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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22879
BIORELIANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal office) (zip code)
(Registrant's Telephone Number, Including Area Code): (301) 738-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by nonaffiliates of
the registrant (based on the closing price of such stock as reported on March 1,
2001 on the Nasdaq Stock Market) was approximately $31,519,774. There were
8,196,972 shares of common stock, $0.01 par value per share, outstanding as of
March 1, 2001.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement, which the
Corporation expects to file with the Securities and Exchange Commission within
120 days after the end of its fiscal year, are incorporated by reference into
Part III, Items 10, 11, 12 and 13 of this Report.
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TABLE OF CONTENTS
ITEM PAGE
PART I
Item 1. Business........................................................... 4
Item 2. Properties......................................................... 11
Item 3. Legal Proceedings.................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders................ 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 13
Item 6. Selected Financial Data............................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......... 35
Item 8. Financial Statements and Supplementary Data........................ 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 36
PART III
Item 10. Directors and Executive Officers of the Registrant................. 37
Item 11. Executive Compensation............................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 37
Item 13. Certain Relationships and Related Transactions..................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 38
Index to Consolidated Financial Statements and Financial Schedules. F-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
BioReliance Corporation (BioReliance or the Corporation) is a leading
contract service organization (CSO) that provides testing and development, and
manufacturing services for biologics and other biomedical products to
biotechnology and pharmaceutical companies worldwide. Through its testing and
development business segment, the Corporation evaluates products to ensure that
they are free of disease-causing agents or do not cause adverse effects,
characterizes products' chemical structures, develops formulations for long-term
stability and validates purification processes under regulatory guidelines. In
its manufacturing business segment, BioReliance develops unique production
processes and manufactures biologics on behalf of clients both for use in
clinical trials and for the worldwide commercial market.
The Corporation was founded in 1947 as Microbiological Associates,
Inc. It reincorporated in Delaware and changed its name to BioReliance in
connection with the initial public offering of its stock in 1997.
CSO INDUSTRY OVERVIEW
The CSO industry provides outsourced product development and licensed
product support services on a contract basis to pharmaceutical and biotechnology
companies. The CSO industry has evolved from providing primarily preclinical
services in the 1970s to being a full service industry today consisting of many
small, limited-service providers and a small number of larger companies in four
broad service sectors: (i) nonclinical laboratory testing focused on product
characterization and identification of potential contaminants; (ii) in vitro
(test tube) and in vivo (animal-based) toxicology studies; (iii) contract
manufacturing for clinical trials and commercial purposes; and (iv) human
clinical trials management. BioReliance provides services in the first three of
these categories, primarily for biologics and other biomedical products.
BIOLOGICS DEVELOPMENT PROCESS
Under the regulatory system of the United States, the product cycle
for new pharmaceuticals can be divided into three distinct stages: preclinical
development, clinical development and licensed product. The preclinical
development stage involves the discovery, characterization, product formulation
and biological trials necessary to prepare an Investigational New Drug (IND)
exemption application for submission to the FDA. The IND must be acceptable to
the FDA before either a biologic or chemical drug can be tested in humans. The
second, or clinical stage, of development follows a successful IND submission
and involves the activities necessary to demonstrate the safety, tolerability,
efficacy and dosage of the active substance in humans, as well as the ability to
manufacture the substance in accordance with the FDA's Good Manufacturing
Practices (GMP) regulations. For biologics, data from these activities are
compiled in a Product License Application or, if a specified biologic, in a
Biologic License Application, and submitted to the Center for Biologics
Evaluation and Research (CBER) of the FDA requesting approval to market the
product. The third stage, or licensed product (approved product or commercial
product) stage, follows FDA approval of the Product License Application or
Biologics License Application, and involves the manufacture, distribution and
clinical monitoring of the product. The licensed product stage, during which the
biologic can be marketed as a product, also involves the
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development and regulatory approval of product modifications and line extensions
of the original product.
SERVICES
BioReliance provides two broad types of contract services, testing
and development services and manufacturing services, each of which spans the
product cycle from early preclinical development through licensed production.
The only significant CSO services not provided by BioReliance are chronic
toxicology studies and human clinical trials management.
Compared to CSOs specializing in human clinical trials management,
BioReliance's involvement with clients begins at a much earlier stage of product
development, most often well before any clinical trials are initiated. In the
Corporation's experience, preclinical services lead to increased business for
later stage services, including manufacturing, by providing an entry at the
earliest stage of product development. The Corporation provides these services
to clients at every stage of product development and manufacture, including
in-process and final testing of licensed biologics.
TESTING AND DEVELOPMENT SERVICES
BioReliance provides a broad range of testing and development
services. Testing services represent the more mature parts of its business,
while development services are a more recent outgrowth of the core testing
business.
Testing Services. The Corporation's testing services include assessments of cell
banks used to manufacture biologics, validation of purification processes for
clearance of adventitious agents such as viruses, and testing of in-process and
final products. The Corporation pioneered biologics testing during the
development of the first biologic products, including Genentech's Activase(R)
and Ortho Pharmaceutical's Orthoclone OKT(R)3, in the early 1980s. The
Corporation believes that it has a significant share of the current outsourced
international market for these services and intends to increase its market share
in this rapidly expanding field.
Cell Bank Characterization. The starting point for manufacture of a biologic is
a cell bank, consisting of a large number of vials of cryopreserved cells. Each
bank must be free of any detectable biologic contaminants. BioReliance performs
all the FDA-required tests to characterize cell banks with respect to the
presence of biologic agents such as viruses, mycoplasma and bacteria. The
Corporation also confirms the species and identity of cell lines. A biologic may
not proceed to human clinical trials without satisfactory results from these
tests.
In-Process and Final Product Testing. The Corporation tests the biologic during
intermediate states of manufacture (i.e., before purification) and as a final
purified product. Each production lot must be tested for the presence of
specified biological agents both before and after the purification process. In
addition, the Corporation tests the final purified (and vialed) product on a
lot-by-lot basis to detect the presence of microbial and other agents. This
FDA-required testing currently must be compliant with Good Laboratory Practices
(GLPs). The Corporation, however, as a leader in ensuring the quality of
biologics, holds itself to the more stringent GMP requirements in its lot
release testing, which are the same requirements that must be met in
manufacturing processes. Tests are performed on each lot of a manufactured
product throughout its clinical development and commercial marketing phases.
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For over twenty years, BioReliance has provided both in vitro and in
vivo testing services to assess the genetic safety of pharmaceutical and
chemical products. With the advent of biotechnology, BioReliance has developed
specialized assays to assess the safety of a variety of biologic products, from
genetically engineered proteins to DNA plasmids used in gene therapy clinical
trials. The Corporation believes that the greatest future growth in in vivo
services will come from the application of molecular biological techniques.
In Vitro Studies. BioReliance conducts a wide array of preclinical biological
trials employing primarily in vitro (test tube) approaches to assess
toxicological effects of biologics and other substances. These studies include
genetic safety assays for the detection of gene mutations, chromosome damage,
primary DNA damage and cell transformation. The Corporation is well positioned
to provide these services with its experienced scientific staff and
state-of-the-art laboratory facilities. BioReliance custom designs its testing
batteries and GLP compliant protocols to comply with international guidelines.
An additional in vitro service provided by the Corporation is the detection of
infectious agents, primarily viral, in laboratory animals used for research
purposes by clients worldwide.
In Vivo and Molecular Studies. BioReliance currently offers several types of in
vivo (animal-based) studies, primarily designed to assess product safety during
the preclinical stage of product development. A particular area of interest is
developing mechanistic data that enables earlier prediction of the carcinogenic
potential of a drug or chemical.
BioReliance is engaged in a contract sponsored by the National
Institute of Environmental Health Sciences (NIEHS) to determine whether tumor
formation can be induced by known carcinogens in certain strains of transgenic
mice. The advantage of such an approach is to shorten the "in life" portion of
long-term carcinogenicity studies from two years to six months.
Employing its molecular biology expertise from the emerging gene
therapy sector, the Corporation has developed a unique assay system in which
specialized small animal models are coupled with advanced polymerase chain
reaction (PCR) techniques to detect the presence of therapeutic DNA distributed
in tissues and organs throughout the body. This specialized biodistribution
study is important for gene therapy and other DNA-based products because the
"active ingredient" is a genetic element that may have side effects if delivered
to sites outside the target area within the body. For developers of DNA-based
products, these studies now are required by the FDA prior to the first
administration to humans in clinical trials.
Development Services. In 1995, the Corporation expanded its capabilities to
better characterize biologics in anticipation of new FDA regulations and
guidelines. These regulations, published in 1996, permit the development and
manufacturing processes for specified biologics to be streamlined. This
expansion into development services was an outgrowth of the Corporation's
testing business and includes the analytical services and validation services
described below.
Product Testing and Methods Validation. These services focus on protein product
testing to show that a product meets predefined criteria for identity, purity,
strength and quality. The Corporation routinely uses methods based on SDS PAGE,
isoelectric focusing, N-terminal sequencing, high performance liquid
chromatography (HPLC), peptide mapping, amino acid analysis, LC-electrospray
mass spectrometry (LC-MS), and matrix assisted laser desorption/ionization
time-of-flight (MALDI-TOF) mass spectrometry for clients in a GMP environment.
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Each biologic product presents a unique set of analytical challenges.
The size, shape and internal structure of the molecule determine the methods
employed to fully characterize it in a manner suitable for regulatory
submission. Generally, several different methods are required to fully
characterize a biologic molecule. For a product license submission, it also is
necessary to develop and rigorously validate each analytical method.
Formulation Development, Product Stability and Consistency Testing. The
Corporation's development services include the full spectrum of formulation
development, stability testing and consistency testing services. Biologics are
extremely sensitive to their immediate environment, and a suitable, stable
formulation must be developed so that the product can be administered in active
form to patients. The structural uniqueness of each product demands its own
formulation -- a poor formulation can reduce therapeutic effect during clinical
trials. The formulation also plays a key role in the stability of the product.
Typically, several candidate formulations are developed and the relative product
stability is compared for each formulation over an extended period of time
(usually months to years) under a variety of conditions (temperature and
humidity, for example). The product's stability is measured by the same
validated analytical techniques that are used to assess the product's structural
integrity on a lot-by-lot basis. The goal is a formulation in which the product
remains active through final packaging, inventory storage, distribution to
clinical or pharmaceutical sites and administration to patients. One of the
major impacts of a successful formulation will be to extend the shelf-life of a
biologic -- an extended shelf-life can have a significantly positive economic
impact for the client. Finally, the FDA requires that the product maintain its
structural identity and activity from lot-to-lot throughout the product's
commercial lifetime.
Purification Process Validation. BioReliance validates client purification
processes to determine the capability of the process for clearance (removal or
inactivation) of certain biological agents and impurities such as viruses,
mycoplasma, DNA and TSE agents such as BSE. The client typically conducts a
small-scale version of its purification process at the Corporation's facilities.
A biologic product will not be licensed if these studies are not performed.
BioReliance has the capacity to perform large studies (for example, studies
involving multiple purification steps and simultaneous testing with multiple
biological agents), and the Corporation has dedicated laboratory suites for the
performance of these studies in the United States and Europe.
Cell Banking and Biorepository. A cell bank is a collection of cryopreserved
vials, usually several hundred in number, which is held in a frozen state (at
liquid nitrogen temperatures). Each vial contains genetically altered cells that
are used for production of the biologic product. Typically, each biologic
product will have both a Master Cell Bank (MCB) and a Working Cell Bank (WCB).
As the name implies, the WCB is the bank from which frozen vials are withdrawn,
the cryopreserved cells are thawed, and the resulting live cells are used to
seed a bioreactor vessel for culture and production of the biologic product. The
MCB is the bank from which additional WCBs are manufactured, if needed. The MCB
and WCB must be created in compliance with GMPs. BioReliance offers this
capability in both the United States and Europe. The long-term storage of such
vials is called a biorepository, which also must be maintained under strict GMP
guidelines.
MANUFACTURING SERVICES
BioReliance's manufacturing services currently include both viral
production and microbial fermentation. The Corporation has been providing
services in viral production since 1993 when it formed its Phase I/II
manufacturing department in the United States. The rapid progress of gene
therapy products into Phase I/II human clinical trials and the emergence of
viral cancer therapies have fueled the growth of
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manufacturing revenue for the Corporation from viral production services from
1993 to the present. The Corporation began manufacturing microbial products in
1996 with its acquisition of BIOMEVA GmbH (BIOMEVA, now known as BioReliance
Manufacturing GmbH), a contract manufacturer of microbial products located in
Heidelberg, Germany.
Production and Production Development. Generally, biologics are manufactured
either by genetically altered mammalian cells (if the molecular structure is
complex) or genetically altered microbial cells (if the molecular structure is
relatively less complex). BioReliance offers mammalian cell culture services to
developers of viral-based products, particularly viral vaccines, gene therapies
and cancer oncolytics. In 1988, the Corporation began pioneering assays to
support the development of gene therapy products. Building on this early testing
capability, in 1993 the Corporation established an independent contract
manufacturing service for companies and research institutes developing gene
therapies, which it believes was the first of its kind. This expanded
manufacturing service drew upon the Corporation's many years of experience in
viral testing and small scale manufacturing. BioReliance now has GMP-compliant
viral manufacturing laboratories in Rockville, Maryland and Stirling, Scotland
(U.K.). Combined, these facilities have manufactured more than 130 lots of human
clinical trial material for gene therapy clinical trials in the United States,
Europe and Japan. The Corporation has specific experience in manufacturing
retroviruses, adenoviruses, adeno-associated viruses and cells as tumor
vaccines. The early-stage nature of these therapies demands that specific
production techniques are developed for each product, much the same as with
other biologic products. BioReliance offers these production development
services as part of its manufacturing "package" to clients.
In October 2000, the Corporation commissioned its large-scale
manufacturing facility located in Rockville, Maryland in close proximity to
other U.S. operations. The Corporation initiated pilot services in this facility
in May 2000 and cGMP bulk manufacturing services in October 2000. The operation
of this facility supports the development and manufacture of viral gene therapy
products and viral vaccines, derived from mammalian cell culture. The facility
is staffed by qualified scientific and management employees involved in process
development, manufacturing and quality oversight. The facility contains
qualified biopharmaceutical systems and equipment used to support large-scale
manufacture of biologics for late-stage clinical trials. These systems include
those designed to supply high purity steam, water and air for product
manufacture.
Currently, the most advanced of the Corporation's manufacturing
clients are engaged in Phase II clinical trials. However, the Corporation's
manufacturing capacities are at the 100 liter per lot size -- more than
sufficient for many Phase III viral therapy trials. As more gene therapy and
other viral products reach Phase III and the market, and their manufacturing
require scales beyond 100 liters, the Corporation plans to construct appropriate
facilities according to market demand.
In 1996, the Corporation expanded its manufacturing capabilities by
acquiring BIOMEVA, an established contract manufacturing company located in
Heidelberg, Germany. This operation has been serving clients since 1989 and
offers GMP-compliant contract fermentation services for recombinant and natural
microorganisms, with bioreactor working volumes up to 1,000 liters. These
microbial fermentation capabilities allow BioReliance to provide manufacturing
services not only to viral product companies but also to companies that are
employing "naked" DNA or plasmid DNA as a vector (rather than viruses). Besides
manufacturing, the Corporation's German facility offers scale-up and development
for production processes and provides analytical testing of proteins and other
biologics.
Purification and Purification Development. Both U.S. and German operations
provide purification services for production clients. Similar to production
services, purification techniques must be developed
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on a product-by-product basis. BioReliance has developed GMP-compliant
chromatographic-based techniques for the large-scale purification of viruses
that will be necessary as emerging gene therapy and other viral products
progress to Phase III clinical trials.
