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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to _________________

Commission File Number 0-22879

BIORELIANCE CORPORATION
(Exact name of the registrant as specified in its charter)

Registrant’s telephone number, including area code:
(301) 738-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]         NO [   ]

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES [X]         NO [   ]

As of October 31, 2003, 8,377,542 shares of registrant’s common stock, par value $.01 per share, were outstanding.

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BIORELIANCE CORPORATION

TABLE OF CONTENTS

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BIORELIANCE CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) 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.

     The consolidated financial statements include the accounts of BioReliance Corporation and its subsidiaries, including Q-One Biotech Group Ltd. (Q-One Biotech) from September 23, 2003, when the Corporation acquired all of Q-One Biotech’s outstanding shares, through September 30, 2003.

(2) Interim Financial Statements Presentation

     The accompanying interim financial statements are unaudited and have been prepared by the Corporation pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and therefore these consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in the Corporation’s Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements for the three month and nine month periods ended September 30, 2002 and 2003 include all normal and recurring adjustments that are necessary for a fair presentation of the results of the interim period. The results of operations for the three month and nine month periods ended September 30, 2003 are not necessarily indicative of the results for the entire year ending December 31, 2003.

(3) Business Acquisition

     On September 23, 2003, the Corporation acquired Q-One Biotech, a privately-held company based in Glasgow, Scotland pursuant to (i) a Share Purchase Agreement, dated August 12, 2003, among BioReliance Corporation, BioReliance (Glasgow) Limited and the sellers named therein (relating to the acquisition of shares of Q-One Biotech) and (ii) a Share Purchase Agreement, dated August 12, 2003, among BioReliance Corporation, BioReliance (Glasgow) Limited and the sellers named therein (relating to the acquisition of shares of Satron Management Services (Technology) Limited, which provides management services to Q-One Biotech) (collectively, the “Share Purchase Agreements”). Q-One Biotech provides safety testing and process validation services and contract manufacturing to the biopharmaceutical industry. Q-One Biotech’s services have included safety testing of biopharmaceuticals, human blood products, vaccines, transgenics and gene therapy products. Q-One Biotech’s primary facilities are located in Glasgow, Scotland and Worcester, Massachusetts.

     Under the terms of the Share Purchase Agreements, the Corporation purchased all of the outstanding capital stock of Q-One Biotech for an aggregate purchase price of approximately £42.0 million ($69.4 million) in cash, subject to post-closing adjustments and excluding transaction costs. Pending the determination of the post-closing adjustments, £1.5 million ($2.5 million) has been placed in escrow and is not included in the purchase price allocation below.

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     The Corporation funded the purchase price of the acquisition, excluding transaction costs, with approximately $48.2 million of borrowings under a new senior secured credit facility with Bank of America, N.A. as administrative agent, security trustee and letter of credit issuer and Banc of America Securities LLC as the sole lead arranger and sole book manager. The Corporation funded the remainder of the purchase price with approximately $21.2 million of existing cash resources. The Corporation funded the transaction costs with approximately $1.4 million of existing cash resources. The Corporation expects to incur additional transaction costs in the fourth quarter.

     The purchase price allocation for Q-One Biotech has not been completed; however, it is expected to be finalized by the end of 2003. The preliminary allocation of the purchase price as of September 23, 2003 is as follows (in thousands):

     In connection with the purchase, the Corporation issued Floating Rate Guaranteed Unsecured Loan Notes (Loan Notes) in the amount of £6,182,974 ($10,290,324 at September 30, 2003) to a former shareholder of Q-One Biotech. The Loan Notes mature on September 23, 2006.

     In consideration for Clydesdale Bank’s guarantee, the Corporation deposited an amount equal to the principal amount of the Loan Notes with Clydesdale Bank. Amounts outstanding on the Loan Notes accrue interest in an amount equal to interest the Corporation earns on the cash deposited in Clydesdale Bank. The cash deposit is recorded as restricted cash on the Corporation’s balance sheet as of September 30, 2003.

