade, interest bearing obligations, including money market funds, municipal
notes, and bank and corporate debt instruments. Securities purchased with
initial maturities of three months or less, are valued at cost plus accrued
interest, which approximates fair market value, and classified as cash
equivalents.
(v) Research and Development Costs
Research and development costs are expensed as incurred.
(vi) Inventories
Inventories are stated at the lower of cost or net realizable value and
include material, labor and manufacturing overhead.
(vii) Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is recognized using accelerated and straight-line
methods, allocating the cost of the assets over their estimated useful lives
ranging from five to ten years for certain manufacturing and laboratory
equipment, from three to five years for management information systems and
office equipment, three years for automobiles and thirty years for the building.
Leasehold improvements are amortized over the shorter of the life of the
improvement or the remaining life of the leases, which range from four to ten
years. Upon retirement or sale, the cost and related accumulated depreciation of
the asset are removed from the accounting records. Any resulting gain or loss is
credited or charged to income.
(viii) Goodwill and Intangibles
The Company has classified as goodwill, the cost in excess of fair value
of the assets of the business acquired. Goodwill is being amortized on a
straight line basis over ten to fifteen years. Other intangibles primarily
consist of patents, licenses, and intellectual property rights and are amortized
over periods ranging from four to sixteen years.
(ix) Impairment of Long-Lived Assets
The Company periodically evaluates the potential impairment of its
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. At the occurrence of a
certain event or change in circumstances, the Company evaluates the potential
impairment of an asset based on estimated future undiscounted cash flows. In the
event impairment exists, the Company will measure the amount of such impairment
based on the present value of estimated future cash flows using a discount rate
commensurate with the risks involved. Based on management's assessment as of
December 31, 1998, the Company has determined that no impairment of long-lived
assets exists.
(x) Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred taxes arise from temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse. A
valuation allowance is provided for net deferred tax assets if, based on the
weighted available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. Tax credits are recognized when
realized using the flow through method of accounting.
-33-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies -- (Continued)
(xi) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents, and
accounts receivable. The Company places its cash in federally chartered banks,
each of which is insured up to $100,000 by the Federal Deposit Insurance
Corporation. The Company limits credit risk in cash equivalents by investing
only in short-term, investment grade securities including money market funds
restricted to such securities. Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom the Company makes
substantial sales (see Note 8). The Company does not require collateral from its
customers. To reduce risk, the Company routinely assesses the financial strength
of its customers and, as a consequence, believes that its trade accounts
receivable credit risk exposure is limited.
(xii) Deferred Revenue
Deferred revenue consists of payments received from customers in advance
of services performed.
(xiii) Computation of Earnings per Share
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a dilutive
effect. Options and warrants that were antidilutive were excluded from the
calculation.
(xiv) Segment Reporting
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," on December 31, 1998. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, but retains the
requirements to report information about major customers. Disclosures required
by this new standard are included in the notes to the consolidated financial
statements under the caption "Segment Reporting and Related Information."
(xv) Recent Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. It is effective for all fiscal years beginning after June 15, 1999. The
new standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company does not currently engage in derivative trading or hedging activity.
The Company will adopt SFAS 133 in the fiscal year ending December 31, 2000,
although no impact on operating results or financial position is expected.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company is currently assessing the impact that
adoption of this statement will have on consolidated financial position and
results of operations.
-34-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisition of BioSeq, Inc.
On September 30, 1998 the Company acquired the remaining common stock
outstanding of BioSeq (approximately 81%) for $879,000 in cash (net of cash
acquired of $121,000), warrants to purchase 100,000 shares of the Company's
stock at an exercise price of $2.50 per share, minimum long-term royalty
payments of $424,000, debt and accrued interest owed by BioSeq at the time of
acquisition of approximately $736,000, and other acquisition costs. The Company
also exchanged BioSeq's stock options for 46,623 BBI stock options with an
average exercise price of $2.74. Accordingly, the Company's aggregate cost of
acquiring all of BioSeq's equity, including the original 19% investment under
the 1996 Purchase Agreement of $1,482,000 (classified as long-term investment at
December 31, 1997, see Note 7), was approximately $4,226,000. The cash portion
of the acquisition was financed from a combination of debt and cash. The
acquisition has been recorded using purchase accounting, and BioSeq's results
are included in the consolidated results of the Company commencing October 1,
1998.
BioSeq is a development stage company with patent pending technology based
on pressure cycling technology ("PCT"). Approximately $3,381,000 of the purchase
price has been allocated to in-process research and development and expensed in
the third quarter based on an independent valuation of the assets acquired. The
patents on the core technology have been valued and capitalized at $778,000, and
are being amortized over their remaining life, approximately sixteen years.
Other assets acquired are primarily laboratory equipment, which are being
depreciated over their remaining useful lives of three to ten years.
Allocated in-process research and development consists of two projects
that were on going at the time of the acquisition related to pathogen nucleic
acid extraction and inactivation. BioSeq expended approximately $1.6 million
prior to September 30, 1998 on these projects. Both of these projects have
encouraging preliminary data demonstrating potential feasibility on a limited
number of pathogens, but with significant scientific, mechanical and design
issues remaining. The Company estimates that it will spend in excess of $4.8
million through the year 2002 to complete the development into commercially
viable products and to begin generating revenue. Remaining development efforts
are focused on feasibility studies to establish the key performance parameters
and biological activities to be retained; designing and building a prototype
instrument; further development of the prototype for the applications; scale-up
of design; data generation and clinical trials; applying and obtaining Food and
Drug Administration approval; final design modifications; and transfer to
manufacturing. In addition to the risk of the technology ultimately not working,
failure to complete on a timely basis could allow new or existing competing
technologies to be developed and commercially accepted.
The valuation methodology was based on estimated discounted future cash
flows. Significant assumptions include gross and operating profit margins, and
future tax, discount, and royalty rates. Recent Securities and Exchange
Commission ("SEC") guidelines on valuation methodologies for in-process research
and development are still evolving. The amount written off maybe subject to
adjustment as the SEC continues to focus on accounting for acquired in process
research and development.
The following unaudited pro forma information combines the consolidated
results of operations of the Company and BioSeq as if the acquisition had
occurred at the beginning of 1997, after giving effect to certain adjustments,
including amortization of intangible assets, increased interest expense on the
acquisition debt, and related income tax effects. The unaudited pro forma
information is shown for comparative purposes only and is based on management's
estimates of research and development expenditures.
Years Ended December 31,
----------------------------
Unaudited .................................. 1998 1997
------------ ------------
Revenue .................................... $ 26,081,076 $ 22,299,337
Operating (loss) income .................... (1,474,694) 191,952
Net (loss) income .......................... (989,327) 242,834
Pro forma (loss) income per share, basic ... (0.21) 0.05
Pro forma (loss) income per share, diluted . (0.21) 0.05
The pro forma information excludes acquired research and development of
$4,231,000.
-35-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Purchase of the Business and Net Assets of Source Scientific, Inc.
In July 1997, the Company, through its wholly owned subsidiary BBI Source
Scientific, Inc. ("BBI-Source"), completed the acquisition of all of the assets,
business, and selected liabilities of Source Scientific, Inc. ("Source"). In
addition to the cash payment of $1,894,000 to Source, the total purchase price
was $1,994,000 including consulting, legal, accounting and other acquisition
costs, net of cash acquired. The acquisition is treated as an asset purchase as
of July 1, 1997 and the results of operations have been included since that
date. The purchase price exceeded the fair market value of net assets acquired
by approximately $2,202,000, which is recognized as goodwill and is being
amortized on a straight line basis over fifteen years.
(4) Inventories
The Company purchases human plasma and serum from various private and
commercial blood banks. Upon receipt, such purchases generally undergo
comprehensive testing, and associated costs are included in the value of raw
materials. Most plasma is manufactured into Basematrix and other diagnostic
components to customer specifications. Plasma and serum with the desired
antibodies or antigens are sold or manufactured into Quality Control Panels,
Accurun(R) Run Controls, and reagents ("Finished Goods"). Panels and reagents
are unique to specific donors and/or collection periods, and require substantial
time to characterize and manufacture due to stringent technical specifications.
Panels play an important role in diagnostic test kit development, licensure and
quality control. Panels are manufactured in quantities sufficient to meet
expected user demand which may exceed one year. Inventory also includes
component parts used in the manufacture of laboratory instrumentation. Inventory
balances at December 31, 1998 and 1997 consist of the following:
1998 1997
---------- ----------
Raw materials ........................ $2,407,154 $2,033,040
Work-in-process ...................... 1,788,399 1,190,567
Finished goods ....................... 2,494,215 2,679,214
---------- ----------
$6,689,768 $5,902,821
========== ==========
(5) Property and Equipment
Property and equipment at December 31, 1998 and 1997 consist of the
following:
1998 1997
----------- -----------
Laboratory and manufacturing equipment ......... $ 3,082,834 $ 2,297,590
Management information systems ................. 2,556,193 1,925,194
Office equipment ............................... 821,538 686,608
Automobiles .................................... 206,693 189,775
Leasehold improvements ......................... 1,610,260 687,714
Land, building and improvements ................ 2,307,039 1,872,747
----------- -----------
10,584,557 7,659,628
Less accumulated depreciation .................. 3,659,134 2,679,464
----------- -----------
Net book value ................................. $ 6,925,423 $ 4,980,164
=========== ===========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was approximately $1,096,000, $731,000, and $585,500 respectively. Included in
1998 and 1997 land, building and improvements is approximately $1,345,000 and
$920,000, respectively, of construction in progress.
-36-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Intangible Assets
Intangible assets at December 31, 1998 and 1997 consist of the following:
1998 1997
---------- ----------
Goodwill ................................... $2,293,045 $2,293,045
Patents .................................... 796,380 14,754
Licences ................................... 37,752 37,751
---------- ----------
3,127,177 2,345,550
Less accumulated amortization .............. 317,352 133,330
---------- ----------
Net book value ............................. $2,809,825 $2,212,220
========== ==========
Amortization expense for the years ended December 31, 1998, 1997 and 1996
was approximately $184,000, $125,000, and $16,000 respectively.
(7) Long-term Investment
On December 31, 1997 the Company had a long-term investment of $1,482,500.
This amount represented 19.9% of the common stock of BioSeq, Inc. During 1998,
the Company purchased the remaining stock of BioSeq and included the investment
in the purchase price (see Note 2).
(8) Segment Reporting and Related Information (all dollar amounts in thousands)
Operating segments are components of an enterprise for which separate
financial information is available that is evaluated regularly by senior
management in deciding how to allocate resources and in assessing performance of
the segment. The Company is organized along legal entity lines and senior
management regularly reviews financial results for all entities, focusing
primarily on revenue and operating income.
The Company has four operating segments. The Diagnostics segment serves
the worldwide in vitro diagnostics industry, including users and regulators of
their test kits, with quality control products, test kit components, and
clinical trial and research services. This segment pursues third party contracts
to help fund the development of its products and services, primarily with
agencies of the United States Government. The Clinical Laboratory Services
segment performs specialty infectious disease testing for hospitals, blood
banks, doctors and other clinical laboratories, primarily in North America. The
Laboratory Instrumentation segment sells diagnostic instruments primarily to the
worldwide in vitro diagnostic industry on an OEM basis, as well as performing
in-house instrument servicing. Finally, "Other" consists of research and
development in two areas: pressure cycling technology ("PCT") and drug
discovery. The Company performs basic and applied research in the development of
PCT, with particular focus in the areas of pathogen inactivation and nucleic
acid purification. The Company also conducts active research, together with Dr.
K. H. Lee and collaborators at the School of Pharmacy, University of North
Carolina at Chapel Hill, in the area of anti-HIV drug discovery, with exclusive
focus on natural products and their synthetic derivatives.
The Company's underlying accounting records are maintained on a legal
entity basis for government and public reporting requirements, as well as for
segment performance and internal management reporting. Inter-segment sales are
recorded on a "third party best price" basis and are significant in measuring
segment operating results. The cost of most corporate functions are included in
the Diagnostic Products segment as the senior management group has dual
responsibility to this segment as well as the Company. The following segment
information has been prepared in accordance with the internal accounting
policies of the Company, as described above.
-37-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Segment Reporting and Related Information (Continued)
Operating segment revenue for the years ended December 31, 1998, 1997 and
1996 were as follows:
1998 1997 1996
--------------------------------
Diagnostics ................ $ 15,901 $ 14,282 $ 11,518
Clinical Laboratory Services 7,187 6,024 4,568
Laboratory Instrumentation.. 3,929 2,608 --
Other ...................... -- -- --
Eliminations ............... (936) (615) (577)
--------------------------------
Total Revenue ........... $ 26,081 $ 22,299 $ 15,509
================================
Operating segment (loss) income for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
-----------------------------
Diagnostics .......................... $ 714 $ 1,277 $ 1,115
Clinical Laboratory Services ......... 134 403 55
Laboratory Instrumentation............ (906) (189) --
Other ................................ (613) (99) (155)
Acquired R&D ......................... (4,231) -- --
-----------------------------
Total (Loss) Income from Operations $(4,902) $ 1,392 $ 1,015
=============================
Operating segment depreciation and amortization expense for the years
ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
------------------------
Diagnostics ................ $ 754 $ 520 $ 454
Clinical Laboratory Services 217 175 146
Laboratory Instrumentation . 289 163 --
Other ...................... 20 -- --
------------------------
Total ................... $1,280 $ 858 $ 600
========================
Identifiable operating segment assets are all located in the United
States, and as of December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
---------------------------
Diagnostics ................ $16,548 $16,958 $17,802
Clinical Laboratory Services 2,348 1,948 1,996
Laboratory Instrumentation . 4,428 4,744 --
Other ...................... 758 -- --
---------------------------
Total assets ............ $24,082 $23,650 $19,798
===========================
-38-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Segment Reporting and Related Information (Continued)
Operating segment capital expenditures for the years ended December 31,
1998, 1997 and 1996 were as follows:
1998 1997 1996
------------------------
Diagnostics ................ $2,702 $2,148 $ 503
Clinical Laboratory Services 202 196 176
Laboratory Instrumentation . 22 269 --
Other ...................... 4 -- --
------------------------
Total ................... $2,930 $2,613 $ 679
========================
Revenue by geographic area for the years ended December 31, 1998, 1997 and
1996 are as follows:
1998 1997 1996
----------------------------
United States ........... $21,978 $17,706 $11,183
Europe .................. 2,453 2,614 2,844
Pacific Rim ............. 1,063 1,285 948
Total all others ........ 587 694 534
----------------------------
Total .............. $26,081 $22,299 $15,509
============================
Revenue of Product and Service classes in excess of 10% of consolidated
revenue (excludes inter-segment sales) for the years ended December 31, 1998,
1997 and 1996 are as follows:
1998 1997 1996
----------------------
Quality Control Products .. $9,369 $8,220 $6,132
Clinical Laboratory Testing 6,806 5,695 4,296
Government Contracts ...... 3,535 2,638 1,920
The government contract revenues are from United States government
agencies, primarily the National Institutes of Health (NIH) and represent the
only customer with revenue in excess of 10% of consolidated revenue.
(9) Debt
Effective March 28, 1997, as amended, the Company entered into a $7.5
million uncollateralized revolving line of credit (the "Line") with its bank.
The Line matures on June 30, 2000; bears interest at the Company's option based
on either base rate, LIBOR plus 1.75%, or overnight money market rate plus
1.75%; and carries a facility fee of .25% per annum, payable quarterly. The Line
contains covenants regarding the Company's ratio of total liabilities-to-equity,
minimum tangible net worth, and minimum debt service coverage ratio. The Line
further provides for restrictions on the payment of dividends, and limitations
on additional borrowings. At December 31, 1998, the interest rate was 7.75% and
the total balance due was approximately $3,977,000. At December 31, 1998, the
Company was in violation of certain covenants however it obtained a waiver from
its bank on March 31, 1999. The Company did not draw upon the Line during 1997.
The Company's outstanding debt includes an installment note payable with
an interest rate of 9.75%, due August 2001. The note is collateralized by office
furniture and laboratory equipment. The amounts outstanding including the
current portion, at December 31, 1998 and 1997 was $26,820 and $40,948,
respectively.
-39-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Other Liabilities
The Company's California facility lease includes scheduled base rent
increases over the term of the lease. The amount of base rent payments is
charged to expense using the straight-line method over the term of the lease. As
of December 31, 1998 and 1997, the Company has recorded a long-term liability of
$153,290 and $189,867, respectively ($188,519 and $223,748 including the current
portion), to reflect the excess of rent expense over cash payments since
inception of the lease. In addition to base rent, the Company pays a monthly
allocation of the operating expenses and real estate taxes for the above
facility.
Included in long-term liabilities at December 31, 1998 is the present
value of future minimum royalty payments of approximately $424,000 payable to
the former owners of BioSeq, Inc. (See Note 2)
(11) Accrued Compensation
Accrued compensation consists of the following:
Year Ended December 31
1998 1997
---------- ----------
Accrued payroll .......... $ 598,937 $ 421,369
Accrued vacation ......... 360,509 370,332
Other accrued compensation 324,716 312,136
---------- ----------
1,284,162 1,103,837
========== ==========
(12) Income Taxes
The components of the (benefit) provision for income taxes are as follows:
1998 1997 1996
--------- --------- ---------
Current (benefit) provision: federal ............. $ (63,868) $ 567,373 $ 404,775
Current provision: state ......................... $ 28,145 $ 100,125 $ 71,431
--------- --------- ---------
Total current (benefit) provision ............ (35,723) 667,498 476,206
Deferred (benefit) provision: federal ............ (417,315) (5,078) (132,120)
Deferred (benefit) provision: state .............. (111,361) 7,469 (23,315)
--------- --------- ---------
Total deferred (benefit) provision ........... (528,676) 2,391 (155,435)
========= ========= =========
Total (benefit) provision for income taxes $(564,399) $ 669,889 $ 320,771
========= ========= =========
Significant items making up deferred tax liabilities and deferred tax
assets are as follows:
1998 1997
--------- ---------
Current deferred taxes:
Inventory ......................................... $ 169,796 $ 72,249
Accounts receivable allowance ..................... 224,240 153,469
Technology licensed ............................... 322,516 --
Other accruals .................................... 130,716 102,844
--------- ---------
Total current deferred tax assets ........... 847,268 328,562
Long term deferred taxes:
Accelerated tax depreciation ...................... (279,358) (217,029)
Goodwill and intangibles .......................... 17,729 15,176
Tax credits ....................................... 60,000 --
Operating loss carryforwards ...................... 861,066 52,520
Less: valuation allowance ......................... (798,800) --
--------- ---------
Total long term deferred tax liabilities, net (139,363) (149,333)
--------- ---------
Total net deferred tax assets ............... $ 707,905 $ 179,229
========= =========
-40-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Income Taxes (Continued)
On December 31, 1998, operating loss carryforwards were partially offset
by a valuation allowance of $798,800. This allowance is to reserve for the
entire loss carryforward obtained through the acquisition of BioSeq, Inc. The
Company establishes valuation allowances in accordance with the provisions of
SFAS 109 "Accounting for Income Taxes". The Company continually reviews the
adequacy of the valuation allowance. The state net operating loss carryforwards
expire at various dates beginning in 1999 through 2007. As of December 31, 1998,
the Company had $60,000 of federal research credits which expire during 2019.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:
1998 1997 1996
---- ---- ----
Federal tax (benefit) provision rate ...................... (34%) 34% 34%
State tax (benefit) provision, net of federal benefit ..... (1%) 6% 6%
Nondeductable writeoff of acquired research and development 23% - -
Other items, net .......................................... 1% - -
---- ---- ----
Effective income tax (benefit) provision rate ............. (11%) 40% 40%
==== ==== ====
(13) Commitments and Contingencies
The Company leases certain office space, laboratory, research and
manufacturing facilities under operating leases with various terms through
October 2007. All of the real estate leases include renewal options at either
market or increasing levels of rent.
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$914,440 $506,300, and $365,700, respectively. At December 31, 1998, the
remaining fixed lease commitment was as follows:
Year Ended Amount
---------- ----------
1999 1,038,483
2000 900,122
2001 840,438
2002 572,061
2003 582,050
2004 and 2,389,455
thereafter
----------
$6,322,609
----------
Commencing in February 1995, the Company committed under a sponsored
research agreement with a university to fund a research scientist at a cost of
$13,125 per quarter for three years which costs are charged to research and
development expense. In return, the Company has exclusive rights to any anti-HIV
compounds or derivatives developed in the course of this research, provided the
Company obtains certain regulatory approvals from the FDA.
(14) Retirement Plan
In January 1993, the Company adopted a retirement savings plan for its
employees, which has been qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the plan through payroll
deductions within statutory limitations and subject to any limitations included
in the plan. Company contributions are made at the discretion of management. To
date, no such contributions have been made. During 1998, 1997 and 1996 the
Company recognized administrative expense of approximately $32,000, $23,000, and
$18,000, respectively in connection with the plan.
-41-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Stockholders' Equity
Common Stock
On October 31, 1996, the Company commenced trading on the NASDAQ National
Market as a result of the initial public offering of its common stock ("IPO"),
raising net proceeds of $11,633,000 from the sale of 1,600,000 shares at $8.50
per share.
On April 26, 1996, the Company entered into a Stock Purchase Agreement and
Exclusive Distributor Agreement for five years with a foreign distributor.
Pursuant to the Stock Purchase Agreement, the Company issued 117,647 shares of
redeemable common stock at a price per share of $8.50, for which it received net
proceeds of $898,503. Issuance costs were $101,497. Completion of the IPO
terminated the redemption feature. The distributor was restricted from selling
these securities for a one-year period after completion of the IPO. The Company
issued 80,000 shares of Treasury Stock in connection with this transaction.
On August 8, 1996 the Board of Directors approved a 1-for-2 reverse stock
split and an increase in authorized common shares to 20,000,000, and authorized
1,000,000 shares of preferred stock (par value $.01), which were approved by the
stockholders on September 10, 1996. The stock split has been retroactively
reflected in the accompanying financial statements and notes for all periods
presented.
Options and Warrants
The Company has a nonqualified stock option plan and an incentive stock
option plan both of which are administered by a committee of the Board of
Directors. The exercise price of an option generally equals the fair market
value of the stock at grant date. Generally, options become exercisable at the
rate of 25% at the end of each of the four years following the anniversary of
the grant. Options expire ten years from the date of grant, or 30 days from the
date the grantee's affiliation with the Company terminates.
At December 31, 1998, 1,245,775 shares have been reserved for incentive
stock options, of which 179,887 are available for future grants. In December
1997 the non-qualified stock option plan terminated and became unavailable for
future grants.
On December 11, 1998, the Company's Board of Directors authorized the
Company to offer a reduction of the stock option exercise price to $3.25 per
share, which represented a premium over the market price of $3.00 on that day.
Any option holder with outstanding stock options with an exercise price higher
than $3.25 was eligible to participate in the repricing. A total of 411,417
options were repriced, which represents substantially all eligible options. The
original vesting schedule, generally four years from date of grant, remains
unchanged. However, all optionees accepting the offer agreed not to exercise
vested, repriced options for a period of one year from the date of amendment.
The previous weighted average exercise price of the options repriced was $6.72.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998. The minimum value option pricing model was used for all
grants during 1996 as they were granted prior to the Company's IPO.
1998 1997 1996
--------- ---------- ---------
Risk-free interest rate 4.69% 5.72% 6.18%
Volatility factor 75.57% 55.00% 0.10%
Weighted average 5 years 5 years 5 years
expected life
Expected dividend yield 0 0 0
-42-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Stockholders' Equity-(Continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and pro forma net income per share is as follows:
1998 1997 1996
----------- ----------- ----------
Net (loss) income-as reported $(4,388,719) $1,004,834 $481,220
Net (loss) income-pro forma $(4,959,228) 851,408 424,921
Net (loss) income per share-as (.94) .23 .17
reported, basic
Net (loss) income per share-as (.94) .21 .14
reported, diluted
Net (loss) income per share-pro (1.07) .19 .14
forma, basic
Net (loss) income per share-pro (1.07) .18 .13
forma, diluted
Because SFAS 123 provides for pro forma expense for options granted
beginning in 1995, the pro forma expense will likely increase in future years as
new option grants become subject to the pricing model. The average fair value of
options granted during 1998, 1997 and 1996 is estimated as $1.89, $4.44 and
$1.86, respectively.
-43-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Stockholders' Equity-(Continued)
In 1991 and 1993, the Company issued warrants in connection with certain
debt financings. During 1997 all of those warrants were exercised.
The Company has reserved shares of its authorized but unissued common
stock for the following:
Stock Options Warrants
-------------------------- --------------------------
Weighted Weighted
Average price Average price Total
-------------------------
Shares per share Shares per share Shares Exercisable
------------ ------------- ----------- -------------- ----------- -----------
Balance outstanding, December 31, 1995 800,287 $2.45 260,338 $2.85 1,060,625 879,038
Granted 140,600 7.27 - - 140,600
Exercised (1,500) 4.50 (84,260) 2.88 (85,760)
Expired (21,500) 6.05 (56,078) 3.54 (77,578)
------------ ----------- ------------
Balance outstanding, December 31, 1996 917,887 3.10 120,000 2.50 1,037,887 839,272
Granted 263,050 7.42 - - 263,050
Exercised (124,409) 1.44 (120,000) 2.50 (244,409)
Expired (30,435) 7.36 - - (30,435)
------------ ----------- ------------
Balance outstanding, December 31, 1997 1,026,093 4.28 - - 1,026,093 672,231
Granted 358,836 3.80 * 100,000 2.50 458,836
Exercised (45,250) 1.97 - - (45,250)
Expired (165,013) 6.05 - - (165,013)
------------ ----------- ------------
Balance outstanding, December 31, 1998 1,174,666 2.75 ** 100,000 2.50 1,274,666 669,434
============ =========== ============
* Includes 46,623 shares at $2.74 granted in connection with the
BioSeq, Inc. acquisition.
** Includes the effect of 411,417 options repriced in December 1998
from a weighted average price of $6.72 to $3.25 per share.
The following table summarizes information concerning options outstanding
and exercisable as of December 31, 1998:
Options Outstanding Options Exercisable
-------------------------- ------------------------
Range of Exercise Prices Weighted Weighted Weighted
Average Average Average
Remaining Number of Exercise Number of Exercise
Life Options Price Options Price
------------ ------------ ------------- ----------- ------------
$0.00-$0.85 .............. 0.40 40,000 $ 0.2500 40,000 $ 0.2500
$0.86-$1.70 .............. 2.20 187,334 $ 1.4981 187,334 $ 1.4981
$1.71-$2.55 .............. 3.70 194,767 $ 2.4920 189,767 $ 2.5000
$2.56-$3.25 .............. 7.80 740,253 $ 3.2008 245,571 $ 3.1720
$3.26-$8.50 .............. 1.30 12,312 $ 6.4446 6,762 $ 6.0262
------------ -----------
1,174,666 669,434
============ ===========
-44-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Computation of Net Income per Share
The following illustrates the computation of basic and diluted net income
per share.
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ---------- ----------
Shares, basic ........................ 4,654,609 4,437,801 2,915,522
Net effect of dilutive common stock
equivalents-based on treasury stock
method using average market price * 342,269 424,714
----------- ---------- ----------
Shares, diluted ...................... 4,654,609 4,780,070 3,340,236
=========== ========== ==========
Net (loss) income, basic and diluted . $(4,388,719) $1,004,834 $ 481,220
=========== ========== ==========
Net (loss) income per share-basic .... (0.94) 0.23 0.17
Net (loss) income per share-diluted .. (0.94) 0.21 0.14
* Potentially dilutive securities of 192,826 were not included in the
computation of diluted earnings per share because to do so would have
been antidilutive for twelve months ended December 31, 1998.
(17) Selected Quarterly Financial Data (Unaudited)
Unaudited (Amounts in thousands, except for per share data)
1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue .............. $ 6,273 $ 6,383 $ 6,181 $ 7,244
Gross profit ............... 2,178 2,709 2,448 2,669
Net (loss) income .......... (645) 134 (3,377) (502)
Net (loss) income per share, basic (0.14) 0.03 (0.72) (0.11)
Net (loss) income per share, diluted (0.14) 0.03 (0.72) (0.11)
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue .............. $ 4,209 $ 4,649 $ 6,140 $ 7,301
Gross profit ............... 1,678 1,921 2,541 3,148
Net income ................. 148 176 246 435
Net income per share, basic 0.03 0.04 0.06 0.10
Net income per share, diluted 0.03 0.04 0.05 0.09
-45-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity and
cash flows present fairly, in all material respects, the financial position of
Boston Biomedica, Inc. and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14 (a) (2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 24, 1999, Except as to certain information in the first paragraph of
Note 9, for which the date is March 31, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference to the
information under Part I, Item 1 - Business under the heading "Executive
Officers of the Registrant" at page 14 of this Report, and to the information in
the Registrant's definitive Proxy Statement which is expected to be filed by the
Registrant within 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
information in the Registrant's definitive Proxy Statement under the heading
"Executive Compensation," which is expected to be filed by the Registrant within
120 days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
information in the Registrant's definitive Proxy Statement under the heading
"Security Ownership of Directors, Officers and Certain Beneficial Owners," which
is expected to be filed by the Registrant within 120 days after the close of its
fiscal year.
-46-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 is incorporated by reference to the
information in the Registrant's definitive Proxy Statement under the heading
"Certain Relationships and Related Transactions," which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
-47-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Index to Financial Statements:
(a) 1. Index to Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997..... .....28
Consolidated Statements of Income for the three years ended
December 31, 1998.....................................29
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 1998...............30
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998.....................................31
Notes to Consolidated Financial Statements.............................32
Report of Independent Accountants...................... ...............46
(a) 2. Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts..........................53
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the Consolidated
Financial Statements or the Notes to Consolidated Financial Statements.
(a) 3. Exhibits:
Exhibit No.
3.1 Amended and Restated Articles of Organization of the Company**
3.2 Amended and Restated Bylaws of the Company**
4.1 Specimen Certificate for Shares of the Company's Common Stock**
4.2 Description of Capital Stock (contained in the Restated Articles of
Organization of the Company filed as Exhibit 3.1) **
10.1 Agreement, dated January 17, 1994, between Roche Molecular Systems,
Inc. and the Company**
10.2 Exclusive License Agreement, dated December 6, 1994, between the
University of North Carolina at Chapel Hill and the Company**
10.3 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and
the Company**
10.4 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut
Facility between MB Associates and the Company**
10.5 Stock Purchase Agreement, dated April 26, 1996, between Kyowa Medex
Co., Ltd. And the Company**
10.6 1987 Non-Qualified Stock Option Plan**++
10.7 Employee Stock Option Plan**++
10.8 Underwriters Warrants, each dated November 4, 1996, between the
Company and each of Oscar Gruss & Son Incorporated and Kaufman
Bros., L.P. **
10.9 Purchase Agreement, dated October 7, 1996, between BioSeq, Inc. and
the Company**
10.10 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. and
the Company**
10.11 Stockholders' Agreement, dated October 7, 1996, between BioSeq,
Inc. and the Company**
-48-
10.12 License Agreement, dated October 7, 1996, between BioSeq, Inc. and
the Company**
10.13 Commercial Loan Agreement, dated as of March 28, 1997, between The
First National Bank of Boston and the Company**
10.14 Asset Purchase Agreement, dated March 26, 1997 between Source
Scientific, Inc. and the Company**
10.15 Contract, dated March 1, 1997, between National Cancer Institute and
the Company**
10.16 Lease Agreement, dated May 16, 1997, for Gaithersburg, Maryland
facility between B.F. Saul Real Estate Investment Trust and the
Company**
10.17 Lease Agreement, dated January 30, 1995 for Garden Grove, California
facility between TR Brell, Cal Corp. and Source Scientific, Inc.,
and Assignment of Lease, dated July 2, 1997, for Garden Grove,
California facility between Source Scientific and BBI Source
Scientific**
10.18 Contract, dated July 1, 1998, between the National Institutes of
Health and the Company (NO1-AI-85341)**
10.19 Contract, dated July 1, 1998, between the National Heart Lung and
Blood Institute and the Company (NO1-HB-87144)**
21.1 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
- ------------------------
++ Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby incorporated
by reference.
(b) REPORTS ON FORM 8-K.
The Registrant did not file any Current Reports on Form 8-K during
the quarter ended December 31, 1998.
-49-
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.
Date: April 15, 1999 Boston Biomedica, Inc.
By: /s/Richard T. Schumacher
----------------------------
Richard T. Schumacher
President and Chief
Executive Officer
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.
SIGNATURES TITLES DATE
/s/ Richard T. Schumacher President, Chief Executive Officer, April 15, 1999
---------------------------
Richard T. Schumacher and Chairman of the Board
(Principal Executive Officer)
/s/ Kevin W. Quinlan Senior Vice President, Finance; April 15, 1999
---------------------------
Kevin W. Quinlan Chief Financial Officer; Treasurer
and Director
(Principal Accounting Officer)
/s/ Calvin A. Saravis Director April 15, 1999
---------------------------
Calvin A. Saravis
/s/ Henry A. Malkasian, Sr. Director April 15, 1999
---------------------------
Henry A. Malkasian, Sr.
/s/ Francis E. Capitanio Director April 15, 1999
---------------------------
Francis E. Capitanio
-50-
EXHIBIT INDEX
- -------------
Exhibit No. Reference
----------- ---------
3.1 Amended and Restated Articles of Organization of the A**
Company
3.2 Amended and Restated Bylaws of the Company A**
4.1 Specimen Certificate for Shares of the Company's A**
Common Stock
4.2 Description of Capital Stock (contained in the A**
Restated Articles of Organization of the Company
filed as Exhibit 3.1)
10.1 Agreement, dated January 17, 1994, between Roche A**
Molecular Systems, Inc. and the Company
10.2 Exclusive License Agreement, dated December 6, 1994, A**
between the University of North Carolina at Chapel
Hill and the Company
10.3 Agreement, dated October 1, 1995, between Ajinomoto A**
Co., Inc. and the Company
10.4 Lease Agreement, dated July 28, 1995, for New Britain, A**
Connecticut Facility between MB Associates and the Company
10.5 Stock Purchase Agreement, dated April 26, 1996, A**
between Kyowa Medex Co., Ltd. and the Company
10.6 1987 Non-Qualified Stock Option Plan* A**
10.7 Employee Stock Option Plan* A**
10.8 Underwriters Warrants, each dated November 4, 1996, B**
between the Company and each of Oscar Gruss & Son
Incorporated and Kaufman Bros., L.P.
10.9 Purchase Agreement, dated October 7, 1996, between A**
BioSeq, Inc. and the Company
10.10 Warrant Agreement, dated October 7, 1996, between A**
BioSeq, Inc. and the Company
10.11 Stockholders' Agreement, dated October 7, 1996, A**
between BioSeq, Inc. and the Company
10.12 License Agreement, dated October 7, 1996, between A**
BioSeq, Inc. and the Company
10.13 Commercial Loan Agreement, as of dated March 28, 1997, C**
between The First National Bank of Boston and the Company
10.14 Asset Purchase Agreement, dated March 26, 1997 between C**
Source Scientific, Inc. and the Company
10.15 Contract, dated March 1, 1997, between National Cancer D**
Institute and the Company
10.16 Lease Agreement, dated May 16, 1997, for Gaithersburg, E**
Maryland facility between B.F. Saul Real Estate
Investment Trust and the Company
-51-
10.17 Lease Agreement, dated January 30, 1995 for Garden F**
Grove, California facility between TR Brell, Cal Corp.
and Source Scientific, Inc., and Assignment of Lease,
dated July 2, 1997, for Garden Grove, California facility
between Source Scientific and BBI Source Scientific
10.18 Contract, dated July 1, 1998, between the National G**
Institutes of Health and the Company (NO1-AI-85341)
10.19 Contract, dated July 1, 1998, between the National G**
Heart Lung and Blood Institute and the Company
(NO1-HB-87144)
21.1 Subsidiaries of the Company Filed
herewith
23 Consent of PricewaterhouseCoopers LLP Filed
herewith
27 Financial Data Schedule Filed
herewith
- ------------------------
A Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-10759)(the "Registration Statement"). The number
set forth herein is the number of the Exhibit in said registration
statement.
B Incorporated by reference to the Registration Statement, where the Exhibit
was filed as Exhibit No. 10.17 and contained in Exhibit 1.1.
C Incorporated by reference to the Company's Annual Report on Form 10K for
the fiscal year ended December 31, 1996.
D Incorporated by reference to the Company's Quarterly Report on Form 10Q for
the fiscal quarter ended March 31, 1997.
E Incorporated by reference to the Company's Quarterly Report on Form 10Q for
the fiscal quarter ended June 30, 1997.
F Incorporated by reference to the Company's Annual Report on Form 10K for
the fiscal year ended December 31, 1997.
G Incorporated by reference to the Company's Quarterly Report on Form 10Q for
the fiscal quarter ended June 30, 1998.
* Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby incorporated
by reference.
-52-
SCHEDULE II
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Recoveries
Balance At for Accounts Uncollectable Balance at
Allowance for Doubtful Beginning of Additions to Previously Accounts End of
- ----------------------
Accounts Period Allowances Written Off Written Off Period
- -------- ------------- ------------- -------------- --------------- -----------
1998 $ 446,517 $ 429,036 $ 126,658 $(378,501) $ 623,710
1997 352,058 395,272 194,154 (494,967) 446,517
1996 142,372 429,677 62,753 (282,744) 352,058
-53-
EXHIBIT 21.1
Subsidiaries of the Company
---------------------------
Name Jurisdiction of Organization Location
- ---- ---------------------------- --------
BBI Clinical Laboratories, Inc. Massachusetts New Britain, CT
BBI Biotech Research Laboratories, Inc. Massachusetts Gaithersburg, MD
BBI Source Scientific, Inc. Massachusetts Garden Grove, CA
BBI BioSeq, Inc. Massachusetts Woburn, MA
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EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Boston Biomedica, Inc. on Form S-8 (File Nos. 333-24749) of our report dated
February 24, 1999, except as to certain information in the first paragraph of
Note 9, for which the date is March 31, 1999, on our audits of the consolidated
financial statements and financial statements schedule of Boston Biomedica, Inc.
as of December 31, 1998 and 1997, and for the years ended December 31, 1998,
1997, and 1996, which report is included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 14, 1999
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