Final Formulation and Filling. BioReliance offers aseptic final formulation and
filling services for its viral production clients and others. Filling involves
dispensing the final purified product into individual containers suitable for
shipment to the client for further processing or into formulated, individual
dosage forms suitable for administration to individual patients in a human
clinical trial. For its microbial-based production clients, the Corporation does
not currently offer final filling services.
BACKLOG
The Corporation does not have a significant backlog, and does not
believe that backlog is a meaningful indicator of its future results.
GOVERNMENT REGULATION
During 1996, the FDA introduced new approaches to the regulation of
biologics that benefit BioReliance and many of its clients. The FDA has
published a list of "specified" biologic products that are eligible for new
guidelines reducing the complexity of the licensing process. The list of
specified products includes most of the biologics now under development by
pharmaceutical and biotechnology companies; namely, therapeutic monoclonal
antibodies, therapeutic recombinant DNA (protein) products, synthetic
therapeutic peptides of less than 40 amino acids, and synthetic plasmid nucleic
acid therapeutics. The FDA recognizes that reliable bioanalytical techniques now
are available that enable accurate characterization of these structurally
complex products. Specified biologics for which bioanalytical techniques have
been developed, validated and accepted by the FDA are often termed
"well-characterized" products.
The FDA allows other important benefits and exemptions for
well-characterized products. Biologics developers now have more flexibility in
engaging independent contract suppliers for each portion of the manufacturing
process, so long as they ensure that each contract manufacturer employed meets
manufacturing compliance requirements. In addition, the FDA no longer requires
an "Establishment License" for a facility designated for the production of a
specified product. Under prior regulations, the large-scale facility necessary
for licensed production was needed prior to product approval. The current
approach enables the use of a smaller, pilot-scale facility owned by the
developer or a contract manufacturer for the production of clinical trials
materials, including those for pivotal Phase III trials and for licensed
products. BioReliance believes that developers of biologics will pursue CSOs
that understand these new guidelines and can provide the full range of services
to support the proper characterization and documentation for biologics.
The services performed by BioReliance are subject to various
regulatory requirements designed to ensure the quality and integrity of
pharmaceutical products, primarily under the Federal Food, Drug and Cosmetic Act
and associated GLP and GMP regulations which are administered by the FDA in
accordance with current industry standards. These regulations apply to all
phases of drug manufacture, testing and record keeping, including personnel,
facilities, equipment, control of materials, processes and laboratories,
packaging, labeling and distribution. Noncompliance with GLPs or GMPs by the
Corporation in a project could result in disqualification of data collected by
the Corporation in the project. Material violation of GLP or GMP requirements
could result in additional regulatory sanctions, and in
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severe cases could result in a mandated closing of the Corporation's facilities,
which would have a material adverse effect on the Corporation's business and
results of operations.
To help assure compliance with applicable regulations, BioReliance
has established quality assurance units at its facilities that monitor ongoing
compliance by auditing test data and regularly inspecting facilities, procedures
and other GLP and GMP compliance parameters. In addition, FDA regulations and
guidelines serve as a basis for the Corporation's standard operating procedures.
Certain of the Corporation's development and testing activities are subject to
the Controlled Substances Act, administered by the Drug Enforcement Agency
(DEA), which regulates strictly all narcotic and habit-forming substances. The
Corporation maintains restricted-access facilities and heightened control
procedures for projects involving such substances due to the level of security
and other controls required by the DEA. In addition to FDA regulations, the
Corporation is subject to other federal and state regulations concerning such
matters as occupational safety and health and protection of the environment.
COMPETITION
The CSO industry is highly fragmented, with many providers ranging in
size from one person consulting firms to full-service global drug development
corporations. BioReliance primarily competes with in-house research and
development departments of biopharmaceutical companies, universities and medical
centers, in addition to other CSOs. Some of these other CSOs possess
substantially greater capital and technical resources than the Corporation. The
Corporation's primary service competitors are different in each of its service
areas. For testing and development services, its primary competitors are
aaiPharma Inc., Charles River Laboratories, Inc., ClinTrials Research Inc.,
Covance, Inc., Inveresk Research International Ltd., Q-One Biotech Ltd. and SRI
International; and for manufacturing services, DSM Biologics Holding Inc.,
Molecular Medicine, Inc. and Q-One Biotech Ltd.
The industry has begun to consolidate as a result of competitive
pressures. This trend is likely to produce increased competition among the
larger competitors for both clients and acquisition candidates. In addition, the
service industry has attracted the attention of the investment community, which
could lead to heightened competition by increasing the availability of financial
resources. Increased competition may lead to price and other forms of
competition, which may affect the Corporation's margins. The Corporation
believes the principal competitive factors in its business are scientific
expertise, technological advancements, reputation, regulatory experience,
international presence and the ability to offer a comprehensive range of
biologics testing, development and manufacturing services.
INFORMATION SYSTEMS
Digital information systems are an important component of the
Corporation's technological leadership. The Corporation believes that superior
information systems are essential to expanding its operations and to providing
innovative services to clients, for timely, accurate reporting and project
monitoring.
BioReliance has made significant investments in its information
systems and personnel, in both the United States and Europe, to maximize its
relationships with its clients. Those investments have included state-of-the-art
hardware and software that maximize compatibility and integration internally and
with the Corporation's clients, and an Oracle enterprise application suite of
modules as the software foundation for its business.
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The FDA has become increasingly sophisticated with respect to
information systems and the integrity of all forms of data incorporated into
regulatory submissions. Correspondingly, BioReliance strives to be at the
forefront of nonclinical testing laboratories in validation of hardware and
software systems.
INSURANCE
BioReliance maintains product liability and professional errors and
omissions liability insurance, providing $13 million in coverage on a
claims-made basis. In addition, in certain circumstances the Corporation seeks
to manage its liability risk through contractual provisions with clients
requiring the Corporation to be indemnified by the client or covered by clients'
product liability insurance. In addition, in certain types of engagements, the
Corporation seeks to limit contractual liability to its clients, most commonly
to the amount of fees received by the Corporation. The contractual arrangements
are subject to negotiation with clients and the terms and scope of such
indemnification, liability limitation and insurance coverage vary from client to
client and from project to project. Although many of the Corporation's clients
are large, well-capitalized companies, the financial performance of their
indemnities, if any, is not secured. Therefore, BioReliance bears the risk that
the indemnifying party may not have the financial ability to fulfill its
indemnification obligations or that liability would exceed the amount of
applicable insurance. In addition, the Corporation could be held liable for
errors and omissions in connection with the services it performs.
EMPLOYEES
At December 31, 2000 the Corporation had 480 full-time equivalent
employees, of whom 275 were employed directly in testing and development
services and 55 were employed directly in manufacturing services, with the
remainder employed in general and administrative roles. The Corporation believes
that its relations with its employees are good. None of the Corporation's
employees is represented by a collective bargaining agreement.
ITEM 2. PROPERTIES
BioReliance's corporate headquarters are located in Rockville,
Maryland. In addition to the headquarters building, the Corporation occupies
five other facilities in Rockville, Maryland, providing approximately 210,000
square feet of operational, manufacturing and administrative space. BioReliance
uses its headquarters facility and three of its other buildings for testing,
development, warehousing and administrative space. A fifth facility is used for
both testing and Phase I/II manufacturing. The sixth facility, which became
operational during 2000, is the new U.S. based Phase III and commercial
manufacturing services facility with approximately 58,000 square feet of
production and administrative space. To date, 35,000 square feet of this
facility are completed and in service. Of the Corporation's six facilities, one
facility is owned, four are leased under operating leases, and the sixth
facility is leased under a capital lease.
The Corporation also leases approximately 28,000 square feet of
laboratory, manufacturing and administrative space in Stirling, Scotland (U.K.),
and approximately 14,000 square feet of administrative and manufacturing space
in Heidelberg, Germany. BioReliance maintains sales offices in Rockville,
Maryland; Boston, Massachusetts; San Francisco, California; Los Angeles,
California; Seattle, Washington; Stirling, Scotland (U.K.) and Heidelberg,
Germany. See Notes 5 and 10 of Notes to Consolidated Financial Statements for
information concerning lease obligations.
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ITEM 3. LEGAL PROCEEDINGS
The Corporation from time to time may be involved in various claims
and legal proceedings arising in the ordinary course of business. The
Corporation does not believe that any such claims or proceedings, individually
or in the aggregate, would have a material adverse effect on the Corporation's
financial condition or results of operations.
BioReliance was identified by the U.S. Environmental Protection
Agency (EPA) as one of several hundred potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to the Ramp Industries, Inc., site in Denver, Colorado. The Corporation
has recently signed a consent decree with the EPA, which management expects will
allow BioReliance to resolve its liability for clean-up costs at this site for
approximately $3,600. The consent decree is not final, and there can be no
assurance at this time that the consent decree will be accepted by the
Department of Justice. The Corporation believes that the outcome of this matter
will not have a material adverse effect on the Corporation's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Corporation during the quarter ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE
The Corporation's common stock is traded on the Nasdaq Stock Market
under the symbol "BREL." The following table presents, for the periods
indicated, the high and low sale prices per share of common stock as reported by
the Nasdaq Stock Market.
QUARTER ENDED HIGH LOW
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December 31, 2000 $15.50 $11.25
September 30, 2000 $15.00 $5.00
June 30, 2000 $5.63 $4.25
March 31, 2000 $10.88 $5.00
December 31, 1999 $8.50 $4.50
September 30, 1999 $8.00 $6.25
June 30, 1999 $7.44 $5.88
March 31, 1999 $9.00 $5.75
NUMBER OF STOCKHOLDERS
As of March 13, 2001, there were approximately 233 holders of record
of the Corporation's common stock. Based on a review of its nominee account
listings, the Corporation estimates that there are approximately 582 beneficial
owners of the Corporation's common stock.
DIVIDENDS
The Corporation has never declared or paid any cash dividends on its
common stock, and the Corporation's existing credit facility prohibits the
payment of dividends without the prior consent of the lender. The Corporation
does not anticipate paying any cash dividends in the foreseeable future and
intends to retain future earnings for the development and expansion of its
business.
USE OF PROCEEDS -- INITIAL PUBLIC OFFERING
During 1997, the Corporation received $32.2 million net proceeds from
the initial public offering. The common stock sold in the initial public
offering was registered on registration statement no. 333-25071, which became
effective on July 28, 1997. As of December 31, 2000, the Corporation had used
approximately $17.9 million of the net proceeds from the Corporation's initial
public offering toward
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planning and construction for manufacturing expansion, purchases of laboratory
equipment and information systems hardware and software, and debt repayment.
At December 31, 2000, $8.4 million of the net proceeds from the
initial public offering was invested in government securities, government agency
securities and commercial paper and the balance, $6.1 million, was invested in
money market funds.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the five
years ended December 31, 2000 has been derived from the Corporation's
consolidated financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. The selected consolidated financial data set forth
below should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Corporation's audited consolidated financial statements and
related notes appearing elsewhere in this Report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000
------- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue .............................................. $37,789 $47,949 $50,017 $47,192 $55,894
------- ------- ------- ------- -------
Cost of sales ........................................ 24,860 29,452 29,738 31,056 37,080
Selling, general and administrative
expenses .......................................... 7,852 10,093 13,627 16,126 15,200
Research and development expenses .................... 1,110 1,393 1,438 1,306 1,414
Nonrecurring charge .................................. 696(2) --- --- --- ---
------- ------- ------- ------- -------
Total expenses .............................. 34,518 40,938 44,803 48,488 53,694
------- ------- ------- ------- -------
Income (loss) from operations ........................ 3,271 7,011 5,214 (1,296) 2,200
Interest and other expenses (income), net ............ 816 (67) (842) (161) 104
------- ------- ------- ------- -------
Income (loss) before income taxes .................... 2,455 7,078 6,056 (1,135) 2,096
Provision for (benefit from) income taxes ........... 887 2,974 2,354 (145) 880
------- ------- ------- ------- -------
Net income (loss) .................................... $ 1,568 $ 4,104 $ 3,702 $ (990) $ 1,216
======= ======= ======= ======= =======
Net income (loss) per share (3):
Basic ............................................ $ 4.62 $ 1.19 $ 0.48 $(0.13) $ 0.15
======= ======= ======= ======= =======
Diluted .......................................... $ 0.28 $ 0.60 $ 0.45 $(0.13) $ 0.15
======= ======= ======= ======= =======
Weighted-average common stock outstanding ............ 309 3,458 7,791 7,886 8,072
======= ======= ======= ======= =======
Weighted-average common and common
equivalent shares outstanding (4) ................. 5,679 6,833 8,233 7,886 8,324
======= ======= ======= ======= =======
14
15
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities .......... $2,965 $33,781 $27,097 $18,764 $16,662
Working capital ................... 5,481 38,213 36,031 26,741 25,210
Total assets ...................... 35,934 68,819 77,287 78,941 79,674
Long-term debt .................... 8,982 5,434 7,914 12,546 11,602
Stockholders' equity .............. 14,157 49,899 54,035 52,536 53,721
- ----------
(1) In July 1996, the Corporation acquired all of the shares of common
stock of BIOMEVA GmbH. The acquisition has been accounted for by the
purchase method and, accordingly, BIOMEVA's results of operations
have been included in the consolidated financial statements since the
date of acquisition.
(2) Nonrecurring charge represents a charge of $0.7 million ($0.4 million
after income taxes) in connection with the settlement of a dispute
with a landlord relating to the termination of a lease.
(3) In 1996, net income has been reduced to reflect the assumed dividend
paid to preferred stockholders.
(4) The weighted average common stock outstanding has been reduced by the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the Corporation. See Note 9 of Notes to Consolidated
Financial Statements.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements made in this Report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, which generally are not historical in nature, and may contain the
words "believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result," or similar words or phrases. Forward-looking
statements involve risks and uncertainties which may cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by BioReliance
with the Securities and Exchange Commission, including in its Forms 10-K and
10-Q, and include, but are not limited to, the following:
- general economic and market conditions in the United States and
in other countries in which the Corporation currently does
business;
- the size and growth of the overall markets for
biopharmaceuticals, including the amounts spent on research and
development by biotechnology and pharmaceutical companies;
- technological advances by the Corporation or its competitors;
- changes in laws and regulations in the United States and in
other countries in which the Corporation currently does
business;
- the size, timing and mix of contracts for the Corporation's
products and services;
- the success of the Corporation's new contracts and whether they
will contribute to revenue growth;
- the Corporation's ability to increase revenues in its testing
and development, and manufacturing segments;
- the ability of the Corporation to attract and retain qualified
technical and management personnel;
- seasonal demand for the Corporation's products and services;
- fluctuations and difficulty in forecasting operating results;
- changes in exchange rates in one or more of the Corporation's
geographic segments;
- the ability of the Corporation to sustain, manage or forecast
its growth and utilize its facilities, particularly its new U.S.
manufacturing facility;
- the loss of significant contracts or customers;
- business disruptions and other factors referenced in the above
reports or in this Form 10-K.
As and when made, management believes that these forward-looking
statements are reasonable. The Corporation undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Therefore, readers are cautioned not to place undue reliance on
these forward-looking statements since new risk factors emerge from time to time
and it is not possible for management to predict all such risk factors, nor can
it assess the impact of all such risk factors on the Corporation's business or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
The following discussion and analysis of the Corporation's financial
condition and results of operations should be read in conjunction with the
Corporation's consolidated financial statements and related notes thereto
included elsewhere in this Report.
16
17
OVERVIEW
The Corporation is a leading contract service organization (CSO) that
provides testing and development, and manufacturing services for biologics and
other biomedical products to biotechnology and pharmaceutical companies
worldwide.
The Corporation follows Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information." Under SFAS 131, the Corporation reports the results of two
operating segments: testing and development services and manufacturing services.