(4) Debt

     Corporation Debt consisted of the following amounts as of December 31, 2002 and September 30, 2003:

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     The Corporation entered into a credit agreement, dated August 12, 2003, with the Corporation and BioReliance (Glasgow) Ltd. as borrowers, certain subsidiaries of the Corporation as guarantors, Bank of America, N.A. as administrative agent, security trustee and letter of credit issuer, the lenders party thereto, and Banc of America Securities LLC as the sole lead arranger and sole book manager. Under the Credit Agreement, the Corporation may borrow up to $60.0 million to finance the acquisition of Q-One Biotech, for general corporate purposes, including working capital and capital expenditures, and to refinance existing indebtedness. The Credit Facility consists of a $15.0 million revolving credit facility, a $35.0 million domestic term loan and a $10.0 million foreign term loan (together, the “Credit Facility”). The Corporation borrowed approximately $48.2 million to fund a portion of the purchase price paid in the Q-One Biotech acquisition, including a $3.2 million revolving loan and $45.0 million in term loans. The Corporation is required to make quarterly payments under the term loans beginning on December 31, 2003. Amounts due under the term loans will become due and payable in full on September 30, 2008. Final amounts due under the revolving credit facility will become due and payable in full on September 30, 2006.

     The Credit Facility includes negative covenants including, among others, those restricting the Corporation’s ability to incur liens on its assets, pay dividends, make investments, and incur additional indebtedness. The Credit Facility also contains customary financial covenants including, among others, those that require the Corporation to maintain a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum net worth. The Credit Facility includes customary events of default including, among other things, the Corporation’s failure to pay the principal or interest of any loan or letter of credit under the Credit Facility, a default or event of default of any other agreement involving indebtedness, insolvency by the Corporation or any of its subsidiaries, and change in control of the Corporation (as defined in the Credit Agreement). Specifically the Corporation is required to:

	•		Maintain consolidated net worth of at least the sum of (i) 85% of consolidated net worth of the consolidated group as of the initial funding date (after giving proforma effect to the acquisition of Q-One Biotech), plus (ii) as of the end of each quarter of the Corporation, commencing with the quarter ending December 31, 2003, an amount equal to 75% of Consolidated Net Income (but not less than zero) for such quarter, such increases to be cumulative, plus an amount equal to 100% of the net cash proceeds from all equity transactions after the closing date.
	•		Maintain a consolidated leverage ratio (the ratio of consolidated funded debt to consolidated EBITDA) as of the end of any quarter of the Corporation of no greater than 2.50 to 1.00. Consolidated funded debt excludes funded debt relating to the Loan Notes. EBITDA is defined as consolidated net income, interest expense, income taxes, depreciation and amortization, and non-cash expense for stock options. EBITDA will be calculated based on the four previous consecutive quarters.
	•		Maintain a consolidated fixed charge coverage ratio (ratio of the sum of consolidated EBITDAR less cash taxes paid, less consolidated capital expenditures to consolidated fixed charges) as of the end of any quarter of the Corporation of at least 1.25 to 1.00. Consolidated fixed charges are defined as the sum of the cash portion of consolidated interest expense, rent and lease expense, consolidated scheduled funded debt payments, and dividends and other distributions paid on the Corporation's capital stock. Consolidated EBITDAR is EBITDA plus rent and lease expense. EBITDAR and consolidated fixed charges will be calculated based on the four previous quarters.

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     Interest on the Credit Facility is calculated using the applicable Euro Currency Rate or Base Rate plus an Applicable Rate Adjustment (the Rate Adjustment). The Rate Adjustment is variable based on the ratio of total funded debt under the facility to the Corporation’s EBITDA. This ratio will be calculated and reported to the lenders quarterly. The interest rate at September 30, 2003 was 4.63%, which includes a 3.5% Rate Adjustment.

     In November 2003, the Corporation entered into a new interest rate swap whereby the variable interest rate portion of $28.0 million of the domestic loan was effectively converted into debt with a fixed rate of 3.21% per annum. The swap expires in September 2008.

     In November 2003, the Corporation entered into a cross-currency interest rate swap whereby the $8.0 million of the foreign term loan and its variable interest rate portion was effectively converted into a fixed rate United Kingdom Pound Sterling note with a fixed rate of 5.30% per annum. The swap expires in September 2008.

     The Corporation entered into a security agreement on September 22, 2003, whereby the Corporation, and certain of its subsidiaries have granted a security interest in all personal property currently owned or subsequently acquired to Bank of America, N.A. as administrative agent for the lenders as security for their obligations under the Credit Agreement.

     The Corporation entered into a pledge agreement on September 22, 2003, whereby the Corporation, and certain of its subsidiaries have granted a security interest in (1) 100% of the capital stock of each domestic subsidiary of the Corporation, (2) 65% of the issued and outstanding shares of capital stock entitled to vote of each foreign subsidiary and (3) 100% of the issued and outstanding Capital Stock not entitled to vote of each foreign subsidiary of the Corporation to Bank of America, N.A. as administrative agent for the lenders as security for their obligations under the Credit Agreement.

     The aggregate maturities on long-term debt less capital leases and the interest rate swap agreement as of September 30, 2003 are due as follows (in thousands):

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(5) Net Income 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 in which they have an anti-dilutive effect. Net income available to common stockholders and common equivalent stockholders is equal to net income for all periods presented.

     The following table represents reconciliations between the weighted average common stock outstanding used in basic EPS and the weighted average common and common equivalent shares outstanding used in diluted EPS for each of the periods presented (in thousands):

(6) Segment Information

     Summarized financial information concerning the Corporation’s reportable segments for the three months and nine months ended September 30 is shown in the following table (in thousands):

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     Summarized financial information concerning the Corporation’s revenue and gross profit by geographic region for the three months and nine months ended September 30 is shown in the following table (in thousands):

(7) Stock Based Compensation

     The Corporation has stock-based compensation plans, described more fully in Note 5 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. Effective January 1, 2003, BioReliance adopted FASB Statement No. 148 (FAS 148), “Accounting for Stock-Based Compensation — Transition and Disclosure.” FAS 148 amends FASB Statement No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” to provide, among other things, prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. As permitted by FAS 123 and amended by FAS 148, 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. To determine fair value under FAS 123, the Corporation used the Black-Scholes option-pricing model and the following respective weighted average assumptions for the three and nine months ended September 30, 2002 and 2003:

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     Had the fair value method of accounting been applied to the Corporation’s stock option plans utilizing the valuation method currently recognized, the impact would have been as follows:

(8) Stock Repurchase

     On March 5, 2003, the Corporation’s Board of Directors authorized the repurchase of up to 500,000 shares of the Corporation’s common stock over the following two years. The repurchase is being funded using the Corporation’s working capital. During the nine months ended September 30, 2003, the Corporation repurchased 190,242 shares for $3,501,000. The Corporation did not repurchase any shares during the three months ended September 30, 2003.

(9) COMMITMENTS AND CONTINGENCIES

Operating Leases

     The Corporation leases facilities and equipment under noncancelable operating leases that expire at various dates through 2024. Future minimum lease payments as of September 30, 2003 under operating leases were as follows (in thousands):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Certain statements made in this Report on Form 10-Q 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 in this Report on Form 10-Q include, among others, statements regarding:

	•		the anticipated growth of revenue and improvement in profit margins,
	•		the anticipated growth of revenue to exceed cost increases related to the Corporation’s U.S. manufacturing facility,
	•		the anticipated growth of revenue in connection with the integration of Q-One Biotech, which the Corporation acquired on September 23, 2003,
	•		the Corporation’s ability to use additional capacity in its manufacturing facilities, including those facilities acquired in connection with the acquisition of Q-One Biotech,
	•		the anticipated increase in selling, general and administrative expenses and the hiring of new employees,
	•		the Corporation’s ability to maintain selling, general and administrative expenses as a percentage of revenue near or below 20%,
	•		the Corporation’s ability to maintain research and development expenses and tax rates at constant levels,
	•		the Corporation’s ability to fund its operations, capital expenditures, and interest and principal payments on debt for 2003 with existing cash, cash flows from operations and its line of credit,
	•		the Corporation’s expansion plans.

     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 Form 10-K filed on March 31, 2003.

     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, or to 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 Form 10-Q.

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Overview

     The Corporation is a leading contract service organization providing, testing, development and manufacturing services for biologics and other biomedical products to pharmaceutical companies worldwide. The Corporation believes that it is the largest provider of outsourcing services focused on the expanding biologics sector of the pharmaceutical industry. During the quarter ended September 30, 2003, the Corporation continued to work with clients on the development of global multi-year arrangements, such as those announced in 2002. The Corporation also continued to contribute to bioterrorism defense through the work performed in both operating segments on the smallpox vaccine contracts. The Corporation believes that the services provided under some of its key relationships, the benefits that have been provided by what the Corporation believes is a growing market, and the increasing recognition of BioReliance as a service provider of choice continues to have a positive effect on the Corporation’s results of operations.

     On September 23, 2003, the Corporation acquired Q-One Biotech, a privately-held company based in Glasgow, Scotland, pursuant to (i) a Share Purchase Agreement, dated August 12, 2003, among BioReliance Corporation, BioReliance (Glasgow) Limited and the sellers named therein (relating to the acquisition of shares of Q-One Biotech) and (ii) a Share Purchase Agreement, dated August 12, 2003, among BioReliance Corporation, BioReliance (Glasgow) Limited and the sellers named therein (relating to the acquisition of shares of Satron Management Services (Technology) Limited) (collectively, the “Share Purchase Agreements”). Q-One Biotech provides safety testing and process validation services and contract manufacturing to the biopharmaceutical industry. Q-One Biotech’s services have included safety testing of biopharmaceuticals, human blood products, vaccines, transgenics and gene therapy products. Q-One Biotech’s primary facilities are located in Glasgow, Scotland and Worcester, Massachusetts.