The Corporation evaluates the performance of these operating segments based on
revenues and gross profit. The Corporation also reports separately the results
of its U.S. operations and European operations.
The Corporation derived 91.8%, 89.2% and 89.9% of its revenue from
commercial contracts in 1998, 1999 and 2000, respectively, of which 89.0%, 91.2%
and 89.6% were testing and development contracts and 11.0%, 8.8% and 10.4% were
manufacturing contracts, respectively. Commercial contracts are either fixed
price or fixed rate, and their terms range from under a day to three or more
years. Revenue recognized from commercial contracts is predominately accounted
for using the percentage-of-completion method, except for services that are
completed within approximately three days, which are accounted for using the
completed-contract method. Percentage of completion is determined using total
project costs as a cost input measure. The Corporation also follows the guidance
in the Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." No commercial client accounted
for more than 10% of the Corporation's revenue in 2000.
The Corporation derived 8.2%, 10.8% and 10.1% of its revenue from
government contracts in 1998, 1999 and 2000, respectively. Government contracts
generally are cost-plus-fixed-fee and have terms of three to five years. Revenue
from government contracts is recognized in an amount equal to reimbursable costs
plus a pro rata portion of the earned fee. The Corporation derived a significant
portion of this revenue from government contracts that had been set aside for
award to small businesses as defined under government regulations. If the
Corporation continues to grow at a rate similar to its growth rate in 2000,
management estimates that within the next 6 to 12 months the corporation will no
longer be eligible for small business set-aside contracts and grants.
BioReliance enters into several different types of contractual
relationships with its clients. Contracts in the testing and development
business can be quotations, based upon established price lists for individual
services, or work proposals, most often for larger studies composed of a variety
of services. A majority of testing and development contracts range in length
from a few weeks to several months; however, some stability testing and lot
release testing contracts may be one to three years in length. Manufacturing
contracts tend to be relatively long because of the length of time required to
create and characterize cell banks, perform pilot production runs, and produce
and test the products. These contracts require a formal statement of work and
range in length from six months to over two years. Government contracts, usually
multi-year, are consistent with the requirements of the particular granting
agency.
Clients generally are invoiced either as work is completed or, for
contracts in excess of $70,000, with a payment at the commencement of the
services and progress payments based on defined milestones. Contracts may be
terminated for a variety of reasons, including the client's decision to forego a
particular study or to cancel or delay particular product development program,
the failure of a clinical trial or
17
18
unexpected or undesired results of product testing, or by the government for
convenience. Generally, service contracts may be canceled by the client upon
notice, with a partial charge commensurate with the percentage of work completed
at the time of cancellation.
For both testing and development services and manufacturing services,
the major components of cost of sales are labor and related fringe benefits;
facilities, primarily rent or depreciation, utilities and maintenance; direct
materials; overhead costs, such as travel, office expenses and employee-related
expenses; consulting costs and subcontracted costs. Cost of sales includes these
expenses for laboratories directly providing the services and for supporting
services departments, principally regulatory affairs, quality assurance and
quality control. In relative proportion to the total cost of sales, labor and
materials costs are greater and facilities costs are less for testing and
development services than for manufacturing services.
Selling, general and administrative expense consists primarily of
labor and related fringe benefits, administrative materials, travel, legal,
consulting, costs related to managing investor relations, and bad debt expense.
In addition, a portion of facilities and information systems costs are allocated
to general and administrative departments. Research and development expense
consists primarily of labor and related fringe benefits, materials, travel, and
a portion of facilities cost.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
The following table shows a comparison of revenue by operational
segment for the years ended December 31, 1999 and 2000:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1999 2000 % CHANGE
---- ---- --------
Testing and Development $43,328 $50,397 16%
Manufacturing 3,864 5,497 42%
----------------------------------------------
Total $47,192 $55,894 18%
==============================================
The increase in testing and development revenue in 2000 is attributed
primarily to increased orders in both the U.S. and Europe. The increase in U.S.
testing and development revenue results from increases in biosafety testing
services and analytical services. The increase in European testing and
development is attributable to an increase in revenues generated in the U.K.,
partially offset by a decrease in revenues generated in Germany. The Corporation
benefited from the establishment of new client relationships as well as the
strengthening of existing relationships in these areas. Price increases did not
provide a highly significant portion of the revenue increases in either of the
Corporation's business segments.
The increase in manufacturing revenues in 2000 is the result of
significant increases in Europe and, to a lesser extent, an increase in the U.S.
The U.S. increase is primarily attributable to an increase in manufacturing
revenue for both Phase I/II and Phase III services. The increase in Phase III
18
19
manufacturing revenue is a result of the Corporation's opening of its new
manufacturing facility during 2000. Project delays resulting from requirements
for additional process development and other client decisions, prior to
completion of work, adversely affected U.S. manufacturing revenue in the second
half of the year.
During the third quarter of 2000, BioReliance announced its selection
as the principal provider of manufacturing services for a smallpox vaccine for
military purposes and, separately, a teaming agreement to provide large-scale
manufacturing services for a new smallpox vaccine to create a national civil
defense stockpile. During the fourth quarter, the Corporation announced that it
was awarded a contract for the development and production of viral vectors to be
used to test novel gene therapies. These contracts have terms of up to 20 years.
Management expects the revenue from these contracts to grow over each of the
next several years. Accordingly, while BioReliance expects these contracts will
contribute to the Corporation's revenues in 2001, the revenues from these
contracts are likely to be more significant in future years. Work under these
contracts is subject to government-issued task orders and thus the related
revenues cannot be predicted with certainty. Like all government contracts,
these contracts are subject to termination by the government at any time.
The following table shows a comparison of revenue by geographic
region for the years ended December 31, 1999 and 2000:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1999 2000 % CHANGE
---- ---- --------
United States $40,818 $47,824 17%
Europe 6,374 8,070 27%
----------------------------------------------
Total $47,192 $55,894 18%
==============================================
The increase in revenue generated in the United States for the year
ended December 31, 2000 resulted from an increase in orders in both the testing
and development and manufacturing segments. This was achieved in part by having
a full complement of account managers both in the U.S. and Europe. U.S. testing
and development revenue was positively impacted by increased revenue generated
in its toxicology and biosafety laboratories. The increase in manufacturing
revenue can be attributed to growth in orders and the resultant revenue for both
Phase I/II and Phase III services. Price increases did not provide a highly
significant portion of the revenue increases in either of the Corporation's
geographic regions.
The increase in revenue generated in Europe for the year ended
December 31, 2000 reflects increases in both the testing and development and
manufacturing revenue. The increase in testing and development revenue generated
in Europe for year ended December 31, 2000 is related to an increase in testing
and development revenue generated in the U.K., partially offset by a decrease in
testing and development revenue in Germany. During the second quarter of 2000,
the Corporation began the consolidation of German testing and development
services into its Stirling, Scotland (U.K.) operations. European manufacturing
revenue also increased in 2000, as the Corporation benefited from a strong
performance from its manufacturing services in Germany.
19
20
The Corporation expects that testing and development revenue will
continue to increase in the foreseeable future, and it expects that
manufacturing revenue in the U.S. will increase with the Corporation's new
contracts. There can be no assurance that such expectations will prove to be
correct. European manufacturing services are currently running near their
capacity and, therefore, further revenue growth in that segment and region
likely will be modest, if at all, for the next year. These expectations could be
adversely affected by factors noted in the cautionary statements on page 16 and
the risk factors beginning on page 31.
The following table compares gross profit and gross margin by
operational segment for the years ended December 31, 1999 and 2000:
YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1999 2000 % CHANGE
---- ---- --------
Testing and Development
Gross Profit $17,398 $20,677 19%
Gross Margin 40% 41%
Manufacturing
Gross Profit (1,262) (1,863) (48%)
Gross Margin (33%) (34%)
Totals
-----------------------------------------------
Gross Profit $16,136 $18,814 17%
===============================================
Gross Margin 34% 34%
===============================================
The increase in testing and development gross margin for the year
ended December 31, 2000 can be attributed to increased gross profit generated in
both the U.S. and Europe. The increase was partially offset by increases in
costs for labor, fringe benefits, direct materials, depreciation and
non-recurring subcontracting costs related to one development project.
The decrease in margins generated by manufacturing services is
related to an increase in losses generated in U.S. manufacturing partially
offset by an increase in the gross profit generated in Europe. Gross profit
decreased as a result of increased costs for labor, fringe benefits, direct
materials and capacity costs related to the new U.S. manufacturing facility.
20
21
The following table compares gross profit and gross margin by
geographic region for the years ended December 31, 1999 and 2000:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1999 2000 % CHANGE
---- ---- --------
United States
Gross Profit $14,544 $15,511 7%
Gross Margin 36% 32%
Europe
Gross Profit 1,592 3,303 107%
Gross Margin 25% 41%
Totals
----------------------------------------------
Gross Profit $16,136 $18,814 17%
==============================================
Gross Margin 34% 34%
==============================================
The increase in gross profit for the year ended December 31, 2000,
for the United States resulted from increased revenue, partially offset by
increased cost of sales in both testing and development and manufacturing, which
are as discussed above. The improvement in the gross profit for Europe for the
year ended December 31, 2000 can be primarily attributed to improved European
margins in both the testing and development and manufacturing segments,
resulting from increased utilization of capacity and a more favorable revenue
mix.
The Corporation expects margins in testing and development, both in
the U.S. and Europe, to remain the same or improve with economies of scale in
the foreseeable future, and expects manufacturing margins in the U.S. to improve
as capacity is more fully utilized. These projected improvements could be
adversely affected by factors noted in the cautionary statements on page 16 and
the risk factors beginning on page 31.
The following table shows a comparison of operating expenses, other
than cost of sales, for the years ended December 31, 1999 and 2000:
YEARS ENDED
DECEMBER 31,
------------------------------------------
1999 2000 % CHANGE
---- ---- --------
Selling, General and Administrative $16,126 $15,200 ( 6%)
Research and Development 1,306 1,414 8%
------------------------------------------
Total $17,432 $16,614 (5%)
==========================================
The decrease in selling, general and administrative expenses for the
year ended December 31, 2000 is due primarily to a decrease in labor and fringe
costs due to fewer administrative employees and a decrease in the provision for
bad debt expense, partially offset by an increase in consulting expenses.
21
22
Bad debt expense decreased because of an improvement in the accounts receivable
aging resulting from improved and enhanced collection efforts in 2000. The
decrease was partially offset by restructuring expenses of $0.2 million related
to the consolidation of testing and development operations in Germany with U.K.
operations and consulting fees. Selling, general and administrative expenses may
increase as the Corporation implements additional client service applications
for the Corporation's information systems.
Research and development expenses represent the investment of
internal resources to develop new methods and tests to support the Corporation's
services. These expenses have not changed significantly in the periods
presented, but the Corporation expects these expenses to increase modestly with
an accelerated program of new assay development and commercial introductions.
The following table shows a comparison of non-operating expenses for
the years ended December 31, 1999 and 2000:
YEARS ENDED
DECEMBER 31,
-----------------------------
1999 2000
---- ----
Other Expense (Income) $(161) $104
-----------------------------
Income Taxes
Provision (Benefit) $(145) $880
Effective Rate (13%) 42%
-----------------------------
The increase in net interest and other expense for the year ended
December 31, 2000 reflects increases in interest and other expense, partially
offset by an increase in interest income. The increased interest expense can be
attributed to the capital lease arrangements related to the new manufacturing
facility opened during 2000.
The provision for income tax for the year ended December 31, 2000 is
the result of the Corporation's generation of income before income taxes. The
low effective rate in 1999 was the consequence of different accounting treatment
for various tax attributes in periods of net losses. The Corporation expects tax
rates to remain at or below current levels in the foreseeable future, but since
the Corporation has international operations, its effective tax rate may vary
from year to year due to changes in the distribution of its pre-tax earnings.
22
23
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
The following table shows a comparison of revenue by operational
segment for the years ended December 31, 1998 and 1999:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1998 1999 % CHANGE
---- ---- --------
Testing and Development $44,396 $43,328 (2%)
Manufacturing 5,621 3,864 (31%)
----------------------------------------------
Total $50,017 $47,192 (6%)
==============================================
The overall decrease in revenue for the year ended December 31, 1999
can be attributed to a decrease in orders in both segments. The decrease in
testing and development revenue can be attributed to decreased revenue generated
in both the U.S. and Europe. The decrease in testing and development revenue in
the U.S. can be primarily attributed to a decrease in testing services revenue,
partially offset by an increase in development services revenue. Development
services were positively impacted by an increase in biorepository revenue and
revenue from analytical services. The decrease in European testing and
development revenue was primarily the result of a decrease in U.K. testing
services, which was partially offset by an increase in revenue generated from
German testing and development services. U.K. testing and development revenue
was adversely affected by client delays and a decrease in new orders.
The decrease in manufacturing revenue for year ended December 31,
1999 is attributable to decreases in both the U.S. and Europe. The decrease in
U.S. manufacturing revenue is a result of the Company's focus in the first half
of the year on developing new client relationships and operational improvements
and a delay in manufacturing projects at the end of the year. Revenue generated
by European manufacturing operations is attributable to a decrease in German
manufacturing revenues which were adversely impacted by client delays and delays
in obtaining new contracts. The decrease is partially offset by an increase in
manufacturing revenue generated in the U.K.
The following table shows a comparison of revenue by geographic
region for the years ended December 31, 1998 and 1999:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1998 1999 % CHANGE
---- ---- --------
United States $42,291 $40,818 (3%)
Europe 7,726 6,374 (17%)
----------------------------------------------
Total $50,017 $47,192 (6%)
==============================================
23
24
The decrease in revenue generated in the United States for the year
ended December 31, 1999 resulted from decreased revenue in both the testing and
development and manufacturing segments. The decrease in U.S. testing and
development revenue was partially offset by increased revenue from analytical
services and biorepository services discussed above. U.S. manufacturing revenue
decreased as a result of the Company's focus on client relationships and project
delays discussed above.
The decrease in revenue generated in Europe for the year ended
December 31, 1999 reflects decreases in both the testing and development and
manufacturing revenue. Decreases in U.K. testing and development revenue were
partially offset by an increase in revenue generated from German testing and
development. The decrease in European manufacturing revenue is primarily the
result of a decrease in revenue generated in Germany, as discussed above.
The following table compares gross profit and gross margin by
operational segment for the years ended December 31, 1998 and 1999:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1998 1999 % CHANGE
---- ---- --------
Testing and Development
Gross Profit $20,279 $17,398 14%
Gross Margin 46% 40%
Manufacturing
Gross Profit 0 (1,262) N.M.
Gross Margin (00%) (33%)
Totals
----------------------------------------------
Gross Profit $20,279 $16,136 (20%)
==============================================
Gross Margin 41% 34%
==============================================
N.M. = not meaningful
The decrease in gross profit for the year ended December 31, 1999 can
be attributed to decreased revenue from both the testing and development and
manufacturing segments and an increase in cost of sales in the testing and
development segment, partially offset by decreased cost of sales in the
manufacturing segment. The increase in cost of sales is attributable to a shift
in revenue mix leading to increases in direct materials, as well as increases in
labor, fringe benefits and depreciation.
For the year ended December 31, 1999, margins for both segments were
adversely affected by the increase in cost of sales discussed above. Margins for
the manufacturing segment were also particularly affected by the significant
manufacturing revenue decreases from the U.S. and Europe discussed above.
24
25
The following table compares gross profit and gross margin by
geographic region for the years ended December 31, 1998 and 1999:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1998 1999 % CHANGE
---- ---- --------
United States
Gross Profit $17,650 $14,544 (18%)
Gross Margin 42% 36%
Europe
Gross Profit 2,629 1,592 (39%)
Gross Margin 34% 25%
Totals
----------------------------------------------
Gross Profit $20,279 $16,136 (20%)
==============================================
Gross Margin 41% 34%
==============================================
The decrease in the gross profit and the related margins for year
ended December 31, 1999 resulted from decreases in both the U.S. and European
segments. Margins in both geographic segments were adversely affected by
decreased revenue which is discussed above. An increase in cost of sales in the
U.S. contributed to the decreased gross margin. The decrease in European margins
is partially offset by a decrease in cost of sales in Europe for the year ended
December 31, 1999.
The following tables show a comparison of operating expenses, other
than cost of sales, for the years ended December 31, 1998 and 1999:
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1998 1999 % CHANGE
---- ---- --------
Selling, General and Administrative $13,627 $16,126 18%
Research and Development 1,438 1,306 (9%)
----------------------------------------------
Total $15,065 $17,432 16%
==============================================
The increase in selling, general and administrative expenses for the
year ended December 31, 1999 is due primarily to greater facility costs related
to the full year of the Corporation's occupancy of its new combined headquarters
and laboratory facility, completed in the latter half of 1998, as well as
increased depreciation and other expenses related to the Corporation's
investments in an enterprise information system and an increase in the bad debt
allowance. The increase in the bad debt allowance was primarily the result of
the ongoing reviews of customer projects and trade receivables.
25
26
Research and development expenses represent the investment of
internal resources to develop new methods and tests to support the Corporation's
services. These expenses have not changed significantly in the periods
presented.
The following table shows a comparison of non-operating expenses for
the years ended December 31, 1998 and 1999:
YEARS ENDED
DECEMBER 31,
--------------------------------------------
1998 1999 % CHANGE
---- ---- --------
Other Expense (Income) $(842) $(161) (81%)
--------------------------------------------
Income Taxes
(Benefit) Provision $2,354 $(145) N.M.
Effective Rate 39% (13%)
--------------------------------------------
N.M. = not meaningful
The decrease in net interest and other expense for the year ended
December 31, 1999 resulted primarily from a decrease in interest income.
Interest income decreased from $1.9 million in 1998 to $1.1 million in 1999, due
to a decrease in cash, cash equivalents and marketable securities. Interest
expense, net of amounts capitalized, remained relatively constant at $0.6
million in 1998 and 1999.
The benefit from income taxes for the year ended December 31, 1999 is
the result of the Corporation's loss before income taxes. The low effective rate
in 1999 was the consequence of different accounting treatment for various tax
attributes in periods of net losses.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has funded its business through existing cash, cash
flows from operations, long-term bank loans and capital leases. At December 31,
2000, the Corporation had cash, cash equivalents and marketable securities of
$16.7 million, compared to $18.8 million at December 31, 1999.
Marketable securities are composed of investments in government
securities, government agency securities and commercial paper with original
maturities of more than three months at the time of purchase. These marketable
securities totaled $6.5 and $8.4 million at December 31, 1999 and 2000,
respectively.
In 1999 and 2000, the Corporation generated positive net cash flow
from operating activities of $5.8 million and $6.1 million, respectively. In
1998, the Corporation did not generate positive net cash flow from operating
activities. Net income, as adjusted for depreciation and amortization, deferred
income taxes and other non-cash adjustments, provided cash of $8.3 million, $3.1
million and $4.9 million in the years ended December 31, 1998, 1999 and 2000,
respectively. Changes in other assets and liabilities provided cash of $1.1
million in 2000, primarily due to an increase in other accrued liabilities and
customer advances, partially offset by an increase in accounts receivable and a
decrease in accounts payable. In 1999 changes in other assets and liabilities
provided cash of $2.7 million in 1999, primarily due to a decrease in accounts
receivable and an increase in accrued employee compensation and benefits,
26
27
partially offset by decreases in customer advances, other accrued liabilities
and an increase in deposits and other assets.
Working capital decreased slightly to $25.2 million at December 31,
2000, from $26.7 million at December 31, 1999. This decrease was due to a
decrease in current assets and an increase in current liabilities. The decrease
in current assets resulted from a decrease in cash and cash equivalents and
marketable securities, partially offset by an increase in accounts receivable.
The increase in current liabilities is the result of an increase in other
accrued liabilities and customer advances, partially offset by a decrease in
deferred income tax and accounts payable. Additionally, the current portion of
long-term debt decreased as of December 31, 2000 because several of the
Corporation's capital equipment leases expired during the year.
The Corporation leases facilities and equipment under leases that
expire at various dates through 2017 which require the Corporation to make
noncancelable lease payments totaling approximately $29.5 million.
The Corporation's new manufacturing facility in Rockville, Maryland
became operational in the second quarter of 2000. In April 1998, the Corporation
entered into third-party leasing and subleasing arrangements relating to the new
manufacturing facility in Rockville, Maryland. These arrangements require the
Corporation to make noncancelable lease payments totaling approximately $11.9
million over the next eighteen years and to guarantee indebtedness of
approximately $4.6 million. A portion of the lease payments is equivalent to the
interest and principal due on the indebtedness. In February 2001, the
Corporation entered into an interest rate swap with respect to one of those
leases whereby the variable interest rate portion of the indebtedness was
effectively converted into debt with a fixed rate of 6.14% per annum. This swap
expires on November 1, 2009. The terms of the arrangements require the
Corporation to account for the leases and subleases of the manufacturing
facility as capital leases. The assets underlying the capital leases are
included with the Corporation's owned property and equipment as of December 31,
2000. Property and equipment, net of accumulated depreciation and amortization
at December 31, 2000 included approximately $10.0 million related to these
capital leases. The related lease obligation is included in the Corporation's
liabilities at December 31, 2000.
The build-out and validation of the new U.S. manufacturing facility
has demanded and will continue to demand considerable time and resources. The
Corporation is utilizing substantially less than full capacity in this building.
This operation will likely constrain earnings for the Corporation at least
through the second quarter of 2001. Management cannot predict when, if ever, the
facility will generate positive cash flow.
During 2000, the Corporation invested approximately $7.1 million in
capital expenditures. These expenditures were primarily related to leasehold
improvements and equipment for the new manufacturing facility. The Corporation
invested $5.9 million and $15.3 million in capital expenditures during 1998 and
1999, respectively. The Corporation acquired additional capital assets under
capital lease agreements of $7.1 million and $0.4 million in 1998 and 1999,
respectively.
At December 31, 2000, the Corporation had commitments to spend
approximately $0.6 million in capital expenditures for leasehold improvements
and laboratory equipment.
The Corporation expects to continue expanding its operations through
internal growth, geographic expansion and possibly strategic acquisitions. The
Corporation expects to fund its growth and its planned capital expenditures from
existing cash, cash flows from operations, bank borrowings and
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lease or other financing from third-party sources to the extent that funds are
available on favorable terms and conditions. Although the Corporation has no
agreements or arrangements in place with respect to any future acquisition,
there may be acquisition or other growth opportunities that require additional
external financing, and the Corporation may, from time to time, seek to obtain
funds from public or private issuances of equity or debt securities on a
strategic basis. There can be no assurances that such financing will be
available on terms acceptable to the Corporation. See Notes 5 and 10 of Notes to
the Consolidated Financial Statements.
Based on its current operating plan, the Corporation believes that
available liquid resources are sufficient to meet its operational and other
foreseeable cash needs for at least the next twelve months.
BORROWINGS AND CREDIT FACILITIES
In 1994, the Corporation obtained a mortgage loan of $4.3 million
from Bank of America with a maturity date of November 30, 1999 (the Mortgage
Loan). The Mortgage Loan was renewed in December 1999 and matures in November
2009. The Mortgage Loan requires a monthly principal payment of $10,576 per
month, and bears interest at the London Inter-Bank Offering Rate (LIBOR) plus
the applicable LIBOR Rate Additional Percentage (LIBOR Rate Option). The LIBOR
Rate Option ranges from 1.00% to 2.15% depending on the Corporation achieving
funded debt to EBITDA ratios. At December 31, 2000, the applicable interest rate
on the Mortgage Loan was 8.79% and the LIBOR Rate Option was 2.15%.
Approximately $2.4 million was outstanding on the Mortgage Loan at December 31,
2000.
From 1995 to 1999, the Corporation had in place an interest rate swap
whereby the variable interest rate portion of the Mortgage Loan was effectively
converted into debt with a fixed rate of 6.55% per annum. This swap expired on
November 30, 1999. Amounts paid or received under the interest rate swap were
recognized as interest income or expense in the periods in which they accrued
and were recorded in the same category as that arising from the Mortgage Loan.
The Corporation believes that the effect of the interest rate swap on interest
expense was not material in 1998 or 1999.
In February 2001, the Corporation entered into a new interest rate
swap whereby the variable interest rate portion of the Mortgage Loan was
effectively converted into debt with a fixed rate of 6.14% per annum. This swap
expires November 1, 2009.
The Corporation has available borrowings up to $2.0 million under the
terms of a revolving loan agreement with Bank of America. The revolving loan
agreement requires monthly interest payments on the unpaid principal. The loan
matures on May 31, 2001, and the line of credit expires at that time. Amounts
borrowed under the revolving loan agreement bear interest at the LIBOR rate plus
the applicable LIBOR Rate option which ranges from 0.85% to 2.00% depending on
the Corporation achieving funded debt to EBITDA ratios. There were no borrowings
under this agreement in 1999 or 2000.
The Corporation financed the acquisition of BioReliance Manufacturing
GmbH (formerly known as BIOMEVA) in July 1996 and obtained additional funds for
working capital and expansion of its business through a promissory note with
Bank of America in the amount of $1.8 million. The note requires monthly
principal payments of $30,000, and bears interest at the same rate as the
Mortgage Loan. At December 31, 2000, $0.3 million was outstanding on the note,
and the interest rate on the note was 8.79%. The note matures on June 30, 2001.
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All of the Corporation's agreements with Bank of America are cross
collateralized and are secured by a deed of trust on one of the Corporation's
laboratory facilities in Rockville, Maryland. The agreements require the
Corporation to comply with financial and restrictive covenants, including fixed
charge coverage and funded debt to EBITDA ratios. Specifically:
- Maintain a ratio of total funded indebtedness to EBITDA
not greater than 3.50 to 1.00 as of the end of each fiscal
quarter, calculated on the preceding four quarter period.
For the fiscal quarter ended December 31, 2000, this ratio
was based on the preceding three quarter period on an
annualized basis. EBITDA is defined as earnings before
interest, taxes, depreciation and amortization.
- Maintain a fixed charge coverage ratio as of the end of
each quarter of at least 1.25 to 1.00. This ratio is
determined by dividing EBITDA by the sum of interest
expense and current-maturities of long-term debt and
capital leases.
At December 31, 2000, the Corporation was in compliance with all
covenants under its loan agreements.
On July 1, 1999, the Corporation received the proceeds of a
$3,000,000 loan from the Department of Business and Economic Development, a
department of the State of Maryland. The Corporation is required to use the
proceeds to expand and relocate its activities in Rockville, Maryland. The loan
requires quarterly principal payments of $107,143 plus accrued interest and
matures on June 30, 2006. The loan bears interest at rates ranging from 0% to
7.5% based on the Corporation's achieving specific employment levels over the
next six years. There is currently no interest being charged on this loan. The
terms of the loan contain annual reporting requirements, including the reporting
of employment data. At December 31, 2000, approximately $2.4 million was
outstanding on the loan.
FOREIGN CURRENCY
The accounts of the Corporation's international subsidiaries are
measured using local currency as the functional currency. Assets and liabilities
of these subsidiaries are translated into United States dollars at period-end
exchange rates, and revenue and expense accounts are translated at average
monthly exchange rates. Net exchange gains and losses resulting from these
translations are excluded from net income and are accumulated in a separate
component of stockholders' equity. Translation gains and losses that arise from
some intercompany transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred. The
Corporation recorded net exchange losses of $0.7 million and $0.4 million for
the years ended December 31, 1999 and 2000, respectively.
Since the revenues and expenses of the Corporation's international
operations generally are denominated in local currencies, exchange rate
fluctuations between such local currencies and the United States dollar will
subject the Corporation to currency translation risk with respect to the
reported results of its international operations as well as to other risks
sometimes associated with international operations. The Corporation derived
15.5%, 13.5% and 14.4% of its revenue for 1998, 1999 and 2000, respectively,
from services performed outside of the United States. In addition, the
Corporation may be subject to currency risk when the Corporation's service
contracts are denominated in a currency other than the currency in which the
Corporation incurs expenses related to such contracts.
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There can be no assurance that the Corporation will not experience
fluctuations in financial results from the Corporation's operations outside the
United States, and there can be no assurance the Corporation will be able,
contractually or otherwise, to reduce the currency risks associated with its
operations. At the present time, the Corporation does not use derivative
financial instruments to manage or control foreign currency risk because most of
its revenue and related expenses are in the same functional currencies. However,
there can be no assurance that the Corporation will not use such financial
instruments in the future or that any such use will be successful in managing or
controlling foreign currency risk. See "Item 7A -- Market Risk."
The revenue and identifiable assets attributable to the Corporation's
geographic regions are reported in Note 11 of Notes to Consolidated Financial
Statements.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the EMU)
introduced a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as
their local currency, initially available for currency trading on currency
exchanges and non cash (banking) transactions. On or before July 1, 2002, the
participating countries are planned to withdraw all legacy currency and use the
Euro exclusively. The introduction of the Euro has not had a material adverse
effect on the Corporation, and it does not anticipate any material adverse
effects as other currencies are phased out. However, unforeseen legislation,
changes in commercial cross-border practices or a significant devaluation of
the Euro could have an adverse effect on the future results of operations and
financial position of the Corporation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS 133 is
effective for years beginning after June 15, 1999, with earlier adoption
permitted. On July 8, 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" (SFAS 137). SFAS No. 137 defers the effective date of
SFAS 133 until fiscal years beginning after June 15, 2000. The adoption of SFAS
137, as further amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," is not expected to have a material
effect on the Corporation's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of the SEC staff's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective for the year beginning January 1, 2000. In March 2000, the
SEC issued SAB 101A. This guidance defers the effective date of SAB 101 until
the fiscal quarter ending June 30, 2000, and permits a change that may result
from the application of this guidance to be reported as a
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change in accounting principle. In June 2000, the SEC issued SAB 101B. SAB 101B
delays the implementation date of SAB 101 until no later than the fourth fiscal
quarter of fiscal quarters beginning after December 15, 1999. The adoption of
this guidance has not had a material impact on the Corporation's results of
operations or financial position.
RISK FACTORS
The business and future operating results of BioReliance could differ
materially from the descriptions in this Report due to the risks discussed below
and elsewhere in this Report.
DEPENDENCE ON OUTSOURCING FOR DEVELOPMENT OF BIOLOGICS; MARKET ACCEPTANCE OF
BIOLOGICS
The Corporation's revenues are highly dependent on research,
development and manufacturing expenditures by biotechnology and pharmaceutical
companies for the development of biologics. The Corporation has benefited to
date from the growing tendency of biotechnology and pharmaceutical companies to
outsource product development projects to CSOs. A decline in the development of
biologics, a general decline in research and development expenditures by these
companies, or a delay or reduction in the outsourcing to CSOs of research and
development expenditures due to market conditions, pharmaceutical industry
consolidation or other factors could have a material adverse effect on the
Corporation's business and results of operations.
The Corporation's business strategy is dependent upon market
acceptance of biologics. The market for biologics is still emerging, and most
biologic products are still in the research and development stage. The extent to
which biologics are accepted in commercial markets will affect the Corporation's
business, results of operations and financial condition.
SIGNIFICANT CAPITAL EXPENDITURES
During 2000, the Corporation invested $7.1 million in capital
expenditures primarily related to completion of its new U.S. manufacturing
facility for a total investment in the facility of $25.1 million, and may spend
up to $7.0 million on capital expenditures during 2001. Management cannot
predict when, if ever, its new manufacturing facility will generate positive
cash flow. There is a risk that the return on these capital expenditures may be
less than expected.
RISKS ASSOCIATED WITH THE NATURE OF CONTRACTS
Most of the Corporation's contracts are short-term in duration. As a
result, the Corporation must continually replace its contracts with new
contracts to sustain its revenue. The Corporation's inability to generate new
contracts on a timely basis would have a material adverse effect on its
business, financial condition and results of operations.
In addition, many of the Corporation's long-term contracts may be
cancelled or delayed by clients for any reason upon notice. Contracts may be
terminated for a variety of reasons, including termination of product
development, failure of products to satisfy safety requirements, unexpected or
undesired results from use of the product or the client's decision to forego a
particular study. Such terminations are somewhat common in the CSO industry, and
have affected the Corporation's revenues in the past. The failure to obtain new
contracts or the cancellation or delay of existing contracts could have a
material adverse effect on the Corporation's business and results of operations.
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GOVERNMENT CONTRACTS MAY BE TERMINATED
During fiscal 2000, approximately 10.1% of the Corporation's revenues
were from government contracts. A government contract may be modified or
terminated at any time for the convenience of the government, including for
changes in requirements or reductions in budgetary resources. Any termination of
our government contracts, particularly our newly-awarded contracts would have a
material adverse effect on our future revenues.
REVENUES DIFFICULT TO PREDICT
The Corporation's revenues are difficult to predict because they are
primarily generated on a contract-by-contract basis. Most of the contracts are
short-term, and may be canceled at any time. Consequently, the Corporation does
not have a significant backlog. As a result, the Corporation's revenues are not
recurring from period to period, which contributes to the variability of results
from period to period.
VARIATION IN QUARTERLY OPERATING RESULTS; HIGH FIXED COSTS
The Corporation's revenues and operating results have fluctuated, and
could continue to fluctuate, on a quarterly basis. The operating results for a
particular quarter may be lower than expected as a result of a number of
factors, including the timing of contracts; the delay or cancellation of a
contract; the mix of services provided; seasonal slowdowns in Europe during the
summer months; the timing of start-up expenses for new services and facilities;
and changes in regulations related to biologics. Because a high percentage of
the Corporation's costs are fixed (such as the cost of maintaining facilities
and compensating employees), any one of these factors could have a significant
impact on the Corporation's quarterly results. In some quarters the
Corporation's revenues and operating results may fall below the expectations of
securities analysts and investors due to any of the factors described above. In
such event, the trading price of the Corporation's common stock would likely
decline, even if the decline in revenues did not have any long-term adverse
implications for the Corporation's business.
MANAGEMENT OF GROWTH
The Corporation's operations - both domestic and international - have
grown in recent years. This growth has placed a strain on the Corporation's
management, operational, human and financial resources. In order to manage its
growth, the Corporation must continue to improve its operating and
administrative systems, including its financial and accounting systems, and
continue to attract and retain qualified management and professional, scientific
and technical operating personnel. There can be no assurance that the
Corporation will be able to manage its growth effectively. Any failure to
effectively anticipate, implement and manage the changes required to sustain its
growth could have a material adverse effect on the Corporation's business and
results of operations.
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DEVELOPMENT OF MANUFACTURING CAPABILITIES
As part of its business strategy, the Corporation had expanded its
manufacturing capabilities to allow for large-scale production of biologics.
There can be no assurance that the Corporation will be able to develop revenue
from these expanded capabilities on acceptable terms, find clients for any
manufacturing capacity it may further develop or operate any expanded
manufacturing capabilities on a profitable basis.
COMPETITION; INDUSTRY CONSOLIDATION
The Corporation operates in a highly competitive industry. The CSO
industry is highly fragmented, with many providers ranging in size from one
person consulting firms to full-service global drug development corporations.
The Corporation primarily competes with in-house research departments of
biotechnology and pharmaceutical companies, universities and medical centers,
and other CSOs.
As a result of competitive pressures, the industry is consolidating.
Mergers and acquisitions have resulted in the emergence of several large,
full-service CSOs that have greater capital, technical and financial resources
than BioReliance. As pharmaceutical and biotechnology companies increasingly
outsource development, they may increasingly turn to larger CSOs that provide a
full range of services. This trend is likely to produce increased competition
among the larger CSOs for both clients and acquisition candidates and increased
competitive pressures on smaller providers. In addition, the CSO industry has
attracted the attention of the investment community, which could lead to
heightened competition by increasing the availability of financial resources for
CSOs. Increased competition may lead to price and other forms of competition
that may have a material adverse effect on the Corporation's business and
results of operations.
DEPENDENCE ON PERSONNEL
The Corporation depends on a number of key executives, including
Capers W. McDonald, its President and Chief Executive Officer. The loss of the
services of any of the Corporation's key executives could have a material
adverse effect on the Corporation's business. The Corporation also depends on
its ability to attract and retain qualified scientific and technical employees.
There is a significant shortage of, and intense competition for, qualified
scientific and technical employees. There can be no assurance the Corporation
will be able to retain its existing scientific and technical employees, or to
attract and retain additional qualified employees. The Corporation's inability
to attract and retain qualified scientific and technical employees would have a
material adverse effect on the Corporation's business and results of operations.
POTENTIAL LIABILITY
The Corporation formulates, tests and manufactures products intended
for use by the public. In addition, the Corporation's services include the
manufacture of biologic products to be tested in human clinical trials. These
activities could expose the Corporation to risk of liability for personal injury
or death to persons using such products, although the Corporation does not
commercially market or sell the products to end users. The Corporation seeks to
reduce its potential liability through measures such as contractual
indemnification provisions with clients (the scope of which may vary from
client-to-client, and the performances of which are not secured) and insurance
maintained by clients. The Corporation could be materially and adversely
affected if it were required to pay damages or incur defense costs in connection
with a claim that is outside the scope of the indemnification agreements, if the
indemnity,
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although applicable, is not performed in accordance with its terms or if the
Corporation's liability exceeds the amount of applicable insurance or indemnity.
In addition, the Corporation could be held liable for errors and omissions in
connection with the services it performs. The Corporation currently maintains
product liability and errors and omissions insurance with respect to these
risks. There can be no assurance that the Corporation's insurance coverage will
be adequate or that insurance coverage will continue to be available on terms
acceptable to the Corporation.
HAZARDOUS MATERIALS
The Corporation's activities involve the controlled use of etiologic
agents, hazardous chemicals and various radioactive materials. The Corporation
is subject to foreign, federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of any
contamination or injury from these materials, the Corporation could be held
liable for any damages that result, including joint and several liabilities
under certain statutes such as CERCLA, and any such liability could exceed the
resources of the Corporation. Furthermore, the failure to comply with current or
future regulations could result in the imposition of substantial fines against
the Corporation, suspension of production, alteration of its manufacturing
processes or cessation of operations. There can be no assurance that the
Corporation will not be required to incur significant costs to comply with any
such laws and regulations in the future, or that such laws or regulations or
liability thereunder will not have a material adverse effect on the
Corporation's business and results of operations.
DEPENDENCE ON AND EFFECT OF GOVERNMENT REGULATION
The design, development, testing, manufacturing and marketing of
biotechnology and pharmaceutical products are subject to regulation by
governmental authorities, including the FDA and comparable regulatory
authorities in other countries. The Corporation's business depends in part on
strict government regulation of the drug development process, especially in the
United States. Legislation may be introduced and enacted from time to time to
modify regulations administered by the FDA governing the drug approval process.
Any significant reduction in the scope of regulatory requirements or the
introduction of simplified drug approval procedures could have a material
adverse effect on the Corporation's business and results of operations.
All of the Corporation's testing assays are performed in conformity
with either GLP regulations or current GMP regulations. GLPs and GMPs are parts
of the FDA regulations and guidelines governing the development and production
of biologic and pharmaceutical products. Failure by the Corporation to comply
with applicable requirements could result in the disqualification of data for
client submissions to regulatory authorities and could have a material adverse
effect on the Corporation's business and results of operations.
All facilities and manufacturing techniques used for manufacturing of
products for clinical use or for sale in the United States must be operated in
conformity with current GMP regulations. The Corporation's facilities are
subject to scheduled periodic regulatory inspections to ensure compliance with
GMP requirements. A finding that the Corporation had materially violated GMP
requirements could result in regulatory sanctions, the disqualification of data
for client submissions to regulatory authorities and a mandated closing of the
Corporation's facilities. Any such sanctions would have a material adverse
effect on the Corporation's business and results of operations. See "Business --
Government Regulation."
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CONTROL BY EXISTING STOCKHOLDERS
As of March 1, 2001, Sidney R. Knafel, Chairman of the Board of
Directors of the Corporation, and related persons beneficially own an aggregate
of approximately 39.2% of the outstanding common stock. The Corporation's
executive officers, directors and related persons (including Sidney R. Knafel)
beneficially own an aggregate of approximately 42.8% of the outstanding common
stock (excluding shares issuable upon the exercise of options). As a result, the
Corporation's directors and executive officers and related persons may exercise
a controlling influence over the outcome of matters submitted to the
Corporation's stockholders for approval and may have the power to delay, defer
or prevent a change in control of the Corporation.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Corporation's common stock has experienced a
high degree of volatility. The market price of the common stock could be subject
to wide fluctuations in response to variations in operating results from quarter
to quarter, changes in earnings estimates by analysts, market conditions in the
industry and general economic conditions. Furthermore, the stock market has
experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. These market fluctuations may have an
adverse effect on the market price of the Corporation's common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MARKET RISK
The Corporation is exposed to market risk from adverse changes in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
The Corporation is exposed to interest rate risk primarily through
its investments in short-term marketable securities and cash equivalents and its
debt agreements. The Corporation's investment policy calls for investment in
short-term, low risk instruments. At December 31, 2000, the Corporation had $8.4
million invested in government securities, governmental agency securities, and
commercial paper. A rise in interest rates would have an adverse impact on the
fair market value of fixed rate securities. If interest rates fall, floating
rate securities may generate less interest income. The Corporation manages its
exposure to interest rate risks through investing in securities with maturities
of one year or less.
Additionally, the Corporation is exposed to risk from changes in
interest rates as a result of its borrowing activities. At December 31, 2000,
the Corporation had total debt of $12.7 million. The Corporation's debt consists
of a mortgage loan with approximately $2.4 million outstanding; a promissory
note with approximately $0.3 million outstanding; a State of Maryland loan with
approximately $2.4 million outstanding; and capital lease obligations of
approximately $7.6 million outstanding. See Note 5 of Notes to Consolidated
Financial Statements.
The Corporation partially managed its exposure to losses through an
interest rate swap related to the Mortgage Loan which expired on November 30,
1999. In February 2001, the Corporation entered into a new interest rate swap,
whereby the variable interest rate portion of the Mortgage Loan was effectively
converted into debt with a fixed rate of 6.14% per annum. The Corporation also
entered into a
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separate interest rate swap whereby the variable interest rate portion of the
indebtedness relating to a capital lease for the new manufacturing facility was
also converted into debt with a fixed rate of 6.14%. Both agreements expire on
November 1, 2009.
FOREIGN CURRENCY EXCHANGE RISK
The Corporation's international operations are subject to foreign
exchange rate fluctuations. The Corporation derived 14.4%, 13.5% and 15.5% of
its revenue for 2000, 1999 and 1998, respectively, from services performed in
the United Kingdom and Germany. Since the revenue and expenses of the
Corporation's international operations generally are denominated in local
currencies, exchange rate fluctuations between such local currencies and the
United States dollar will subject the Corporation to currency translation risk
with respect to the reported results of its foreign operations as well as to
risks sometimes associated with international operations. In addition, the
Corporation may be subject to currency risk when its service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts. The United Kingdom and Germany have
traditionally had relatively stable currencies. The Corporation does not hedge
its foreign currency exposure. Management does not believe that the
Corporation's exposure to foreign currency rate fluctuations is material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Corporation are listed in the Index to Financial Statements and Financial
Statement Schedules appearing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to
the information to be set forth under the caption "Executive Officers of the
Registrant" in the Corporation's definitive proxy statement, which is expected
to be filed with the Securities and Exchange Commission within 120 days after
the close of the Corporation's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to
the information to be set forth under the caption "Executive Compensation" in
the Corporation's definitive proxy statement, which is expected to be filed with
the Securities and Exchange Commission within 120 days after the close of the
Corporation's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated by reference to
the information to be set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Corporation's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Corporation's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the information to be set forth under the caption "Certain
Relationships and Related Transactions" in the Corporation's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Corporation's fiscal year.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The financial statements and financial statement schedule required to
be filed as part of this Report are listed in the Index to Consolidated
Financial Statements elsewhere in this Report, which list is incorporated herein
by reference.
EXHIBITS
The documents required to be filed as exhibits to this Report under
Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in
this Report, which list is incorporated herein by reference.
REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER
The Corporation did not file any reports on Form 8-K during the
quarter ended December 31, 2000.
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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, in Rockville,
Maryland, on this 28th day of March, 2001.
BIORELIANCE CORPORATION
(Registrant)
By: s/Capers W. McDonald
--------------------
Name: Capers W. McDonald
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Capers W. McDonald and John L. Coker, and
each of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities to sign any and all amendments
to this Report, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
39
40
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.
SIGNATURE TITLE DATE
--------- ----- ----
s/Sidney R. Knafel Chairman of the Board March 28, 2001
------------------------------------------------------------
SIDNEY R. KNAFEL
s/Capers W. McDonald
------------------------------------------------------------ President, Chief Executive March 28, 2001
CAPERS W. MCDONALD Officer and Director
s/John L. Coker
------------------------------------------------------------ Vice President, Finance and March 28, 2001
JOHN L. COKER Administration; Chief Financial
Officer and Treasurer (Chief
Accounting Officer)
s/William J. Gedale Director March 28, 2001
------------------------------------------------------------
WILLIAM J. GEDALE
Director
------------------------------------------------------------
VICTORIA HAMILTON
s/Gordon J. Louttit Director March 28, 2001
------------------------------------------------------------
GORDON J. LOUTTIT
s/Leonard Scherlis Director March 28, 2001
------------------------------------------------------------
LEONARD SCHERLIS, M.D.
40
41
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
3.1 Amended and Restated Certificate of Incorporation of BioReliance
Corporation (incorporated by reference to Exhibit 3.1 to the
Corporation's Registration Statement on Form S-1 (Registration No.
333-25071))
3.2 Bylaws of BioReliance Corporation (incorporated by reference to Exhibit
3.2 to the Corporation's Registration Statement on Form S-1
(Registration No. 333-25071))
10.1 BioReliance Corporation 1997 Incentive Stock Plan (as adopted May 28,
1997 and amended and restated September 24, 1997 and May 21, 1998)
(incorporated by reference to Exhibit 10.32 to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.2 Modification Agreement -- Leasehold Deed of Trust and Security
Agreement, dated as of December 1, 1994, by and among NationsBank, N.A.,
Kathleen M. Malloy and Microbiological Associates, Inc. (incorporated by
reference to Exhibit 10.2 to the Corporation's Registration Statement on
Form S-1 (Registration No. 333-25071))
10.3 Security Agreement, dated as of December 17, 1993, by and between
Maryland National Bank, Microbiological Associates, Inc. and
Microbiological Associates Limited (incorporated by reference to Exhibit
10.3 to the Corporation's Registration Statement on Form S-1
(Registration No. 333-25071))
10.4 Second Modification Agreement -- Leasehold Deed of Trust and Security
Agreement, dated as of October 31, 1997, by and among BioReliance
Corporation, Elizabeth Shore and NationsBank, N.A. (incorporated by
reference to Exhibit 10.4 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1997)
10.5 Leasehold Deed of Trust and Security Agreement, dated December 17, 1993,
by and between Microbiological Associates, Inc., Kathleen M. Malloy,
Brent H. Donnell and Maryland National Bank (incorporated by reference
to Exhibit 10.5 to the Corporation's Registration Statement on Form S-1
(Registration No. 333-25071))
10.6 International Swap Dealers Association, Inc. Master Agreement, dated as
of May 10, 1995, by and among NationsBank, N.A., Microbiological
Associates, Inc. and MAGENTA Corporation (incorporated by reference to
Exhibit 10.6 to the Corporation's Registration Statement on Form S-1
(Registration No. 333-25071))
10.7 Note Modification Agreement, dated as of October 31, 1997, by and among
NationsBank, N.A., BioReliance Corporation, MA BioServices, Inc.,
MAGENTA Corporation and MAGENTA Viral Production, Inc. (incorporated by
reference to Exhibit 10.7 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1997)
41
42
10.8 Lease Agreement, dated as of December 1, 1983, by and between Montgomery
County, Maryland and Dynasciences Corp. n/k/a BioReliance Corporation
(incorporated by reference to Exhibit 10.8 to the Corporation's
Registration Statement on Form S-1 (Registration No. 333-25071))
10.9 Lease Agreement, dated as of October 31, 1994, as amended December 20,
1994, between Redgate III Limited Partnership, as landlord, and
Microbiological Associates, Inc., as tenant (incorporated by reference
to Exhibit 10.9 to the Corporation's Registration Statement on Form S-1
(Registration No. 333-25071))
10.10 Modification of Loan Agreement, dated as of May 31, 1996, among
NationsBank, N.A., Microbiological Associates, Inc., Microbiological
Associates Limited, MAGENTA Corporation and MAGENTA Services Ltd.
(incorporated by reference to Exhibit 10.10 to the Corporation's
Registration Statement on Form S-1 (Registration No. 333-25071))
10.11 Deed of Trust Note Modification Agreement, dated as of October 31, 1997,
by and among NationsBank, N.A., BioReliance Corporation, MA BioServices,
Inc., MAGENTA Corporation and MAGENTA Viral Production, Inc.
(incorporated by reference to Exhibit 10.11 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997)
10.12 Amended and Restated Replacement Loan Agreement, dated as of October 31,
1997, among NationsBank, N.A., BioReliance Corporation, MA BioServices,
Inc., MAGENTA Corporation and MAGENTA Viral Production, Inc.
(incorporated by reference to Exhibit 10.12 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997)
10.13 Microbiological Associates, Inc. 1995 Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.13 to the Corporation's
Registration Statement on Form S-8 (Registration No. 333-34341))
10.14 MAGENTA Corporation, 1994 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.14 to the Corporation's Registration Statement
on Form S-8 (Registration No. 333-34341))
10.15 Microbiological Associates, Inc., 1988 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.15 to the Corporation's
Registration Statement on Form S-8 (Registration No. 333-34341))
10.16 Lease Agreement, dated as of October 16, 1997, between FP Rockledge,
L.L.C. and MA BioServices, Inc. (incorporated by reference to Exhibit
10.16 to the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997)
10.17 First Amendment to Lease Agreement, dated as of February 12, 1998,
between FP Rockledge, L.L.C. and MA BioServices, Inc. (incorporated by
reference to Exhibit 10.17 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1997)
10.18 Consent of Guarantor, dated as of February 12, 1998, to First Amendment
to Lease Agreement (incorporated by reference to Exhibit 10.18 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997)
42
43
10.19 Replacement Revolving Promissory Note, dated as of October 31, 1997, by
and among BioReliance Corporation, MA BioServices, Inc., MAGENTA
Corporation, MAGENTA Viral Production, Inc. and NationsBank, N.A.
(incorporated by reference to Exhibit 10.20 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997)
10.20 Lease-Purchase Agreement, dated April 1, 1998, between Montgomery
County, Maryland and BioReliance Corporation (incorporated by reference
to Exhibit 10.21 to the Corporation's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998)
10.21 Lease, dated April 1, 1998, between BioReliance Corporation and BPG
Industrial Partners II, LLC. (incorporated by reference to Exhibit 10.22
to the Corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998)
10.22 Project Lease, dated April 1, 1998, between BPG Industrial Partners II,
LLC and MAGENTA Corporation (incorporated by reference to Exhibit 10.23
to the Corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998)
10.23 Leasehold Deed of Trust, dated April 1, 1998, by BioReliance Corporation
and MAGENTA Corporation, to Cynthia Flanders and Eileen Chow (trustees)
and NationsBank, N.A. (incorporated by reference to Exhibit 10.24 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998)
10.24 Guaranty Agreement, dated April 1, 1998, by BioReliance Corporation in
favor of NationsBank, N.A. (incorporated by reference to Exhibit 10.25
to the Corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998)
10.25 Loan Agreement, dated April 1, 1998, between BPG Industrial Partners II,
LLC, NationsBank, N.A. and, for certain purposes, BioReliance
Corporation (incorporated by reference to Exhibit 10.26 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998)
10.26 First Amendment to Amended and Restated Replacement Loan Agreement,
dated April 1, 1998, among BioReliance Corporation, MA BioServices,
Inc., MAGENTA Corporation, MAGENTA Viral Production, Inc. and
NationsBank, N.A. (incorporated by reference to Exhibit 10.27 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998)
10.27 Second Note Modification Agreement, dated April 1, 1998, among
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation,
MAGENTA Viral Production, Inc. and NationsBank, N.A. (incorporated by
reference to Exhibit 10.28 to the Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998)
10.28 Second Deed of Trust Note Modification, dated April 1, 1998, among
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation,
MAGENTA Viral Production, Inc. and NationsBank, N.A. (incorporated by
reference to Exhibit 10.29 to the Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998)
10.29 Second Replacement Revolving Promissory, dated April 1, 1998, by
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation and
MAGENTA Viral Production, Inc. in favor of NationsBank, N.A. in the
amount of $1 million (incorporated by reference to Exhibit 10.30 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998)
43
44
10.30 Third Modification Agreement - Leasehold Deed of Trust and Security
Agreement, dated April 1, 1998, among BioReliance Corporation, Elizabeth
Shore (trustee) and NationsBank, N.A. (incorporated by reference to
Exhibit 10.31 to the Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998)
10.31 Promissory Note, dated May 10, 1999, by James Nelson Harris and
BioReliance Corporation (incorporated by reference to Exhibit 10.34 to
the Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999)
10.32 Loan Agreement, dated June 28, 1999, by and between Department of
Business and Economic Development, a principal department of the State
of Maryland and BioReliance Corporation (incorporated by reference to
Exhibit 10.35 to the Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999)
10.33 Note Modification Agreement, dated June 11, 1999, by and between
NationsBank, N.A. and BioReliance Corporation, BioReliance Testing and
Development, Inc., BioReliance Manufacturing, Inc. and Magenta Viral
Production, Inc. (incorporated by reference to Exhibit 10.36 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999)
10.34 Note Modification Agreement, dated July 27, 1999, by and between
NationsBank, N.A. and BioReliance Corporation, BioReliance Testing and
Development f/k/a MA BioServices, Inc., BioReliance Manufacturing, Inc.
f/k/a Magenta Corporation and Magenta Viral Production, Inc.
(incorporated by reference to Exhibit 10.37 to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.35 Contractor Agreement, dated June 30, 1999, by and between The
Whiting-Turner Contracting Company and BioReliance Corporation
(incorporated by reference to Exhibit 10.38 to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)
10.36 Third Deed of Trust Note Modification Agreement, dated November 30,
1999, by and between Bank of America, N.A. and BioReliance Corporation,
BioReliance Testing and Development, Inc., BioReliance Manufacturing,
Inc. and MAGENTA Viral Production, Inc. (incorporated by reference to
Exhibit 10.39 to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999)
10.37 Second Amendment to Amended and Restated Replacement Loan Agreement,
dated December 30, 1999, by and between Bank of American, N.A. and
BioReliance Corporation, BioReliance Testing and Development, Inc.,
BioReliance Manufacturing, Inc. and MAGENTA Viral Production, Inc.
(incorporated by reference to Exhibit 10.40 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999)
44
45
10.38 Fourth Replacement Revolving Promissory Note, dated December 30, 1999,
by and between Bank of American, N.A. and BioReliance Corporation,
BioReliance Testing and Development, Inc., BioReliance Manufacturing,
Inc. and MAGENTA Viral Production, Inc. (incorporated by reference to
Exhibit 10.41 to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999)
10.39 Employment Agreement, dated December 2, 1999, by and between John E.
McEntire, Ph.D. and BioReliance Corporation (incorporated by reference
to Exhibit 10.42 to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999)
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on signature page).
45
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL SCHEDULE
PAGE
Report of Independent Accountants...................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000........................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1999 and 2000........................................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1999 and 2000........................................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December
31, 1998, 1999 and 2000.............................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
Financial Statement Schedule:
For the Three Years Ended December 31, 2000
II - Valuation and Qualifying Accounts and Reserves............................ F-23
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
F-1
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of BioReliance Corporation
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of BioReliance Corporation and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 21, 2001
F-2
48
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
----------------------------------
1999 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 12,273 $ 8,231
Marketable securities............................................................. 6,491 8,431
Accounts receivable, net.......................................................... 19,762 21,004
Other current assets.............................................................. 2,074 1,895
--------- ----------
Total current assets............................................................. 40,600 39,561
Property and equipment, net......................................................... 37,085 39,668
Deposits and other assets........................................................... 294 245
Deferred income taxes............................................................... 962 200
--------- ----------
Total assets..................................................................... $ 78,941 $ 79,674
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations................... $ 1,484 $ 1,083
Accounts payable.................................................................. 2,673 2,301
Accrued employee compensation and benefits........................................ 3,001 3,334
Other accrued liabilities......................................................... 1,619 3,310
Customer advances................................................................. 1,874 2,290
Deferred income taxes............................................................. 3,208 2,033
--------- ----------
Total current liabilities........................................................ 13,859 14,351
Long-term debt and capital lease obligations........................................ 12,546 11,602
--------- ----------
Total liabilities................................................................ 26,405 25,953
--------- ----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value: 6,900,000 shares authorized;
no shares issued and outstanding................................................ --- ---
Common stock, $.01 par value: 15,000,000 shares authorized;
7,929,002 and 8,190,166 shares issued and outstanding........................... 79 82
Additional paid-in capital........................................................ 52,764 53,157
Retained earnings................................................................. 671 1,887
Accumulated other comprehensive income............................................ (978) (1,405)
--------- ----------
Total stockholders' equity....................................................... 52,536 53,721
--------- ----------
Total liabilities and stockholders' equity....................................... $ 78,941 $ 79,674
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
49
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
---------- --------- ---------
Revenue...................................... $ 50,017 $ 47,192 $ 55,894
---------- --------- ---------
Expenses:
Cost of sales.............................. 29,738 31,056 37,080
Selling, general and administrative........ 13,627 16,126 15,200
Research and development................... 1,438 1,306 1,414
---------- --------- ---------
44,803 48,488 53,694
---------- --------- ---------
Income (loss) from operations................ 5,214 (1,296) 2,200
---------- --------- ---------
Other (income) expense:
Interest income............................ (1,891) (1,112) (1,191)
Interest expense........................... 551 587 932
Other expense.............................. 498 364 363
----------- --------- ---------
(842) (161) 104
---------- --------- ---------
Income (loss) before income taxes............ 6,056 (1,135) 2,096
Income tax provision (benefit)............... 2,354 (145) 880
---------- --------- ---------
Net income (loss)............................ $ 3,702 $ (990) $ 1,216
---------- --------- ---------
Net income (loss) per share:
Basic...................................... $ 0.48 $ (0.13) $ 0.15
========== ========= =========
Diluted.................................... $ 0.45 $ (0.13) $ 0.15
========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
50
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
-------- --------- --------
Cash flows from operating activities:
Net income (loss).................................................................. $ 3,702 $ (990) $ 1,216
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation................................................................... 3,340 3,684 4,197
Amortization expense........................................................... 227 215 70
Amortization of bond discounts................................................. (276) (460) (377)
Loss on disposal............................................................... 22 13 213
Compensaton element of options................................................. --- 12 44
Deferred income taxes, net..................................................... 1,282 658 (401)
Changes in current assets and liabilities:
Accounts receivable, net................................................... (5,937) 2,237 (1,186)
Other current assets....................................................... (640) 374 150
Accounts payable........................................................... 975 (50) (383)
Accrued employee compensation and benefits................................. (874) 1,049 342
Other accrued liabilities.................................................. (540) (188) 1,755
Customer advances.......................................................... (1,026) (712) 545
Increase in deposits and other assets.......................................... (259) (27) (74)
-------- -------- -------
Net cash provided by (used in) operating activities................... (4) 5,815 6,111
-------- -------- -------
Cash flows from investing activities:
Purchases of marketable securities................................................ (41,070) (14,281) (27,563)
Proceeds from the maturities of marketable securities............................. 50,650 26,500 26,000
Purchases of property and equipment............................................... (5,888) (15,301) (7,071)
-------- -------- -------
Net cash provided by (used in) investing activities.................... 3,692 (3,082) (8,634)
-------- -------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options.......................................... 268 167 352
Proceeds from loan............................................................... --- 3,000 ---
Payments on debt and capital lease obligations................................... (1,586) (1,683) (1,428)
Repurchase and cancellation of treasury stock.................................... (138) --- ---
-------- -------- -------
Net cash provided by (used in) financing activities.................... (1,456) 1,484 (1,076)
-------- -------- -------
Effect of exchange rate changes on cash and cash equivalents.......................... 388 (791) (443)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents.................................. 2,620 3,426 (4,042)
Cash and cash equivalents, beginning of period........................................ 6,227 8,847 12,273
-------- -------- -------
Cash and cash equivalents, end of period.............................................. $ 8,847 $ 12,273 $ 8,231
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
51
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
RETAINED ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS/ OTHER
--------------- ------------ PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) INCOME
--------- --------- ---------- -------- ------- -------- ------
BALANCE AT DECEMBER 31, 1997.......... -- $ -- 7,685,208 $ 77 $ 52,457 $ (2,041) $ (594)
Exercise of stock options........... -- -- 142,245 1 267 -- --
Stock repurchase and cancellation... -- -- (6,109) -- (138) -- --
Equity adjustment from foreign
currency translation.............. -- -- -- -- -- -- 304
Net income, restated................ -- -- -- -- -- 3,702 --
------- -------- ---------- ------ --------- ------- -------
BALANCE AT DECEMBER 31, 1998.......... -- -- 7,821,344 78 52,586 1,661 (290)
Exercise of stock options........... -- -- 108,198 1 168 -- --
Stock repurchase and cancellation... -- -- (540) -- (2) -- --
Compensation expense for stock
options........................... -- -- -- -- 12 -- --
Equity adjustment from foreign
currency translation.............. -- -- -- -- -- -- (688)
Net income (loss)................... -- -- -- -- -- (990) --
------- -------- ---------- ------ --------- ------- -------
BALANCE AT DECEMBER 31, 1999.......... -- -- 7,929,002 79 52,764 671 (978)
------- -------- ---------- ------ --------- ------- -------
Exercise of stock options........... -- -- 270,197 3 485 -- --
Stock repurchase and cancellation... -- -- (9,033) -- (136) -- --
Compensation expense for stock
options............................ -- -- -- -- 44 -- --
Equity adjustment from foreign
currency translation.............. -- -- -- -- -- -- (427)
Net income.......................... -- -- -- -- -- 1,216 --
------- -------- ---------- ------ --------- ------- -------
BALANCE AT DECEMBER 31, 2000.......... -- $ -- 8,190,166 $ 82 $ 53,157 $ 1,887 $(1,405)
======= ======== ========== ====== ========= ======= =======
TOTAL
STOCKHOLDERS'
EQUITY
-------------
BALANCE AT DECEMBER 31, 1997.......... $ 49,899
Exercise of stock options........... 268
Stock repurchase and cancellation... (138)
Equity adjustment from foreign
currency translation.............. 304
Net income, restated................ 3,702
---------
BALANCE AT DECEMBER 31, 1998.......... 54,035
Exercise of stock options........... 169
Stock repurchase and cancellation... (2)
Compensation expense for stock
Options........................... 12
Equity adjustment from foreign
currency translation.............. (688)
Net income (loss)................... (990)
---------
BALANCE AT DECEMBER 31, 1999.......... 52,536
---------
Exercise of stock options........... 488
Stock repurchase and cancellation... (136)
Compensation expense for stock
Options............................ 44
Equity adjustment from foreign
currency translation.............. (427)
Net income.......................... 1,216
---------
BALANCE AT DECEMBER 31, 2000.......... $ 53,721
=========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
52
BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the Corporation) is a contract service organization
that provides testing and development, and manufacturing services for biologics
and other biomedical products to biotechnology and pharmaceutical companies
worldwide.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BioReliance
Corporation and its subsidiaries. All significant intercompany transactions have
been eliminated.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual basis
of accounting which is in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires the Corporation to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
SEGMENT INFORMATION
Segment information has been prepared in accordance with Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." Segments were determined based on
services provided by each segment (see Note 11).
REVENUE RECOGNITION
Revenue recognized from commercial contracts, which are principally
fixed-price or fixed-rate, is recorded predominantly using the
percentage-of-completion method, except for services that are generally
completed within three days which are accounted for using the completed-contract
method. Percentage-of-completion over time is determined using total project
costs as a cost input measure. Revenue recognized from government contracts,
which are principally cost-plus-fixed-fee, is recognized in an amount equal to
reimbursable costs plus a pro-rata portion of the earned fee. Losses are
provided for at the time at which they become known.
RESEARCH AND DEVELOPMENT
Research and development is expensed in the period in which it is incurred.
CASH AND CASH EQUIVALENTS
The Corporation classifies as cash equivalents all highly liquid investments
with an original maturity of three months or less.
F-7
53
MARKETABLE SECURITIES
Marketable securities comprise investments in debt securities with original
maturities of three months or less at the time of purchase. The Corporation has
classified its entire investment portfolio as held-to-maturity. Held-to-maturity
are those securities which the Corporation has the positive intent and ability
to hold until maturity, and are stated at amortized cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the respective assets. The buildings
are depreciated over periods ranging from twenty to forty years. Leasehold
improvements are depreciated or amortized over the shorter of the useful life or
the lease term with useful lives up to twenty years. Other fixed assets are
depreciated or amortized over periods ranging from three to ten years. Equipment
is depreciated over five years; and, computer hardware and software is
depreciated over three to five years. Assets acquired under capital leases are
depreciated or amortized over the estimated useful life of the related asset.
Significant additions and betterments are capitalized. Expenditures for
maintenance and repairs are charged to operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated, upon a triggering event, for possible
impairment through a review of undiscounted expected future cash flows. If the
sum of the undiscounted expected future cash flows is less than the carrying
amount of the asset or if changes in facts and circumstances indicate, an
impairment loss is recognized. No long lived assets were impaired at December
31, 2000.
INCOME TAXES
The Corporation follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the asset and liability method
of SFAS 109, deferred income taxes are recognized for the expected future tax
consequences of temporary differences by applying enacted statutory tax rates in
effect for the year in which the differences are expected to reverse to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. Valuation allowances are provided if it is
anticipated that some or all of a deferred tax asset may not be realized.
NET INCOME (LOSS) PER SHARE
Earnings per share (EPS) is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This
statement requires dual presentation of basic and diluted EPS on the face of the
income statement. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Dilutive securities are
excluded from the computation in periods in which they have an anti-dilutive
effect.
F-8
54
STOCK-BASED COMPENSATION POLICY
The Corporation accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
interpretations. Under APB 25, compensation cost is measured as the excess, if
any, of the market price of the Corporation's stock at the date of the grant
over the exercise price of the option granted. Compensation cost for stock
options, if any, is recognized ratably over the vesting period. The Corporation
provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
Transactions for which non-employees are issued equity instruments for goods
or services are recorded by the Corporation based upon the value of the goods or
services received or fair value of the equity instruments issued, whichever is
more reliably measured.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's cash and cash equivalents,
marketable securities, accounts receivable, other current assets, deposits and
other assets, accounts payable, accrued expenses, and customer advances
approximate their carrying values due to their short-term nature. Since the
interest rates paid by the Corporation approximate current market rates, the
carrying value of its long-term debt approximates fair value.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries are measured using local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
into U.S. dollars at period-end exchange rates, and income and expense accounts
are translated at average monthly exchange rates. Net gains and losses resulting
from such translations are excluded from net income (loss) and are accumulated
in a separate component of stockholders' equity. Translation gains or losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
(2) MARKETABLE SECURITIES
Marketable securities consist of investments in government securities,
government agency securities and commercial paper as follows at December 31:
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST (LOSSES) VALUE
---------- ----------- ----------
(IN THOUSANDS)
1999......... $ 6,491 $(6) $ 6,485
======= ==== =======
2000......... $ 8,431 $(1) $ 8,430
======= ==== =======
All securities have maturities of one year or less.
F-9
55
(3) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following amounts as of December 31:
1999 2000
------- -------
(IN THOUSANDS)
Billed accounts receivable:
Commercial........................... $10,224 $13,660
Government........................... 1,232 1,032
------- -------
11,456 14,692
------- -------
Unbilled accounts receivable:
Commercial........................... 8,378 7,113
Government........................... 1,313 604
------- -------
9,691 7,717
------- -------
Less allowances for doubtful accounts
and unallowable contract costs......... (1,385) (1,405)
------- -------
Accounts receivable, net............... $19,762 $21,004
======= =======
Unbilled commercial receivables represent revenue from commercial contracts
(recorded using the percentage-of-completion method) which are not yet billable
to the client. Generally, these amounts become billable within the next one to
three months upon the attainment of a milestone or the completion of the
contract.
Unbilled government receivables represent amounts which are billed on
government contracts shortly after the end of each month, based on costs
incurred and fees earned during the month, or revenues recognized in excess of
billings on government contracts which generally become billable upon final
determination of allowable costs by the United States government. Government
contract costs for 1999 and 2000 are subject to final determination of allowable
costs by the United States government. In the opinion of management, these
determinations will have no material effect on the Corporation's consolidated
financial position or results of operations.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following amounts as of December 31:
1999 2000
------- -------
(IN THOUSANDS)
Land.............................. $ 2,704 $ 2,704
Building.......................... 10,396 32,249
Equipment, furniture, fixtures, and
computer Hardware and software. 22,199 24,667
Leasehold improvements............ 2,818 1,921
Construction in progress and assets
not yet placed in service...... 19,789 1,775
------- -------
Property and equipment, at cost... 57,906 63,316
Less accumulated depreciation and
amortization.................... (20,821) (23,648)
------- -------
Property and equipment, net....... $ 37,085 $ 39,668
======= =======
During the period that capital items are considered to be in progress,
interest costs incurred are capitalized to the cost of the asset in accordance
with Statement of Financial Accounting Standards No. 34, "Capitalization of
Interest Cost" (SFAS 34). For the years ended December 31, 1999 and 2000,
$265,000 and $90,000 of interest costs, respectively, were capitalized to the
property and equipment.
F-10
56
(5) DEBT
Debt consisted of the following amounts as of December 31:
1999 2000
------- -------
(IN THOUSANDS)
Mortgage Loan....... $ 2,538 $ 2,411
Promissory Note..... 600 270
Capital Lease
Obligations....... 8,106 7,647
State of Maryland
Loan ............. 2,786 2,357
------- -------
Total debt.......... 14,030 12,685
Less current portion (1,484) (1,083)
------- -------
Long-term portion... $12,546 $11,602
======= =======
BANK DEBT
In 1994, the Corporation obtained a loan of $4.3 million from Bank of
America with a maturity date of November 30, 1999 (the Mortgage Loan). The
Mortgage Loan was renewed in December 1999 and matures in November 2009. The
Mortgage Loan requires a monthly principal payment of $10,576 per month, and
bears interest at the London Inter-Bank Offering Rate (LIBOR) plus the
applicable LIBOR Rate Additional Percentage (the LIBOR Rate Option). The LIBOR
Rate Option ranges from 1.0% to 2.15% depending on the Corporation achieving
funded debt to EBITDA ratios. At December 31, 2000, the applicable interest rate
on the Mortgage Loan was 8.79% and the LIBOR Rate Option was 2.15%.
Approximately $2.4 million was outstanding on the Mortgage Loan at December 31,
2000.
From 1995 to 1999, the Corporation had in place an interest rate swap
whereby the variable interest rate portion of the Mortgage Loan was effectively
converted into debt with a fixed rate of 6.55% per annum. This swap expired on
November 30, 1999. Amounts paid or received under the interest rate swap were
recognized as interest income or expense in the periods in which they accrued
and were recorded in the same category as that arising from the Mortgage Loan.
The swap was a standard contract with no imbedded options or other terms
involving a higher level of complexity or risk. The Corporation believes that
the effect of the interest rate swap on interest expense was not material in
1998 or 1999.
In February 2001, the Corporation entered into a new interest rate swap
whereby the variable interest rate portion of the Mortgage Loan was effectively
converted into debt with a fixed rate of 6.14% per annum. This swap expires on
November 1, 2009.
The Corporation has available borrowings up to $2.0 million under the terms
of a revolving loan agreement with Bank of America. The revolving loan agreement
requires monthly interest payments on the unpaid principal. The loan matures on
May 31, 2001, and the line of credit expires at that time. Amounts borrowed
under the revolving loan agreement bear interest at the LIBOR rate plus the
applicable LIBOR Rate Option which ranges from 0.85% to 2.00% depending on the
Corporation achieving funded debt to EBITDA ratios. There were no borrowings
under this agreement during 1999 or 2000.
The Corporation financed the acquisition of BioReliance Manufacturing GmbH
(formerly known as BIOMEVA) in July 1996 and obtained additional funds for
working capital and expansion of its business through a promissory note with
Bank of America in the amount of $1.8 million. The note requires monthly
principal payments of $30,000, and bears interest at the same rate as the
Mortgage Loan. At December 31, 2000, $0.3 million was outstanding on the note
and the interest rate on the note was 8.79%. The note matures on June 30, 2001.
F-11
57
All of the Corporation's agreements with Bank of America are cross
collateralized and are secured by a deed of trust on one of the Corporation's
laboratory facilities in Rockville, Maryland. The agreements require the
Corporation to meet financial and restrictive covenants, including fixed charge
coverage and funded debt to EBITDA ratios.
On July 1, 1999, the Corporation received the proceeds of a $3,000,000 loan
from the Department of Business and Economic Development, a department of the
State of Maryland. The Corporation is required to use the proceeds to expand and
relocate its activities in Rockville, Maryland. The loan requires quarterly
principal payments of $107,143 plus accrued interest and matures on June 30,
2006. The loan bears interest at rates ranging from 0.0% to 7.5% based on the
Corporation's achieving specific employment levels over the next six years. The
terms of the loan contain annual reporting requirements, including the reporting
of employment data. At December 31, 2000, approximately $2.4 million was
outstanding on the loan.
The aggregate maturities on long-term debt are due as follows:
2001-$825,000, 2002-$556,000, 2003-$556,000, 2004-$556,000, 2005-$556,000 and
thereafter-$1,991,000.
CAPITAL LEASE OBLIGATIONS
The Corporation leases land and certain equipment under noncancelable lease
agreements accounted for as capital leases. In April 1998, the Corporation
entered into third-party leasing and subleasing arrangements relating to the new
manufacturing facility in Rockville, MD. These arrangements require the
Corporation to make noncancelable lease payments over the next eighteen years
and to guarantee indebtedness of approximately $4.6 million. A portion of the
lease payments is equivalent to the interest and principal due on the
indebtedness. In February 2001, the Corporation entered into a second interest
swap whereby the variable interest rate portion of the indebtedness related to
one of these capital leases was effectively converted into debt with a fixed
rate of 6.14% per annum. This agreement expires on November 1, 2009. The terms
of the arrangements require that the leases be accounted for as capital leases.
The assets underlying capitalized leases are included with the Corporation's
owned property and equipment, and are summarized as follows as of December 31:
1999 2000
------ ------
(IN THOUSANDS)
Land.................. $ 2,704 $ 2,704
Building.............. --- 6,705
Machinery and equipment 4,319 4,201
Construction in
progress............ 6,533 ---
------ ------
Total assets at cost.. 13,556 13,610
Less accumulated
depreciation........ (3,350) (3,642)
------ ------
Net capitalized assets $10,206 $ 9,968
======= ======
F-12
58
The future minimum lease payments under capital lease obligations at December
31, 2000 were as follows (in thousands):
Years ending December 31:
2001........................ $ 831
2002........................ 740
2003........................ 740
2004........................ 686
2005........................ 681
Thereafter.................. 9,330
------
Total minimum lease payments.. 13,008
Less amount representing
interest.................... (5,362)
------
Present value of minimum lease
payments.................... 7,646
Less current portion.......... (257)
------
Long-term portion............. $ 7,389
======
(6) STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Board of Directors of the Corporation adopted the 1997 Incentive Plan
(the 1997 Plan) in May 1997, and approved amendments to the 1997 Plan in
September 1997, May 1998 and May 1999. Under the terms of the 1997 Plan, the
Corporation may grant or award incentive and nonqualified stock options, stock
appreciation and dividend equivalent rights, restricted stock, performance
units, and performance shares (collectively, Awards) to employees, officers,
non-employee directors, consultants and advisors. These Awards are exercisable
as determined by the Corporation's compensation committee, generally vest in
equal increments over five years and expire no later than ten years after the
date of the grant. The exercise price of incentive stock options must equal or
exceed the fair market value of the stock on the date of grant. The 1997 Plan
also provides for the initial and annual grant of options to each of its
non-employee directors which must be granted at an exercise price equal to the
fair market value on the date of grant and which generally vest in equal
increments over three years and have ten-year terms.
As of December 31, 2000, the Corporation has authorized 1,012,277 shares
under the 1997 Plan, of which 325,777 shares remained available for grants.
Changes in options outstanding granted under the 1997 Plan and prior stock
option plans were as follows:
WEIGHTED
AVERAGE
OPTION
NUMBER OF PRICE
SHARES PER SHARE
--------- ---------
Balance, December 31,
1997................ 709,236 $ 3.34
Granted............ 418,040 13.00
Exercised.......... (142,245) 1.90
Canceled........... (92,879) 11.83
--------
Balance, December 31,
1998................ 892,152 6.71
Granted............ 425,535 8.43
Exercised.......... (108,198) 1.68
Canceled........... (84,821) 10.21
--------
Balance, December 31,
1999................ 1,124,668 7.58
Granted............ 253,500 5.91
Exercised.......... (270,197) 1.89
Canceled........... (222,627) 10.54
--------
Balance, December 31,
2000................ 885,344 8.10
========
F-13
59
To determine fair value under SFAS 123, the Corporation used the
Black-Scholes option-pricing model and the following respective weighted-average
assumptions for 1998, 1999 and 2000: a risk-free interest rate of 5.88%, 5.61%
and 5.93%; expected lives of 6 years; expected volatility of 82%, 55% and 57%;
and expected dividends of zero. The weighted average fair value of options
granted during 1998, 1999 and 2000 was $9.27, $3.86 and $3.52, respectively.
For options outstanding and exercisable at December 31, 2000, the following
number of options, range of exercise prices and weighted average exercise prices
were:
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF SHARES CONTRACTUAL AVERAGE EXERCISE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE PRICE
----------------- ----------- -------------- --------------- ------------ ----------
$ 0.56 - 2.30 45,880 1.1 $ 2.22 45,880 $ 2.22
$ 2.31 - 4.60 57,818 1.9 $ 3.16 56,106 $ 3.14
$ 4.61 - 6.90 318,957 8.3 $ 5.78 66,657 $ 6.39
$ 6.91 - 9.20 213,170 5.0 $ 7.74 72,835 $ 7.93
$ 11.51 - 13.80 127,851 7.4 $ 12.01 33,124 $ 12.04
$ 13.81 - 16.10 112,198 4.9 $ 14.63 54,237 $ 14.63
$ 20.71 - 23.00 9,470 6.3 $ 22.64 1,182 $ 21.25
-------- -------
Total 885,344 6.1 $ 8.10 330,021 $ 7.57
======== =======
As permitted by SFAS 123, the Corporation has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no compensation expense
has been recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Corporation's stock option plans, the
impact would be as follows:
1998 1999 2000
---- ---- ----
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net income (loss) as reported... $3,702 $ (990) $ 1,216
Estimated fair value of the
year's option grants.......... (453) (363) (541)
------- ------- --------
Proforma net income (loss)...... 3,249 (1,353) 675
Adjusted net income (loss) per
share
Basic ...................... 0.42 (0.17) 0.08
Diluted..................... 0.39 (0.17) 0.08
(7) INCOME TAXES
INCOME TAX PROVISION
Income (loss) before income taxes consisted of the following amounts for the
years ended December 31:
1998 1999 2000
------ ------- -----
(IN THOUSANDS)
Domestic............. $5,236 $ (854) $1,134
Foreign.............. 820 (281) 962
------ ------- ------
Income (loss) before
income taxes......... $6,056 $(1,135) 2,096
====== ======= ======
F-14
60
The provision (benefit) for income taxes consisted of the following amounts
for the years ended December 31:
1998 1999 2000
------ ------ -----
(IN THOUSANDS)
Current:
Federal......................... $ 599 $ (705) $ 893
Foreign......................... 222 -- --
State........................... 251 (110) 429
------ ------ ------
Total current provision
(benefit)................ 1,072 (815) 1,322
------ ------ ------
Deferred:
Federal......................... 1,223 875 (372)
Foreign......................... (192) (359) 130
State........................... 251 154 (200)
------ ------ ------
Total deferred provision
(benefit)................. 1,282 670 (442)
------ ------ ------
Total provision (benefit)
for income taxes.......... $2,354 $ (145) $ 880
====== ====== ======
The provision for income taxes differed from that which would be computed by
applying the U.S. federal income tax rate to income before income taxes for the
following years ended December 31:
1998 1999 2000
-------- -------- ------
Federal tax at statutory rate. 34.0% (34.0)% 34.0%
State tax, net of federal
benefit....................... 2.8 (2.6) 2.5
Adjustment for foreign income
taxes......................... 0.1 (11.6) 5.0
U.K. consolidation............ 5.2 -- --
Change in valuation allowance. 4.8 40.8 (6.4)
Tax credits................... (13.4) -- --
Nondeductible expenses........ 3.6 (5.4) 4.9
Other......................... 1.9 -- 2.0
------ ----- -----
Provision for income taxes.... 39.0% (12.8)% 42.0%
====== ===== =====
For German tax purposes, BioReliance Holding GmbH (BRH) and BioReliance
Manufacturing GmbH may consolidate income under an agreement dated November 30,
1998, which continues for five years. In addition BRH declared a distribution to
the Corporation during 1998, which entitles BRH to a German tax refund.
Effective December 31, 1998, BioReliance, Ltd. and BioReliance
Manufacturing, Ltd. (formerly MAGENTA Services, Ltd.) were merged for U.K. tax
purposes. In addition to the business strategy benefits of this merger, it
allows for the efficient use of certain tax assets.
F-15
61
DEFERRED INCOME TAXES
Deferred income taxes consisted of the following amounts as of December 31:
1999 2000
------ -------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards... $ 1,631 $ 1,379
Accrued expenses................... 146 624
Allowance for doubtful accounts.... 539 543
Tax credit carryforwards........... 878 675
Other.............................. 882 1,217
------ -------
Gross deferred tax assets............ 4,076 4,438
Valuation allowance.................. (1,265) (1,845)
------ -------
Net deferred tax assets............ 2,811 2,593
------ -------
Deferred tax liabilities:
Unbilled accounts receivable....... (4,385) (3,624)
Depreciation and amortization...... (672) (801)
------ -------
Deferred tax liabilities........... (5,057) (4,425)
------ -------
Deferred taxes, net.................. $(2,246) $(1,833)
====== =======
Deferred income tax liabilities,
current portion...................... $(4,385) $(3,624)
Deferred income tax liabilities,
long-term portion.................... (672) (801)
Deferred income tax assets, current
portion.............................. 1,177 1,591
Deferred income tax assets, long-term
portion.............................. 1,634 1,001
------ -------
Deferred taxes, net.................. $(2,246) $(1,833)
====== =======
The Corporation records a valuation allowance for deferred tax assets when it
is management's judgment that it is more likely than not that all or a portion
of a deferred tax asset will not be realized. During 2000, the valuation
allowance increased primarily due to increases in valuation allowances related
to net operating losses for state jurisdictions.
TAX CARRYFORWARDS
At December 31, 2000, the Corporation had state net operating loss (NOL)
carryforwards available to offset future taxable income of approximately $12.8
million. State NOLs expire at varying dates through 2019. At December 31, 2000,
the Corporation had foreign net operating loss carryforwards available to offset
future taxable income of approximately $600,000 and $584,000 in the U.K. and in
Germany, respectively, which may be carried forward indefinitely.
At December 31, 2000, the Corporation had foreign tax and alternative minimum
tax credits totaling $563,000 and $112,000, respectively. The foreign tax
credits expire at varying dates through 2015. The alternative minimum tax
credits are carried forward indefinitely.
(8) RETIREMENT PLAN
The Corporation sponsors a defined-contribution retirement 401(k) plan
covering substantially all of its employees. Contributions made by the
Corporation in 1998, 1999 and 2000 equaled 50% of the voluntary employee
contributions up to a maximum of 6% of a participant's annual compensation, with
the exception of certain highly-compensated employees, per the plan. The
Corporation's portion of retirement plan contributions were $282,000, $257,000
and $350,000 in 1998, 1999 and 2000, respectively.
F-16
62
(9) NET INCOME (LOSS) PER SHARE
The Corporation calculates earnings per share (EPS) on both a basic and
diluted basis. Dilutive securities are excluded from the computation in periods
which they have an anti-dilutive effect. Net income (loss) available to common
stockholders and common equivalent stockholders is equal to net income (loss)
for each of the years presented.
The following represents reconciliations between the weighted average common
stock outstanding denominator used in basic EPS and the weighted average common
and common equivalent shares outstanding denominator used in diluted EPS for the
years ended December 31:
1998 1999 2000
------ ------ -----
(IN THOUSANDS)
Weighted average common stock
outstanding....................... 7,791 7,886 8,072
Stock options, as if converted... 442 --- 252
----- ----- -----
Weighted average common and common
equivalent shares outstanding..... 8,233 7,886 8,324
===== ===== =====
(10) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Corporation leases facilities and equipment under noncancelable operating
leases that expire at various dates through 2017. Future minimum lease payments
under operating leases were as follows (in thousands):
Years ending December 31:
2001........................ $ 2,396
2002........................ 2,444
2003........................ 2,341
2004........................ 2,354
2005........................ 2,406
Thereafter.................. 17,588
-------
Total future minimum
lease payments......... $29,529
=======
Total rent expense for all operating leases was $1,864,000, $2,112,000 and
$2,666,000 in 1998, 1999 and 2000, respectively.
COMMITMENTS
At December 31, 2000, the Corporation had commitments for capital spending
of approximately $0.6 million, relating to building improvements and laboratory
equipment.
LEGAL
From time to time, the Corporation is involved in various claims and legal
proceedings arising in the ordinary course of business. The Corporation does not
believe that such claims or proceedings, individually or in the aggregate, will
have a material adverse effect on the Corporation's consolidated financial
position or results of operations.
BioReliance was identified by the U.S. Environmental Protection Agency (EPA)
as one of several hundred potentially responsible parties under the
Comprehensive Environmental Response,
F-17
63
Compensation and Liability Act with respect to the Ramp Industries, Inc., site
in Denver, Colorado. The Corporation has recently signed a consent decree with
the EPA, which management expects will allow BioReliance to resolve its
liability for clean-up costs at this site for approximately $3,600. The consent
decree is not final, and there can be no assurance at this time that the consent
decree will be accepted by the Department of Justice. The Corporation believes
that the outcome of this matter will not have a material adverse effect on the
Corporation's financial position or results of operations.
(11) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
SEGMENT INFORMATION
The Corporation has two reportable segments: (1) testing and development
services and (2) manufacturing services, each of which spans the product cycle
from early preclinical development through licensed production. Through its
testing and development business segment, the Corporation evaluates products to
ensure that they are free of disease-causing agents or do not cause adverse
effects, characterizes products' chemical structures, develops formulations for
long-term stability and validates purification processes under regulatory
guidelines. In its manufacturing business segment, BioReliance develops unique
production processes and manufactures biologics on behalf of clients both for
use in clinical trials and for the worldwide commercial markets. The Corporation
also reports the results of two geographic regions: (1) the United States and
(2) Europe.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes
intersegment revenues. The Corporation evaluates the performance of its
operating segments based on revenues and gross profit. Asset information by
reportable segment is not reported, since the Corporation does not produce such
information internally.
Summarized financial information concerning the Corporation's reportable
segments is shown in the following table (in thousands):
1998 1999 2000
---- ---- ----
Revenues:
Testing and Development $44,396 $43,328 $50,397
Manufacturing 5,621 3,864 5,497
------- ------- -------
Total $50,017 $47,192 $55,894
======= ======= =======
Gross Profit:
Testing and Development $20,279 $17,398 $20,677
Manufacturing -- (1,262) (1,863)
------- ------- -------
Total $20,279 $16,136 $18,814
======= ======= =======
F-18
64
The following table outlines the Corporation's revenues, gross profit and
identifiable assets by geographic region as of or for the years ended December
31 (in thousands):
1998 1999 2000
---- ---- ----
Revenues:
United States $42,291 $40,818 $47,824
Europe 7,726 6,374 8,070
------- ------- -------
Total $50,017 $47,192 $55,894
======= ======= =======
Gross Profit:
United States $17,650 $14,544 $15,511
Europe 2,629 1,592 3,303
------- ------- -------
Total $20,279 $16,136 $18,814
======= ======= =======
Identifiable Assets:
United States $22,063 $34,342 $36,983
Europe 3,308 2,743 2,685
------- ------- -------
Total $25,371 $37,085 $39,668
======= ======= =======
SIGNIFICANT CUSTOMERS
Sales to the U.S. government represented 8%, 11% and 11% of consolidated
revenue in 1998, 1999 and 2000, respectively.
(12) RESTRUCTURING
During the second quarter of 2000, the Corporation announced a plan for the
consolidation of German testing and development services into its Stirling,
Scotland (U.K.) operations. In connection with the plan, the Corporation
recorded a pre-tax restructuring charge of $263,000 in the second quarter. Of
the total restructuring charge, $85,000 related to personnel costs, $78,000
related to property and equipment write-downs, and $100,000 related to lease
termination and other administrative facility closing costs. During the third
quarter 2000, the Corporation reduced the restructuring provision by $100,000 to
account for reduced losses related to lease termination costs. These
restructuring costs are included in selling, general and administrative
expenses.
(13) RELATED PARTIES
Beginning in April 2000, the Corporation retained the consulting services of
two members of its Board of Directors. For the year ended December 31, 2000, the
Corporation incurred $125,000 of fees under this arrangement, recorded as
selling, general and administrative expenses.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-------------------------
1998 1999 2000
------- ------- ------
(IN THOUSANDS)
Cash paid during the year for:
Income tax payments................ $1,317 $ 37 $ 82
Interest payments.................. $ 553 $ 604 $ 385
Noncash investing and financing
activities:
Equipment acquired under capital
lease agreements (Note 5)........ $ 240 $ -- $ --
Land acquired under capital lease
agreement........................ $ 720 $ -- $ --
Building acquired under capital
lease agreement.................. $6,160 $ 373 $ 83
F-19
65
(15) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS 133 is
effective for years beginning after June 15, 1999, with earlier adoption
permitted. On July 8, 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" (SFAS 137). SFAS 137 defers the effective date of
SFAS 133 until fiscal years beginning after June 15, 2000. The adoption of SFAS
137, as further amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", is not expected to have a material
effect on the Corporation's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of the SEC staff's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective for the year beginning January 1, 2000. In March 2000, the
SEC issued SAB No. 101A. This guidance defers the effective date of SAB 101
until the fiscal quarter ending June 30, 2000, and permits a change that may
result from the application of this guidance to be reported as a change in
accounting principle. In June 2000, the SEC issued SAB 101B. SAB 101B delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal quarters beginning after December 15, 1999. The adoption of this guidance
has not had a material impact on the Corporation's results of operations or
financial position.
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66
BIORELIANCE CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT, PER SHARE DATA)
THREE MONTHS ENDED
--------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1999 1999 1999 1999
---- ---- ---- ----
Revenue........................ $10,316 $11,816 $12,424 $12,636
Gross profit................... 2,726 4,231 4,719 4,460
Net income (loss).............. (1,127) (347) 226 258
Earnings (loss) per share:
Basic..................... $ (0.14) $ (0.04) $0.03 $0.03
Diluted................... (0.14) (0.04) 0.03 0.03
Weighted average common
shares outstanding:
Basic..................... 7,832 7,858 7,926 7,929
Diluted................... 7,832 7,858 8,154 8,193
THREE MONTHS ENDED
-----------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2000 2000 2000 2000
---- ---- ---- ----
Revenue........................ $13,279 $13,973 $14,349 $14,293
Gross profit................... 4,521 4,935 4,670 4,688
Net income..................... 191 265 370 390
Earnings (loss) per share:
Basic..................... $0.02 $0.03 $0.05 $0.05
Diluted................... 0.02 0.03 0.04 0.05
Weighted average common
shares outstanding:
Basic..................... 7,943 8,032 8,124 8,189
Diluted................... 8,225 8,184 8,371 8,518
F-21
67
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and
Stockholders of BioReliance Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 21, 2001, relating to the consolidated financial statements,
appearing in BioReliance Corporation's Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 21, 2001
F-22
68
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------- ------------ ----------------------- ----------- -----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------------------------- ------------ ----------- --------- ----------- -----------
Year Ended December 31, 1998
Allowance for doubtful
accounts............... 242,000 510,000 84,000 (1) --- 836,000
Deferred tax valuation
allowance.............. 771,000 318,000 --- --- 1,089,000
Year Ended December 31, 1999
Allowance for doubtful
accounts............... 836,000 1,123,000 --- 574,000(2) 1,385,000
Deferred tax valuation
allowance.............. 1,089,000 176,000 --- --- 1,265,000
Year Ended December 31, 2000
Allowance for doubtful
accounts............... 1,385,000 624,000 --- 603,000(2) 1,406,000
Deferred tax valuation
allowance.............. 1,265,000 580,000 --- --- 1,845,000
- ----------------------------
(1) Amounts represent a reclassification of excess intercompany work in
process reserves.
(2) Amounts are write-offs of uncollectible accounts receivable.
F-23