     Under the terms of the Share Purchase Agreements, the Corporation purchased all of the outstanding capital stock of Q-One Biotech for an aggregate purchase price of approximately £42 million ($69.4 million) in cash, subject to post-closing adjustments and excluding transaction costs. Pending the determination of the post-closing adjustments, £1.5 million ($2.5 million) has been placed in escrow and is not included in the purchase allocation below.

     The Corporation funded the purchase price of the acquisition, excluding transaction costs, with approximately $48.2 million of borrowings under a new senior secured credit facility with Bank of America, N.A. as administrative agent, security trustee and letter of credit issuer and Banc of America Securities LLC as the sole lead arranger and sole book manager. The Corporation funded the remainder of the purchase price with approximately $21.2 million of existing cash resources. The Corporation funded the transaction costs with approximately $1.4 million of existing cash resources. The Corporation expects to incur additional transaction costs in the fourth quarter.

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     The purchase price allocation for Q-One Biotech has not been completed; however, it is expected to be finalized by the end of 2003. The preliminary allocation of the purchase price as of September 23, 2003 is as follows (in thousands):

Results of Operations
(Dollars in tables are in thousands)

     For the three months ended September 30, 2003, the Corporation had revenue of $24.3 million, an increase of 13% over revenue of $21.6 million for the three months ended September 30, 2002. Earnings per share for the three months ended September 30, 2003 were $0.53 (diluted) compared with $0.36 (diluted) for the three months ended September 30, 2002.

     For the nine months ended September 30, 2003, the Corporation had revenue of $68.6 million, an increase of 12% over revenue of $61.3 million for the nine months ended September 30, 2002. Earnings per share for the nine months ended September 30, 2003 were $1.15 (diluted) compared with $0.91 (diluted) for the nine months ended September 30, 2002.

     Continuing increases in orders fueled revenue growth in both of the Corporation’s segments and both geographic regions for the three months and nine months ended September 30, 2003. The acquisition of Q-One Biotech also contributed to the increase in revenue by including five business days of activity into the Corporation’s consolidated results. These higher revenues also drove higher gross profits in both geographic regions for the three months and nine months ended September 30, 2003. Cost increases hampered gross margins in U.S. and U.K. testing and development while margins in other business units, particularly European manufacturing, improved due largely to the revenue growth. Although selling, general, and administrative costs increased, as a percentage of sales these costs decreased to 19% and 20% for the three months and nine months ended September 30, 2003, respectively, as a result of continued programs to control expenses. Income tax rates for the three months and nine months ended September 30, 2003 remained constant at 37%, in line with the Corporation’s historical rates.

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Gross Revenue by Operating Segment

     The following table shows a comparison of revenue by operating segment for the three months and nine months ended September 30, 2002 and 2003:

     The increase in testing and development revenue for the three months and nine months ended September 30, 2003 is due primarily to the continued increase in new orders, and, to a lesser extent, the revenue reported by Q-One Biotech. The new orders continue to include those arising from global arrangements with some of the Corporation’s major clients. The increase in U.K. testing and development revenue is primarily a result of the Q-One acquisition. This increase was partially offset by a decrease in other testing and development revenue in the U.K. for the three months ended September 30, 2003. European testing and development revenue continues to be impacted by client delays in some projects.

     The increase in manufacturing revenue for the three and nine months ended September 30, 2003 represents increases in both the U.S. and Europe. European increases are attributable to increases in both U.K. and German facilities. Both European facilities benefited from increased orders and German revenue benefited from improvements in throughput efficiencies. The U.S. manufacturing revenue improvement was primarily due to an increase in revenue derived from the Corporation’s smallpox vaccine contract.

     Approximately 25% and 24%, respectively, of the Corporation’s manufacturing revenue for the three months and nine months ended September 30, 2003 resulted from work performed under the Corporation’s smallpox vaccine contracts. Approximately 9% of the Corporation’s total revenue for the three months and nine months ended September 30, 2003 resulted from work performed under these smallpox vaccine contracts.

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Gross Revenue by Geographic Region

     The following table shows a comparison of revenue by geographic region for the three months ended September 30, 2002 and 2003: