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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, 1997
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)
9900 BLACKWELL 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
February 27, 1998 on the Nasdaq National Market was approximately
$91,715,949. There were 7,760,027 shares of common stock, $0.01 par value
per share, outstanding as of February 27, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission within 120
days after the end of the registrant's 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..................................................................... 17
Item 3. Legal Proceedings.............................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............................ 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..................................................................... 20
Item 6. Selected Financial Data........................................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 23
Item 8. Financial Statements and Supplementary Data.................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 29
Item 11. Executive Compensation......................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 29
Item 13. Certain Relationships and Related Transactions................................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 30
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. For this purpose, any statements contained herein that are not
statements of historical fact, including without limitation, certain
statements under "Item 1. Business" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and located
elsewhere herein regarding industry prospects and the Corporation's results
of operations or financial position, may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. The important factors discussed below
under the caption "Business -- Risk Factors," among others, could cause
actual results to differ materially from those indicated by forward-looking
statements made herein and presented elsewhere by management from time to
time. Such forward-looking statements represent management's current
expectations and are inherently uncertain. Investors are warned that actual
results may differ from management's expectations.
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PART I
ITEM 1. BUSINESS
OVERVIEW
BioReliance Corporation ("BioReliance" or the "Corporation") is a
leading contract research organization ("CRO") providing nonclinical testing
and contract manufacturing services for biologics to biotechnology and
pharmaceutical companies worldwide. The Corporation provides two types of
contract services, BioTesting Services and BioManufacturing Services, each of
which spans the product cycle from early preclinical development through
licensed production. The Corporation's biotesting services include: (i)
BioSafety Testing, for assessing cell banks used to manufacture biologics,
validating purification processes for clearance of adventitious agents such
as viruses, and testing in-process and final products; (ii) Analytical
Services, for assessing the structure and stability of biologics; and (iii)
preclinical BioTrials, for conducting both in vitro ("test tube") and
short-term in vivo ("animal") studies. The Corporation's biomanufacturing
services include viral production and microbial production.
CRO INDUSTRY OVERVIEW
The CRO industry provides outsourced product development and licensed
product support services on a contract basis to pharmaceutical and
biotechnology companies. The CRO industry has evolved from providing
primarily preclinical services in the 1970s to a full service industry today
consisting of several hundred small, limited-service providers and a handful
of larger companies in four broad service sectors. These sectors are (i)
nonclinical laboratory testing focused on product characterization and
identification of potential contaminants; (ii) contract manufacturing for
clinical trials and commercial purposes; (iii) animal-based chronic
toxicology studies; and (iv) human clinical trials management. BioReliance
provides services in the first two of these categories, primarily for
biologics.
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) 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 development and regulatory approval of product modifications and line
extensions of the original product.
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SERVICES
BioReliance provides two broad types of contract services, BioTesting
Services and BioManufacturing Services, each of which spans the product cycle
from early preclinical development through licensed production. The
Corporation's comprehensive BioTesting Services are organized into three
divisions. These are BioSafety Testing, Analytical Services and preclinical
BioTrials. The Corporation's contract BioManufacturing Services currently
include both viral production and microbial fermentation. The only
significant CRO services not provided by BioReliance are chronic toxicology
studies and human clinical trials management.
Compared to CROs 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.
BIOTESTING SERVICES
BioSafety Testing
BioSafety Testing includes 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 biosafety testing during the development
of the first biologics, including Genentech's Activase (R) and Ortho
Pharmaceutical's Orthoclone OKT(R)3, in the early 1980s. The Corporation
believes that it has a major share of the current international market for
these services and intends to continue 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 these tests.
Purification Process Validation. BioReliance conducts validation of client
purification processes to determine the process' capability for clearance
(removal or inactivation) of certain biological agents such as viruses,
mycoplasma and DNA. 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 the United Kingdom and under
development in Germany.
In-Process and Final Product Testing. The Corporation tests the biologic
during intermediate states of manufacture (i.e., prior to purification) and
as a final purified product. Each production lot must be tested for the
presence of specified biological agents both prior to 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
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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.
Analytical Services
The Corporation's Analytical Services division was formed in 1995 in
response to clients' expressed needs for development of analytical techniques
to characterize biologics better in anticipation of new FDA regulations and
guidelines published during 1996 that permit the development and
manufacturing processes for well-characterized biologics to be streamlined.
It is an outgrowth of prior biotesting relationships with clients and
regulators.
Product Characterization and Methods Validation. The Corporation's
Analytical Services focus on protein characterization to show that a
molecule's structure meets predefined criteria. Generally, identity, purity,
concentration and molecular weight are important defining parameters. 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
routinely are validated for clients in a GMP environment by the Corporation.
Each biologic product presents a unique set of bioanalytical
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 Analytical Services provide the full spectrum of formulation
development, stability testing and consistency testing services to client
companies. 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 be responsible
for a reduced 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, humidity, etc.). The
product's stability is measured by the same validated bioanalytical
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
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.
BioTrials
For over twenty years, BioReliance has provided 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
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engineered proteins to DNA plasmids used in gene therapy clinical trials. The
greatest future growth in the BioTrials division is anticipated to come from
the application of molecular biological techniques to assess chemical
carcinogenicity as described below.
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 in providing these services with its experienced scientific staff
and new state-of-the-art laboratory facilities. BioReliance custom designs
testing batteries and protocols to comply with international guidelines
(which are different among the United States, Europe and Japan), and these
are conducted in full compliance with GLPs. An additional in vitro service
provided by the Corporation includes 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
short-term in vivo ("animal") studies, primarily designed to refine dose
levels during the preclinical stage of product development. Motivating the
development of new in vivo services is a regulatory consensus forming in the
United States not only to reduce the duration and costs of expensive chronic
studies, but also to provide mechanistic data enabling 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 would be to shorten the
"in life" portion of long-term carcinogenicity studies from two years to six
months.
Utilizing its experience in molecular biology, the Corporation believes
that it can determine and measure the initial molecular and cellular events
which culminate in tumor formation, reducing the "in life" portion of the
study further, thereby lowering the per-study cost significantly. BioReliance
expects that combining molecular detection assays with this approach will
provide a compelling economic incentive for product developers to perform
these new molecular carcinogenicity studies. The worldwide annual
expenditure for traditional chronic toxicology studies currently exceeds $1
billion. The Corporation believes that traditional chronic studies will be
at first augmented by, and then replaced with, this molecular approach if it
proves to be successful. Among CROs, BioReliance believes it has the early
technological lead for commercial development of these advanced molecular
assays.
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
serious 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.
BIOMANUFACTURING SERVICES
BioReliance's contract BioManufacturing Services currently include both
viral production and microbial fermentation. The Corporation has been
providing services in viral production since 1993 when it formed MAGENTA
Corporation ("MAGENTA"). The rapid progress of gene therapy products
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into Phase I/II human clinical trials and the emergence of cancer oncolytics
have fueled the significant growth of biomanufacturing revenue for the
Corporation from viral production services from 1993 to 1996. The
Corporation entered into the biomanufacturing of microbial products with its
acquisition of BIOMEVA GmbH, a contract manufacturer of microbial products
located in Heidelberg, Germany ("BIOMEVA") in July 1996. Cell banking and
biorepository services are parts of both manufacturing capabilities.
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 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. Since the MCB and WCB are parts of the manufacturing
process, they 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.
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 gene therapies,
viral vaccines and cancer oncolytics. In 1988, the Corporation began
pioneering assays to support the development of gene therapy products. The
Corporation has been involved in testing materials for over 70% of all gene
therapy human clinical trial protocols that have been approved by regulatory
bodies in the United States, Europe and Japan. 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. Formed as a wholly
owned subsidiary, MAGENTA drew upon the Corporation's many years of
experience in viral testing and small scale manufacturing. BioReliance now
has four GMP-compliant viral manufacturing suites in its Rockville, Maryland
headquarters and two additional suites in Stirling, United Kingdom. Combined,
these facilities have manufactured more than 60 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. MAGENTA offers these production development services as
part of its manufacturing "package" to clients.
At the present time, the most advanced of MAGENTA's 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 requires scales
beyond 100 liters, the Corporation plans to construct appropriate facilities
according to market demand.
In 1996, the Corporation expanded its biomanufacturing capabilities by
acquiring BIOMEVA, an established contract manufacturing company located in
Heidelberg, Germany. BIOMEVA 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. The
microbial fermentation capabilities of BIOMEVA allow BioReliance to provide
manufacturing services not only to viral vector
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gene therapy companies (through MAGENTA), but also to gene therapy companies
that are employing "naked" DNA or plasmid DNA as a vector (rather than
viruses). Besides manufacturing, BIOMEVA offers scale-up and development for
production processes and provides bioanalytical testing of proteins and other
biologics.
Purification and Purification Development. Both MAGENTA and BIOMEVA provide
purification services for production clients. Similar to production services,
purification techniques must be developed on a product-by-product basis. At
the present time, MAGENTA is developing GMP-compliant chromatographic-based
techniques for the large-scale purification of viruses. These techniques will
be necessary as emerging gene therapy and other viral products progress to
Phase III clinical trials.
Final Formulation and Filling. For its viral production clients, MAGENTA
offers final formulation and filling services. Filling involves dispensing
the final purified clinical 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, BIOMEVA does not
currently offer final filling services. The bulk of BIOMEVA's business is for
large-scale production of licensed biologics, and, hence, the filling needs
are quite substantial and would require an automated filling line. It is the
intention of BioReliance to develop large-scale automated filling
capabilities for both its gene therapy and other biologics clients. Such
facilities likely will be located both in the United States and Europe.
CONTRACTUAL ARRANGEMENTS
BioReliance enters into several different types of contractual
relationships with its commercial clients. BioTesting Services contracts 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 BioSafety Testing contracts range in length from a
few weeks to several months; however, certain stability testing and lot
release testing contracts may be one to two years in length. BioManufacturing
contracts tend to be relatively longer 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 in formats consistent with the particular
granting agency.
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. Although the contracts tend to be
short in duration and typically include payment of certain fees based upon
project expenditures to date, the loss of a large contract or the loss of
multiple contracts could adversely affect the Corporation's future revenue
and profitability. Contracts may be terminated for a variety of reasons,
including the client's decision to forego a particular study or to cancel a
particular product development program, the failure of a clinical trial, and
unexpected or undesired results of the product testing.
During 1997, approximately 8% of the Corporation's revenue was derived
from contracts with various governmental agencies. Most of these contracts
were for BioTesting Services. The Corporation generally performs services
under cost-plus-fixed-fee contracts, where the government agency reimburses
the Corporation for allowable costs incurred and pays the Corporation a
negotiated fixed fee, up to contract funding amounts.
A federal 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. If a contract
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is modified, the price of the contract would be adjusted equitably. If a
contract is terminated for convenience, the Corporation would be reimbursed
for reasonable costs plus a reasonable profit on work actually performed. In
the event that the contract would have resulted in a loss, the reimbursed
amounts would be adjusted proportionately to reflect the anticipated loss.
State governments with which the Corporation contracts have statutory or
regulatory provisions relating to government contracting that are generally
comparable to those of the federal government.
As a contractor, the Corporation believes that it has complied in all
material respects with applicable government requirements. In certain
circumstances where a contractor has not complied with the terms of a
contract or with regulations or statutes, the contractor may be debarred or
suspended from obtaining future contracts. Any such debarment or suspension
could have a material adverse effect upon the Corporation's business and
results of operations.
Due to the short duration of most of the Corporation's contracts,
BioReliance does not believe that backlog is a meaningful indicator of its
future results.
GOVERNMENT REGULATION
The FDA recently 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 product development and licensing
process. The list of specified products includes most of the biologics now
under development by pharmaceutical and biotechnology companies; namely,
monoclonal antibodies, 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. Therefore, the FDA will forego some of its
strict adherence to manufacturing process standards for biologics if certain
validated, bioanalytical tests are performed on each lot of final product.
Specified biologics for which bioanalytical techniques have been developed,
validated and accepted by the FDA are termed "well-characterized" products by
the FDA.
The FDA will provide other important benefits and exemptions for
well-characterized products. Biologics developers now will 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, well-characterized
product. Until recently, the large-scale facility necessary for licensed
production was needed prior to product approval. The new 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 of licensed products. BioReliance believes
that developers of biologics will pursue CROs 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
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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 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.
BioReliance's activities involve the controlled use of hazardous
materials and chemicals. The Corporation is subject to foreign, federal,
state and local laws and regulations governing the use, 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 such an accident, the Corporation could be held liable for
any damages that result which could have a material adverse effect on the
Corporation's business and results of operations.
COMPETITION
The CRO industry is highly fragmented, with several hundred producers
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 CROs, some of which may possess
substantially greater capital, technical and other resources than the
Corporation. The Corporation's primary CRO competitors are different in each
of its service areas. For BioSafety Testing, its primary competitors are
Inveresk Research International Ltd. and Q-One Biotech Ltd.; for Analytical
Services, Tektagen, Inc. and Applied Analytical Industries, Inc.; for
BioTrials, Covance Laboratories, Inc., SRI International, Inc. and Charles
River Laboratories, Inc.; and for BioManufacturing Services, Bio-Intermediair
Europe b.v. and Q-One Biotech Ltd. As a result of competitive pressures, the
CRO industry is consolidating. This trend is likely to produce increased
competition among the larger CROs for both clients and acquisition
candidates. In addition, the CRO industry has attracted the attention of the
investment community, which could lead to heightened competition by
increasing the availability of financial resources for CROs. Increased
competition may lead to price and other forms of competition that may affect
the Corporation's margins. The Corporation believes the principal competitive
factors in its business are scientific and technological expertise,
reputation, regulatory experience, the ability to offer a full range of
biologics development services, international presence and price.
INFORMATION SYSTEMS
Although BioReliance is fundamentally a laboratory science based
business, 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
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innovative services to clients, for timely, accurate reporting and to enable
clients to monitor their projects better. The Corporation's customized
laboratory information management system (LIMS) is integral to daily
BioTesting operations, and a new version of the current system is in
development, based on user requirements and facilitated by new digital
technologies. The Corporation relies upon an efficient corporate order
processing system (COPS) for management of client information, beginning with
sales inquiry information and tracking activities throughout the client
service cycle. This is linked to an accounting-based management information
system (MIS) that maintains progress billing and other client account
records. All systems are oriented to the support of timely, accurate study
information and client interactions.
The Corporation is implementing ORACLE applications. The initial
implementation consists of financial modules such as general ledger,
accounts receivable and accounts payable and manufacturing inventory, as well
as order entry, sales and marketing and barcoding technology. Other modules
are scheduled for implementation in the third and fourth quarters of 1998.
The Corporation believes that the ORACLE applications will provide an
efficient business process, enhanced data security and integrity and
integrated data and communications across all of the Corporation's sites and,
importantly, with its customers.
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. The Corporation's continuing commitment to technological
innovations and meeting changing client and regulatory requirements will
drive continuous improvement of its information systems technology,
maintaining a competitive advantage.
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 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 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.
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. See "Risk Factors -- Potential Liability."
EMPLOYEES
At December 31, 1997, the Corporation had 414 full-time equivalent
employees. The Corporation believes that its relations with its employees
are good. None of the Corporation's employees is represented by a union.
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RISK FACTORS
In addition to the other information contained in this report or
incorporated by reference herein, the following factors should be considered
carefully in evaluating the Corporation and its business.
DEPENDENCE ON OUTSOURCING FOR DEVELOPMENT 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 CROs. A
decline in the development of biologics, a general decline in research and
development expenditures by these companies, or a reduction in the
outsourcing to CROs of research and development expenditures due to
pharmaceutical industry consolidation or other factors could 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."
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. In addition, many of the Corporation's
long-term contracts may be cancelled or delayed by clients 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
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decision to forego a particular study. In addition, the federal government
may modify or terminate its contracts at any time for the convenience of the
government. 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.
MANAGEMENT OF GROWTH
The Corporation has experienced rapid growth over the past five years
in both its domestic and international operations. The Corporation believes
that sustained growth places a strain on operational, human and financial
resources. In order to manage its growth, the Corporation must continue to
improve its operating and administrative systems and to attract and retain
qualified management and professional, scientific and technical operating
personnel. To manage the growth of its operations outside the United States,
the Corporation must assimilate differences in international business
practices and overcome language differences. There can be no assurance that
the Corporation will be able to manage its growth effectively. Failure to
manage growth effectively could have a material adverse effect on the
Corporation's business and results of operations.
DEVELOPMENT OF MANUFACTURING CAPABILITIES
As part of its business strategy, the Corporation intends to expand its
manufacturing capabilities to allow for large-scale production of biologics.
There can be no assurance that the Corporation will be able to develop these
expanded capabilities on acceptable terms, find clients for any new
manufacturing capacity it may develop or operate any expanded manufacturing
capabilities on a profitable basis.
The establishment of additional manufacturing facilities will require
substantial additional funds and personnel and will require compliance with
extensive regulations applicable to such facilities. There can be no
assurance that such funds and personnel will be available on acceptable
terms, if at all, or that the Corporation will be able to comply with such
regulations at acceptable cost, if at all. In addition, in managing this
expansion the Corporation may encounter unforeseen regulatory, logistical or
management problems or incur unexpected operating costs. Failure or delays in
establishing these facilities, failure of market demand for these services to
develop, or the incurrence of unexpected operating costs could have a
material adverse effect on the Corporation's ability to meet its strategic
objective of providing a broad range of product development services and its
business and results of operations.
VARIATION IN QUARTERLY OPERATING RESULTS
The Corporation's results of operations historically have fluctuated on
a quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. Quarterly operating results can fluctuate as a result of a
number of factors, including the commencement, delay, cancellation or
completion of contracts; the mix of services provided; seasonal slowdowns in
Europe during the summer months; the timing of start-up expenses for new
services and facilities; the timing and integration of acquisitions; and
changes in regulations related to biologics. The Corporation believes that
quarterly comparisons of its financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. In
addition, fluctuations in quarterly results could affect the market price of
the Common Stock in a manner unrelated to the longer term operating
performance of the Corporation.
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ACQUISITION RISKS
As part of its business strategy, the Corporation continually evaluates
new acquisition opportunities. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products or services
of the acquired companies, the expenses incurred in connection with the
acquisition and subsequent assimilation of operations and products or
services, the diversion of management's attention from other business
concerns, and the potential loss of key employees of the acquired company.
Acquisitions of companies outside the United States also may involve the
additional risks of assimilating differences in international business
practices and overcoming language differences. There can be no assurance that
the Corporation will complete any future acquisitions, nor that acquisitions,
if completed, will contribute favorably to the Corporation's operations and
future financial condition or be integrated successfully.
COMPETITION; INDUSTRY CONSOLIDATION
The CRO industry is highly fragmented, with several hundred 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 CROs, some of which possess
substantially greater capital, technical and other resources than the
Corporation. As a result of competitive pressures, the industry is
consolidating. This trend is likely to produce increased competition among
the larger CROs for both clients and acquisition candidates and increased
competitive pressures on smaller providers. In addition, the CRO industry has
attracted the attention of the investment community, which could lead to
heightened competition by increasing the availability of financial resources
for CROs. 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. See "Business -- Competition."
CONTROL BY EXISTING STOCKHOLDERS
As of February 27, 1998, Sidney R. Knafel, Chairman of the Board of
Directors of the Corporation, and related persons beneficially own an
aggregate of approximately 41.2% of the outstanding Common Stock (excluding
shares issuable upon the exercise of options). In addition, certain of the
Corporation's executive officers, directors and related persons beneficially
own an aggregate of approximately 43.9% 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 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. Such
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 will
be able to maintain such insurance coverage on terms acceptable to the
Corporation. See "Business -- Insurance."
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. 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 liability under certain
statutes such as the Comprehensive Environmental Response, Compensation and
Liability Act ("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.
The Corporation has been identified by the U.S. Environmental
Protection Agency ("EPA") as one of several hundred potentially responsible
parties ("PRPs") under CERCLA with respect to the Ramp Industries, Inc. site
in Denver, Colorado. See "Legal Proceedings."
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 professional, scientific and
technical operating staff. There can be no assurance the Corporation will be
able to continue to attract and retain qualified staff. The Corporation's
inability to attract and retain a qualified operating staff would have a
material adverse effect on the Corporation's business and results of
operations.
EXCHANGE RATE FLUCTUATIONS
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 such translations are excluded from net income and are accumulated in a
separate component of stockholders' equity.
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. The Corporation derived 16% of its
revenue for 1997 from services performed outside of the United States.
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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.
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
to contractually or otherwise favorably reduce the currency risks associated
with its operations.
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.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
Certain provisions of the Corporation's Amended and Restated
Certificate of Incorporation (the "Certificate") and Bylaws, including the
classification of the Board of Directors into three classes, could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the
Corporation. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Corporation's Common
Stock. Certain of such provisions allow the Corporation to issue preferred
stock with rights senior to those of the Common Stock and impose various
procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. In addition, the
Corporation is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"), which restricts certain business
combinations with any "interested stockholder" and may delay, defer or
prevent a change in control of the Corporation.
ITEM 2. PROPERTIES
BioReliance's principal administrative offices are located in
Rockville, Maryland in a 10,000 square foot leased facility. The Corporation
currently leases three laboratory facilities and owns a fourth facility in
Rockville, Maryland, totaling approximately 120,000 square feet of
operational and administrative space. In addition, the Corporation leases
laboratory, manufacturing and administrative facilities of approximately
13,000 square feet in Stirling, United Kingdom, and approximately 14,000
square feet in Heidelberg, Germany. BioReliance maintains sales offices in
Boston, Massachusetts, Chicago, Illinois, and Los Angeles, California; and
European sales offices in Stirling, United Kingdom, and Heidelberg, Germany.
BioReliance completed construction of a biotesting facility near its
Heidelberg biomanufacturing facility in 1997. The Corporation has entered
into a lease for 51,000 square feet of new headquarters space in Rockville,
Maryland in which it plans to consolidate offices and laboratories from other
leased facilities during 1998. The Corporation also is expanding its viral
manufacturing capacity with the construction of a 58,000 square foot facility
which is scheduled to be available for manufacturing in the first quarter of
1999.
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BioReliance believes that its facilities are adequate for the
Corporation's operations and that suitable additional space will be available
when needed.
See Notes 12 and 15 of Notes to Consolidated Financial Statements for
information concerning the Corporation's lease rental obligations.
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.
The Corporation has been identified by the EPA as one of several
hundred PRPs under CERCLA with respect to the Ramp Industries, Inc. site in
Denver, Colorado. Although the Corporation believes that it sent only a small
quantity of waste to this site, liability under CERCLA can exceed a PRP's pro
rata share of cleanup costs. The EPA has incurred approximately $5 million to
date to remove wastes from this site and expects to incur approximately an
additional $1.3 million to remove the remaining wastes. However, the
estimated total cleanup costs have not been determined. A joint settlement
proposal was developed in October 1997 and submitted to EPA Region VIII
representatives, who have agreed to support the proposal to Senior EPA
management and the Department of Justice. There can be no assurance at this
time that the joint settlement proposal 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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the Corporation's executive
officers (as defined by regulations of the Securities and Exchange
Commission), the positions and offices they hold with the Corporation, their
terms as officers and their business experience. Executive officers are
elected by the Board of Directors and serve at the discretion of the Board.
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NAME AGE POSITION
- ---- --- --------
Capers W. McDonald ...........46 President, Chief Executive Officer and
Director
Michael R. N. Thomas .........50 Vice President, Chief Financial Officer and
Treasurer
Sherry L. Rhodes .............42 Vice President, General Counsel and
Secretary
John E. McEntire, Ph.D .......51 Vice President; President, MA BioServices,
Inc.
Brandon J. Price, Ph.D .......49 Vice President; Chief Operating Officer,
MAGENTA Corporation
Raymond F. Cosgrove, Ph.D ....50 Vice President, European Operations
Nona S. Karten ...............61 Vice President, Regulatory Affairs and
Quality Assurance
Capers W. McDonald joined the Corporation as President and Chief Executive
Officer in June 1992 and has been a Director of the Corporation since August
1992. From 1989 to 1992, he served as President of Spectroscopy Imaging
Systems Corporation, a joint-venture of Siemens Medical Systems, Inc. and
Varian Associates, Inc. in California. Prior to 1989, he held senior
management positions with Hewlett-Packard Company in the Analytical Products
Group and with HP Genenchem. Mr. McDonald is a co-founder and immediate past
Chair of the Maryland Bioscience Alliance, a cooperative business association
of over 100 bioscience companies throughout the state, and is a member of the
Board of Visitors to the University of Maryland Biotechnology Institute.
During 1996, he chaired the Bioscience Industry Growth Sector Committee for
the Maryland Department of Business and Economic Development and is a
Governor-appointed member of their Partnership for Workforce Quality. He
received a S.M. in Mechanical Engineering from Massachusetts Institute of
Technology and a M.B.A. from Harvard Business School.
Michael R.N. Thomas joined the Corporation in January 1998 as Vice President,
Chief Financial Officer and Treasurer. From 1995 through 1997, Mr. Thomas
was the Vice President, Chief Financial Officer, Secretary and Treasurer of
Biosys, Inc., a developer and producer of genetically engineered pesticides.
From 1991, he served as Vice President, Chief Financial Officer and Treasurer
of Telor Ophthalmic Pharmaceuticals, Inc., a development-stage company in
ophthalmic therapeutics, and prior to that he held several international
positions with SmithKline Beecham before moving to the U.S. as Director,
Corporate Development. He is a Fellow of the Institute of Chartered
Accountants in England and Wales.
Sherry L. Rhodes joined the Corporation in December 1997 as Vice President,
General Counsel and Secretary. She previously served as Vice President and
General Counsel of I-NET, Inc., a network integration company specializing in
information technology outsourcing, which was acquired by Wang Laboratories,
Inc. in 1996. Prior to joining I-NET in 1994, she was a partner in the law
firm of Reed Smith Shaw & McClay. Ms. Rhodes holds a J.D. from the
University of Maryland School of Law and is admitted to the Bar in Maryland
and the District of Columbia.
John E. McEntire, Ph.D. joined the Corporation in September 1994 as Vice
President of the Biotechnology Group, and became President, MA BioServices,
Inc. in January 1998. From September 1993 to July 1994, Dr. McEntire served
as Director of Business Development for Applied Analytical Industries, Inc.,
an analytical testing company. From 1988 to 1993, he worked at Tektagen,
Inc., another
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biosafety testing firm, where he became Executive Vice President for
Operations in 1992. From 1984 to 1988, he served as Vice President,
Operations and New Product Development of IMBIC Corporation, a contract
research and development services company, where he developed and patented
techniques for production, purification and synthesis of immunotherapeutic
agents. Dr. McEntire earned a M.S. in Microbiology and a Ph.D. in
Biochemistry from the University of Houston and served as a post-doctoral
fellow in cellular immunology at the University of Texas Medical Branch.
Brandon J. Price, Ph.D. joined the Corporation as Vice President, Business
Development in May 1992 and has served as Chief Operating Officer of MAGENTA
since January 1997. In 1987, he co-founded Quality Biotech, a competing
biosafety testing firm. From 1982 to 1986, he held senior management
positions with Damon Biotech and Ortho Diagnostic Systems. From 1975 to 1982,
he was an Assistant Professor of Oncology at the University of Miami Medical
School and a staff member at the Los Alamos Scientific Laboratory. Dr. Price
holds a Ph.D. in Biophysics from the University of Michigan.
Raymond F. Cosgrove, Ph.D. joined the Corporation in February 1993 as
Managing Director of BioReliance Ltd. He has served as Vice President,
European Operations since 1994 and as Director, BioReliance Holding GmbH
since 1996. From 1989 to 1993, he was Director of Business Development of
Shandon Scientific, Ltd., a manufacturer and distributor of clinical
laboratory equipment and diagnostic reagents. Dr. Cosgrove holds a Ph.D. in
Microbiology from London University.
Nona S. Karten joined the Corporation in 1976 and became Vice President,
Regulatory Affairs and Quality Assurance in 1989. She is an active member in
several United States and European quality assurance professional
organizations, including the Society of Quality Assurance, where she serves
as a member of the Board of Directors. Ms. Karten holds a M.A. in Biology
from Hunter College.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE
The Corporation's Common Stock, $.01 par value, is traded on the Nasdaq
National 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 National Market for the quarters since the
Corporation's initial public offering in July 1997.
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 1997 $26.60 $18.00
September 30, 1997 (beginning July 29) $26.25 $16.50
NUMBER OF STOCKHOLDERS
As of February 27, 1998, there were approximately 235 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 800
beneficial owners of the Corporation's Common Stock.
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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.
SALES OF UNREGISTERED SECURITIES
The information required by this portion of Item 5 is incorporated by
reference to Item 15 of Part II of the Registration Statement on Form S-1
(File 333-25071), filed April 11, 1997 with the Securities and Exchange
Commission.
USE OF PROCEEDS - INITIAL PUBLIC OFFERING
As of December 31, 1997, the Corporation had used approximately $1.9
million of the net proceeds from the Comporation's initial public offering
toward debt repayment and purchases of laboratory equipment and information
systems hardware and software.
At December 31, 1997, $27,554,000 of the net proceeds were invested in
short-term United States government securities, and the balance was invested
in money market funds pending the purchase of additional United States
government securities.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the five
years ended December 31, 1997 has been derived from the Corporation's
consolidated financial statements, audited by Price Waterhouse 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.
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YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996(1) 1997
---- ---- ---- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue ................................................. $22,207 $28,094 $30,078 $37,682 $47,888
------- -------- --------- ------- --------
Cost of sales ........................................... 15,248 19,094 20,570 24,860 29,452
Selling, general and administrative expenses ............ 4,704 5,947 7,071 7,852 10,093
Research and development expenses ....................... 236 354 1,012 1,110 1,393
Nonrecurring charge ..................................... - - - 696(2)
------- -------- --------- ------- --------
Total expenses ................................. 20,188 25,395 28,653 34,518 40,938
------- -------- --------- ------- --------
Income from operations .................................. 2,019 2,699 1,425(3) 3,164 6,950
Interest and other (income) expenses, net ............... 297 439 524 816 (67)
------- -------- --------- ------- --------
Income before income taxes .............................. 1,722 2,260 901 2,348 7,017
Provision for (benefit from) income taxes ............... 62 (2,192) 243 846 2,951
------- -------- --------- ------- --------
Net income .............................................. $ 1,660 $ 4,452 $ 658 $ 1,502 $ 4,066
======= ======== ========= ======= ========
Net income per share (4):
Basic ............................................... $ 5.51 $15.46 $ 1.80 $ 4.41 $ 1.18
======= ======== ========= ======= ========
Diluted ............................................. $ 0.42 $ 0.87 $ 0.11 $ 0.26 $ 0.60
======= ======== ========= ======= ========
Weighted average common stock outstanding ............... 276 279 289 309 3,458
======= ======== ========= ======= ========
Weighted average common and common
equivalent shares outstanding (5) .................... 3,916 5,108 4,619 5,679 6,833
======= ======== ========= ======= ========
AS OF DECEMBER 31,
------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities............. $570 $1,676 $693 $2,965 $33,781
Working capital (deficit)............ (76) 5,326 4,963 5,415 38,109
Total assets ........................ 14,110 23,551 24,938 35,827 68,651
Long-term debt ...................... 810 4,694 6,189 8,982 5,434
Stockholders' equity ................ 6,928 11,452 12,121 14,091 49,795
- ----------
(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. See Note 2 of Notes to Consolidated Financial Statements.
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(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. See Note 9 of Notes
to Consolidated Financial Statements.
(3) Income from operations includes the effect of $1.3 million of first-year
expenses for Analytical Services.
(4) In certain years, net income has been reduced to reflect the assumed
dividend paid to preferred stockholders. See Note 11 of Notes to
Consolidated Financial Statements.
(5) 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 11 of Notes to Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
OVERVIEW
The Corporation recently has made significant investments to broaden
the services it offers. In 1995, to augment its BioTesting Services and in
anticipation of new FDA regulations relating to biologics, the Corporation
invested in equipment and in marketing, sales, research and development to
begin offering Analytical Services. In 1996, to complement its existing viral
manufacturing capabilities and to strengthen its European presence, the
Corporation added the capability to manufacture microbial fermentation
products by acquiring BIOMEVA GmbH, an established contract manufacturer
located in Heidelberg, Germany. The Corporation purchased BIOMEVA for an
aggregate of $3.3 million, including $3.1 million paid in cash and the
issuance of 23,333 shares of Common Stock, and accounted for the acquisition
as a purchase. In 1997, the Corporation completed its initial public
offering which raised net proceeds of $32.2 million. Specific initiatives to
invest in information management systems were commenced, as was the design
and planning for a new consolidated headquarters facility and a new
biomanufacturing facility, both in Rockville, Maryland.
The Corporation's revenue has grown from $30.1 million in 1995, and
$37.7 million in 1996, to a record $47.9 million in 1997. Net income
similarly has risen throughout this period, reaching $0.7 million in 1995,
$1.5 million in 1996, and $4.1 million in 1997.
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; 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 order to provide new
services from time to time, the Corporation may be required to expend amounts
for labor and equipment that may have an adverse impact on margins.
23
24
Selling, general and administrative expense and research and
development expense consist primarily of labor and related fringe benefits,
indirect materials and travel.
The following table sets forth, for the periods indicated, certain
income statement data as a percentage of revenue. The trends illustrated in
this table may not be indicative of future results.
YEAR ENDED DECEMBER 31,
1995 1996 1997
---- ---- ----
Revenue ............................................ 100.0% 100.0% 100.0%
Cost of sales ...................................... 68.4 66.0 61.5
Selling, general and administrative ................ 23.5 20.8 21.1
Research and development ........................... 3.4 2.9 2.9
Nonrecurring charge ................................ 1.9
---- ---- ----
Total expenses ................................ 95.3 91.6 85.5
---- ---- ----
Income from operations ............................. 4.7 8.4 14.5
Interest and other expense (income), net ........... 1.7 2.2 (0.2)
---- ---- ----
Income before income taxes ......................... 3.0 6.2 14.7
Provision for income taxes ......................... 0.8 2.2 6.2
---- ---- ----
Net income ......................................... 2.2% 4.0% 8.5%
===== ===== =====
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenue was $47.9 million in 1997, an increase of 27.1% over revenue of
$37.7 million in 1996, reflecting increases in both BioTesting and
BioManufacturing Services. The growth in revenue for BioTesting Services
primarily was due to volume growth in BioSafety Testing and Analytical
Services. The growth in revenue for BioManufacturing Services was due to
volume and price increases in new viral production business for MAGENTA.
BioTesting Services and BioManufacturing Services accounted for 85% and 15%,
respectively, of the Corporation's revenue in 1997.
Cost of sales was $29.5 million in 1997, an increase of 18.5% over cost
of sales of $24.9 million in 1996. As a percentage of revenue, cost of sales
decreased to 61.5% from 66.0% and gross margin increased to 38.5% from 34.0%
in 1997 compared to 1996. This improvement in gross margin primarily was
attributable to the high incremental margins contributed by growth in
revenues from Analytical and BioManufacturing Services, and more efficient
recovery of the fixed cost element of cost of sales.
Selling, general and administrative expense was $10.1 million in 1997,
an increase of 28.5% over expense of $7.9 million in 1996. The increase was
due to administrative expense associated with the initial public offering and
subsequent public status, depreciation and expensed items on information
systems, and additional administrative employees and an increase in legal and
consulting fees for which there was no corresponding expense in 1996. As a
percentage of revenue, selling, general and administrative expense increased
to 21.1% in 1997 from 20.8% in 1996.
Research and development expense was $1.4 million in 1997, an increase
of 25.5% over expense of $1.1 million in 1996. The increase primarily was
attributable to additional staff and the development of new techniques for
BioManufacturing Services.
24
25
Operating income was $7.0 million in 1997, an increase of 119.7% over
operating income of $3.2 million in 1996. This increase was due to an
improvement in gross margin and the effect of the non-recurring charge in
1996 for which there was no corresponding expense in 1997, offset by
increases in selling, general and administrative and research and development
expenses.
Net interest and other income and expense was a $0.1 million benefit in
1997, compared to an expense of $0.8 million in 1996. The benefit was
primarily related to interest earnings from the initial public offering
proceeds.
The provision for income taxes was $3.0 million in 1997, compared to
a provision of $0.8 million in 1996. The effective tax rate was 42.0% in
1997 and 36.0% in 1996. The increase in the effective tax rate from 1996 to
1997 primarily was attributable to deferring the recognition of tax benefits
relating to certain net operating losses generated during 1997 until
realization is probable. These net operating losses related principally to
recent investments the Corporation has made to extend its BioTesting
capabilities in Germany.
Net income was $4.1 million in 1997, an increase of 170.7% over net
income of $1.5 million in 1996. This increase was due to improvement both in
operating margin and net interest and other income and expenses, which more
than offset the increase in income taxes.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue was $37.7 million in 1996, an increase of 25.3% over revenue of
$30.1 million in 1995, reflecting increases in both BioTesting and
BioManufacturing Services. The growth in revenue for BioTesting Services
primarily was due to volume growth in BioSafety Testing and Analytical
Services. The growth in revenue for BioManufacturing Services was due to
volume and price increases in new viral production business for MAGENTA and
the inclusion of $1.8 million of revenue derived from BIOMEVA's results since
its acquisition in July 1996. BioTesting Services and BioManufacturing
Services accounted for 86% and 14%, respectively, of the Corporation's
revenue in 1996.
Cost of sales was $24.9 million in 1996, an increase of 20.9% over cost
of sales of $20.6 million in 1995. As a percentage of revenue, cost of sales
decreased to 66.0% from 68.4% and gross margin increased to 34.0% from 31.6%
in 1996 compared to 1995. This improvement in gross margin primarily was
attributable to the high incremental margins contributed by growth in
revenues from Analytical and BioManufacturing Services.
Selling, general and administrative expense was $7.9 million in 1996,
an increase of 11.0% over expense of $7.1 million in 1995. The increase was
due to additional administrative employees and increases in legal and
consulting fees, depreciation on information systems, and administrative
expense for BIOMEVA, for which there was no corresponding expense in 1995. As
a percentage of revenue, selling, general and administrative expense declined
in 1996 from 1995.
Research and development expense was $1.1 million in 1996, an increase
of 9.7% over expense of $1.0 million in 1995. The increase primarily was
attributable to development of new techniques for BioManufacturing Services.
In 1996, the Corporation incurred a nonrecurring charge against
operations of $0.7 million in connection with the Corporation's settlement of
a dispute with a landlord relating to the termination of a lease.
25
26
Operating income was $3.2 million in 1996, an increase of 122.0% over
operating income of $1.4 million in 1995. This increase was due to both an
improvement in gross margin and a reduction, as a percentage of revenue, in
selling, general and administrative and research and development expenses.
Net interest and other expense was $0.8 million, an increase of 55.7%
over expense of $0.5 million in 1995. The increase was primarily related to
new borrowings to finance the acquisition of BIOMEVA.
The provision for income taxes was $0.8 million in 1996, as compared
to a provision of $0.2 million in 1995. The effective tax rate was 36.0% in
1996 and 27.0% in 1995. The increase in the effective tax rate from 1995 to
1996 primarily was attributable to 1996 income generated by BIOMEVA, which
was taxed at German rates which were higher than the United States federal
tax rate, and a lower effective tax rate in 1995 due to a decrease in the
valuation allowance for deferred tax assets as a result of improved
profitability of the Corporation's operations in the United Kingdom.
Net income was $1.5 million in 1996, an increase of 128.3% over net
income of $0.7 million in 1995. This increase was due to improvement in
operating margin, which more than offset increases in interest and other
expenses and in income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has funded its business through cash flows from
operating activities, private placements of debt and equity securities,
long-term bank loans, capital leases and recently from the proceeds of an
initial public offering completed on August 1, 1997. At December 31, 1997,
the Corporation had cash, cash equivalents and marketable securities of $33.8
million, compared to cash, cash equivalents and marketable securities of $3.0
million and $0.7 million at December 31, 1996 and 1995, respectively.
On August 1, 1997, the Company completed its initial public offering of
2,102,014 shares of its common stock (plus an additional 297,986 shares by a
selling stockholder) at an offering price of $15.00 per share. On August 7,
1997, the underwriters exercised an option to purchase an additional 315,302
shares. The net proceeds to the Company from the public offering and the
exercise of the over-allotment option by the underwriters, after deducting
the underwriting discounts and commissions and offering expenses payable by
the Company, were approximately $32.2 million. A substantial majority of the
proceeds were invested in government and government agency securities with
original maturities of more than 90 days at the time of purchase. These
marketable securities totaled $27.6 million at December 31, 1997.
In addition to the proceeds from the initial public offering, the
Corporation generated cash flows from operations of $6.3 million during 1997,
compared to cash flows from operations of $4.5 million during 1996 and $1.6
million during 1995. Net income, as adjusted for depreciation and
amortization, deferred income taxes and other non-cash adjustments provided
$9.1 million, $4.7 million and $2.5 million in the years ended December 31,
1997, 1996, and 1995, respectively. Changes in other assets and liabilities
used $2.8 million cash in 1997 primarily from an increase in accounts
receivable primarily due to an increase in revenue, and $0.2 million in 1996
where a similar increase in accounts receivable was largely offset by a
corresponding rise in customer advances and other current liabilities.
26
27
Working capital increased to $38.1 million at December 31, 1997,
compared to $5.4 million at December 31, 1996. The increase in 1997
primarily was due to the proceeds of the initial public offering.
The Corporation invested $4.2 million, $2.8 million and $4.6 million in
capital expenditures (including expenditures financed through capital leases)
during 1997, 1996 and 1995, respectively.
The Corporation financed the acquisition of BIOMEVA in July 1996 and
obtained additional funds for working capital and expansion of its business
through a promissory note with NationsBank, N.A. ("NationsBank") in the
amount of $1.8 million and a subordinated note from Sidney R. Knafel, the
Corporation's largest stockholder, in the amount of $1.9 million, which was
repaid on March 28, 1997. The NationsBank promissory note requires monthly
principal payments of $30,000, and at December 31, 1997, $1.3 million was
outstanding on the note.
In December 1994, the Corporation's existing loan agreement with
NationsBank was modified to provide term loan financing in the amount of
$4,300,000 with a maturity date of November 30, 1999 (the "Mortgage Loan").
In October 1997, the Mortgage Loan was modified and restated to release the
foreign subsidiaries from joint and several liability, to include all the
U.S. subsidiaries as joint and several makers, to release the liens created
by the first security interest in all of its tangible and intangible assets,
and to modify the interest rate terms. The Mortgage Loan is secured by a
deed of trust on the Company's facility in Rockville, Maryland. In addition
to a principal payment of $30,000 per month, the note bears interest at the
London Inter-Bank Offering Rate ("LIBOR") plus the applicable LIBOR Rate
Additional Percentage ("LIBOR Rate Option"). The LIBOR Rate Option ranged
from 1.25% to 2.0% depending on the Company achieving certain funded debt to
EBITDA ratios. At December 31, 1997, the applicable interest rate was 6.94%.
In May 1995, the Company entered into an interest rate swap agreement
whereby the variable interest rate of the Mortgage Loan was effectively
converted into debt with a fixed rate of 9.05% per annum. Amounts to be paid
or received under the interest rate swap agreement are recognized as interest
income or expense in the periods in which they accrue and are recorded in the
same category as that arising from the Mortgage Loan. This agreement expires
on November 30, 1999. The effect of the interest rate swap agreement on
interest expense was not material in 1995, 1996 or 1997.
In addition to the Mortgage Loan, the Company has entered into a
revolving loan agreement with NationsBank with a maximum available balance
not to exceed $1,000,000. Amounts to be paid include interest only on the
unpaid Principal Sum, payable monthly, and unless paid sooner, the unpaid
Principal Sum, together with unpaid accrued interest payable in full on May
31, 1998. The note bears interest at the same rate as the Mortgage Loan.
The Company has also agreed to pay a quarterly commitment fee equaling 0.25%
of the average unused portion of the revolving bank loan. At December 31,
1997, no amounts were outstanding under the facility. This line of credit
expires in May 1998.
In June 1996, the Company entered into a promissory note with
NationsBank for $1,800,000 with a maturity date of June 30, 1999 (the
"Promissory Note") and amended its loan agreement to provide for these
borrowings. In addition to a principal payment of $30,000 per month, the note
bears interest at the same rate as the Mortgage Loan. At December 31, 1997,
the interest rate was 6.94%.
The bank agreements are cross collateralized and are secured by a deed
of trust on the Corporation's facility in Rockville, Maryland. The
agreements require the Corporation to meet certain financial and restrictive
covenants, including maintaining certain tangible net worth levels and funded
debt to equity ratios.
27
28
At December 31, 1997, the Corporation had formulated capital spending
plans of approximately $25 million, primarily for BioManufacturing
facilities, the consolidation of headquarter and certain BioTesting
facilities and the continuing development of computer information systems.
To the extent these plans are confirmed, if external funds are available on
favorable terms and conditions, a significant proportion of the potential
expenditure may be financed from third parties. See Notes 12 and 15 of Notes
to Financial Statements.
The Corporation expects to continue the foregoing and other expansions
of its operations through internal growth, geographic expansion and possibly
strategic acquisitions. The Corporation expects that such activities will be
funded from existing cash, cash equivalents and marketable securities, cash
flows from operations, bank borrowings and lease financing. 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, irrespective of need. There can be
no assurances that such financing will be available on terms acceptable to
the Corporation.
Based on its current operating plan, the Corporation believes that
available liquid resources are sufficient to meet its foreseeable cash needs.
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 such translations are excluded from net income and are accumulated in a
separate component of stockholders' equity.
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 risks
sometimes associated with international operations. The Corporation derived
16% of its revenue for 1997 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.
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. Although, at the present time, the Corporation does not
use derivative financial instruments to manage or control foreign currency
risk, 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.
The revenue and identifiable assets attributable to the Corporation's
geographic segments are reported in Note 13 of Notes to Consolidated
Financial Statements.
28
29
INFLATION
The Corporation believes the effects of inflation generally do not have
a material impact on its financial condition or results of operations.
YEAR 2000
The Corporation has assessed the impact of the Year 2000 on its
internal and external software, and has determined that any modification to
the software will not have a material impact on the Corporation or its
financial condition or results of operations.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated herein by
reference to the text appearing in Part I, Item 4 of this report under the
caption "Executive Officers of the Registrant," and by reference to 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 this Item 11 is incorporated herein 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 this Item 12 is incorporated herein 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.
29
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this 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.
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, 1997.
30
31
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 30th day of March, 1998.
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, Michael R. N. Thomas and
Sherry L. Rhodes, 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.
31
32
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 30, 1998
-------------------------------
SIDNEY R. KNAFEL
/s/ Capers W. McDonald President, Chief March 30, 1998
------------------------------- Executive Officer and
CAPERS W. MCDONALD a Director
/s/ Michael R. N. Thomas Vice President, Chief March 30, 1998
------------------------------- Financial Officer and
MICHAEL R. N. THOMAS Treasurer (Chief Accounting
Officer)
/s/ William J. Gedale Director March 30, 1998
-------------------------------
WILLIAM J. GEDALE
/s/ Victoria Hamilton Director March 30, 1998
-------------------------------
VICTORIA HAMILTON
/s/ Gordon J. Louttit Director March 30, 1998
-------------------------------
GORDON J. LOUTTIT
/s/ Dr. Leonard Scherlis Director March 30, 1998
-------------------------------
DR. LEONARD SCHERLIS
32
33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of BioReliance
Corporation.(1)
3.2 Bylaws of BioReliance Corporation.(1)
10.1 Amended and Restated BioReliance Corporation 1997 Incentive
Plan.
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. (1)
10.4 Second Modification Agreement -- Leasehold Deed of Trust and
Security Agreement, by and among BioReliance Corporation,
Elizabeth Shore and NationsBank, N.A., dated as of October 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.(1)
10.6 International Swap Dealers Association, Inc. Master Agreement by
and among NationsBank, N.A., Microbiological Associates, Inc.
and MAGENTA Corporation, dated as of May 10, 1995.(1)
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.
10.8 Lease Agreement dated as of December 1, 1983, by and between
Montgomery County, Maryland and Dynasciences Corp. n/k/a
BioReliance Corporation (1)
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.(1)
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.
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.
10.13 Microbiological Associates, Inc. 1995 Non-Qualified Stock Option
Plan.(2)
10.14 MAGENTA Corporation, 1994 Incentive Stock Option Plan.(2)
10.15 Microbiological Associates, Inc., 1988 Incentive Stock Option
Plan. (2)
10.16 Lease Agreement between FP Rockledge, L.L.C. and MA BioServices,
Inc. dated as of October 16, 1997.
10.17 First Amendment to Lease Agreement between FP Rockledge, L.L.C.
and MA BioServices, Inc.
10.18 Consent of Guarantor to First Amendment to Lease Agreement.
10.19 Release and Separation Agreement, dated November 26, 1997, by
and between BioReliance Corporation and Carl C. Schwan.
10.20 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.
10.21 Professional Services Agreement, dated as of December 2, 1997,
by and between BioReliance Corporation and Jeffrey M. Ostrove,
Ph.D.
21.1 Subsidiaries of the registrant.(1)
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney (included on signature page).
33
34
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
27.5 Financial Data Schedule.
99 Item 15, Part II of the Corporation's Registration Statement on
Form S-1 (Registration No. 333-25071), which is incorporated in
Item 5, Part II hereof by reference.
- ------------
(1) Indicates an exhibit to the Corporation's Registration Statement on Form
S-1 (Registration No. 333-25071), which is incorporated herein by
reference.
(2) Indicates an exhibit to the Corporation's Registration Statement on Form
S-8 (Registration No. 333-34341).
34
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL SCHEDULE
PAGE
----
Report of Independent Accountants.............................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
1996 and 1997................................................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997................................................................................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996 and 1997.......................................................................... F-6
Notes to Consolidated Financial Statements..................................................... F-7
Financial Statement Schedule:
For the Three Years Ended December 31, 1997
II - Valuation and Qualifying Accounts................................................. F-20
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
36
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, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Washington, D.C.
February 23, 1998
F-2
37
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2,965 $ 6,227
Marketable securities............................................ --- 27,554
Accounts receivable, net......................................... 13,645 15,923
Other current assets............................................. 1,204 1,827
Deferred income taxes............................................ 355 ---
------- -------
Total current assets...................................... 18,169 51,531
Property and equipment, net........................................ 14,945 15,601
Intangible assets, net............................................. 468 256
Deposits and other assets.......................................... 246 286
Deferred income taxes.............................................. 1,999 977
------- -------
Total assets.............................................. $35,827 $68,651
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 1,555 $ 1,574
Accounts payable................................................. 1,900 1,811
Accrued employee compensation and benefits....................... 2,213 2,829
Other accrued liabilities........................................ 2,160 2,302
Customer advances................................................ 4,067 3,635
Deferred income taxes............................................ 859 1,271
------- -------
Total current liabilities................................. 12,754 13,422
Long-term debt..................................................... 7,082 5,434
Note payable to stockholder........................................ 1,900 ---
------- -------
Total liabilities......................................... 21,736 18,856
------- -------
Commitments and contingencies (Note 12)
Stockholders' equity:
Convertible preferred stock, $.01 par value: 6,900,000 shares
authorized; 6,470,121 and no shares issued and outstanding... 65 ---
Common stock, $.01 par value: 15,000,000 shares authorized;
339,930 and 7,685,208 shares issued and outstanding......... 3 77
Additional paid-in capital...................................... 20,073 52,457
Accumulated deficit............................................. (6,211) (2,145)
Equity adjustment from foreign currency translation............. 161 (594)
------- -------
Total stockholders' equity............................... 14,091 49,795
------- -------
Total liabilities and stockholders' equity............... $35,827 $68,651
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
38
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
Revenue................................ $30,078 $37,682 $47,888
------- ------- -------
Expenses:
Cost of sales....................... 20,570 24,860 29,452
Selling, general and administrative. 7,071 7,852 10,093
Research and development............ 1,012 1,110 1,393
Nonrecurring charge................. --- 696 ---
------- ------- -------
28,653 34,518 40,938
------- ------- -------
Income from operations................. 1,425 3,164 6,950
------- ------- -------
Other (income) expense:
Interest income..................... (93) (18) (817)
Interest expense.................... 599 844 717
Other expense (income).............. 18 (10) 33
------- ------- -------
524 816 (67)
------- ------- -------
Income before income taxes............. 901 2,348 7,017
Provision for income taxes............. 243 846 2,951
------- ------- -------
Net income............................. $ 658 $ 1,502 $ 4,066
======= ======= =======
Net income per share:
Basic............................... $ 1.80 $ 4.41 $ 1.18
======= ======= =======
Diluted............................. $ 0.11 $ 0.26 $ 0.60
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
39
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
Cash flows from operating activities:
Net income....................................................... $ 658 $ 1,502 $ 4,066
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................. 1,645 2,626 2,991
Amortization of intangibles.................................. --- 92 212
Amortization of bond premiums and discounts.................. --- (173)
Loss on disposal of fixed assets............................. --- 190
Compensation element of stock option grants.................. 3 22 ---
Deferred income taxes, net................................... 174 523 1,789
Changes in assets and liabilities:
Accounts receivable, net................................. 674 (4,303) (2,259)
Other current assets..................................... (358) 37 (678)
Deposits and other assets................................ 77 (203) (89)
Accounts payable......................................... (200) 905 (94)
Accrued employee compensation and benefits............... (65) 408 615
Other accrued liabilities................................ (64) 1,031 26
Customer advances........................................ (954) 1,825 (320)
------ ------ --------
Net cash provided by operating activities........... 1,590 4,465 6,276
------ ------ --------
Cash flows from investing activities:
Purchases of marketable securities............................... --- --- (32,381)
Proceeds from the maturities of marketable securities............ --- --- 5,000
Purchases of property and equipment.............................. (1,870) (1,850) (4,201)
Acquisition of BIOMEVA GmbH, net of cash acquired................ --- (2,752) ---
------ ------ --------
Net cash used in investing activities............... (1,870) (4,602) (31,582)
------ ------ --------
Cash flows from financing activities:
Proceeds from initial public offering, net of expenses........... --- --- 32,247
Proceeds from exercise of stock options.......................... 41 34 223
Proceeds from debt............................................... --- 1,800 ---
Payments on debt................................................. (361) (539) (717)
Proceeds from (payments on) note payable to stockholder.......... --- 1,900 (1,900)
Payments on capital lease obligations............................ (382) (813) (912)
Repurchase and cancellation of treasury stock.................... --- (3) (77)
------ ------ --------
Net cash (used in) provided by financing activities. (702) 2,379 28,864
------ ------ --------
Effect of exchange rate changes on cash and cash equivalents....... (1) 30 (296)
------ ------ --------
Net (decrease) increase in cash and cash equivalents............... (983) 2,272 3,262
Cash and cash equivalents, beginning of year....................... 1,676 693 2,965
------ ------ --------
Cash and cash equivalents, end of year............................. $ 693 $ 2,965 $ 6,227
====== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
40
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
CONVERTIBLE EQUITY
PREFERRED STOCK COMMON STOCK ADJUSTMENT
--------------- ------------- ADDITIONAL FROM FOREIGN TOTAL
PAID-IN ACCUMULATED CURRENCY STOCKHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TRANSLATION EQUITY
------ ------ ------ ------ -------- -------- ----------- ------
BALANCE AT DECEMBER 31,
1994............................. 6,470,121 $ 65 280,518 $ 3 $19,778 $(8,371) $ (23) $11,452
Exercise of stock options........ -- -- 16,484 -- 41 -- -- 41
Compensation element of stock
option grants.................. -- -- -- -- 3 -- -- 3
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- (33) (33)
Net income....................... -- -- -- -- -- 658 -- 658
--------- --- ------- --- ------ ------- ----- -------
BALANCE AT DECEMBER 31,
1995............................. 6,470,121 65 297,002 3 19,822 (7,713) (56) 12,121
Issuance of common stock in
Connection with acquisition.... -- -- 23,333 -- 198 -- -- 198
Exercise of stock options........ -- -- 20,647 -- 34 -- -- 34
Compensation element of stock
option grants.................. -- -- -- -- 22 -- -- 22
Stock repurchase and cancellation -- -- (1,052) -- (3) -- -- (3)
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- 217 217
Net income....................... -- -- -- -- -- 1,502 -- 1,502
--------- --- ------- --- ------ ------- ----- -------
BALANCE AT DECEMBER 31,
1996............................ 6,470,121 65 339,930 3 20,073 (6,211) 161 14,091
Issuance of common stock in
Initial Public Offering("IPO"),
net of offering costs of $1.5
million...................... -- -- 2,417,316 24 32,223 -- -- 32,247
Conversion of preferred stock,
concurrent with IPO........... (6,470,121) (65) 4,778,072 48 17 -- -- --
Exercise of stock options....... -- -- 155,922 2 221 -- -- 223
Stock repurchase and cancellation -- -- (6,032) _ (77) -- -- (77)
Equity adjustment from foreign
currency translation.......... -- -- -- -- -- -- (755) (755)
Net income...................... -- -- -- -- -- 4,066 -- 4,066
--------- --- --------- --- ------- ------- ----- -------
BALANCE AT DECEMBER 31,
1997............................ - $ - 7,685,208 $77 $52,457 $(2,145) $(594) $49,795
========= === ========= === ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
41
BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract research
organization providing nonclinical testing and contract manufacturing services
for biologics to biotechnology and pharmaceutical companies worldwide.
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BioReliance
Corporation and its subsidiaries. All significant intercompany transactions
have been eliminated.
REVENUE RECOGNITION
Revenue recognized from commercial contracts, which are principally
fixed-price or fixed-rate, is recorded using the percentage-of-completion or
the completed-contract method, depending on the nature and duration of the
contract. Nonclinical testing services are accounted for using the
percentage-of-completion method, except for those services that are generally
completed within three days which are accounted for using the
completed-contract method. Contract manufacturing services providing for the
delivery of products are accounted for using the completed-contract method,
while all other contract manufacturing services are accounted for using the
percentage-of-completion method. Percentage-of-completion 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 three months or less.
F-7
42
MARKETABLE SECURITIES
Marketable securities comprise investments in debt securities with
original maturities of more than 90 days 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 building is depreciated over a 20-year period. Leasehold improvements are
depreciated or amortized over the shorter of the useful life or the lease term.
Other fixed assets are depreciated or amortized over periods ranging from three
to ten years. Significant additions and betterments are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of license rights acquired in
connection with the acquisition of BIOMEVA GmbH ("BIOMEVA") in 1996 and are
amortized on a straight-line basis over three years. Accumulated amortization
at December 31, 1996 and 1997 was $92,000 and $304,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated 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.
INCOME TAXES
Deferred income taxes are recognized for the expected future tax
consequences of temporary differences by applying enacted statutory tax rates
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
This statement replaces the presentation of primary earnings per share ("EPS")
with a presentation of basic EPS, and 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 shareholders 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, and net income available to common
stockholders is adjusted accordingly for the effect of cumulative dividends on
Convertible Preferred Stock. The Corporation adopted this statement during the
fourth quarter of 1997, as required. Accordingly, all prior period EPS data
has been restated as required by SFAS 128.
F-8
43
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin 98 ("SAB 98"). SAB 98 rescinded SAB 83, which required
common shares and common share equivalents issued or granted by the Corporation
at prices below the public offering price during the 12 months immediately
preceding the filing of the Corporation's initial Registration Statement and
through the effective date of such Registration Statement to be calculated
using the treasury stock method based upon the estimated initial public
offering price, and to be included for all periods presented regardless of
whether they are dilutive. The Corporation has adopted SAB 98 and,
accordingly, all EPS data has been restated as required.
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 No. 25) and related
interpretations. Under APB No. 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 No. 123) (Note 7).
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 and
are accumulated in a separate component of stockholders' equity.
(2) ACQUISITION
In July 1996, the Corporation acquired all of the shares of BIOMEVA, a
contract manufacturer of microbial products located in Heidelberg, Germany.
Total consideration for the acquisition was negotiated by the parties to be
$3.3 million, and consisted of $3.1 million paid in cash plus the issuance of
23,333 shares of the Corporation's Common Stock. The acquisition of BIOMEVA has
been accounted for by the purchase method and, accordingly the purchase price
was allocated based on the fair values of the assets and liabilities acquired.
BIOMEVA's operations have been included in the consolidated financial
statements since the date of acquisition. Intangible assets of $0.6 million
were recorded in connection with the acquisition and are being amortized on a
straight-line basis over three years. The unaudited pro forma results of
operations, assuming that the acquisition had been consummated at January 1,
1995 are as follows for the years ended December 31:
F-9
44
1995 1996
------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenue....................................................... $32,287 $39,165
Net income.................................................... $ 377 $ 1,386
Net income per basic share.................................... $ 1.30 $ 4.49
Net income per diluted share.................................. $ 0.08 $ 0.24
These unaudited pro forma results of operations include adjustments to
BIOMEVA's unaudited historical results of operations which provide for: (1)
additional amortization and depreciation expense relating to intangible assets
and an increase in the carrying value of property and equipment, which result
from application of purchase accounting as if the acquisition had been
consummated at January 1, 1995; and (2) a net increase in interest expense,
assuming that, as of January 1, 1995, the debt incurred by the Corporation to
finance the acquisition was outstanding and the pre-acquisition BIOMEVA debt
was repaid.
(3) MARKETABLE SECURITIES
Marketable securities consisted of the following amounts at December 31,
1997:
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST (LOSSES) VALUE
--------- ---------- ---------
(IN THOUSANDS)
Government and Government Agencies......... $24,957 $(2) $ 24,955
Commercial paper........................... 2,597 --- 2,597
------- --- --------
$27,554 $(2) $ 27,552
======= ==== ========
All securities have maturities of one year or less.
(4) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following amounts as of December 31:
1996 1997
---- ----
(IN THOUSANDS)
Billed accounts receivable:
Commercial.................................................. $ 6,579 $6,678
Government.................................................. 380 506
------- -------
6,959 7,184
------- -------
Unbilled accounts receivable:
Commercial.................................................. 6,272 7,923
Government.................................................. 654 1,058
------- ------
6,926 8,981
------- ------
Less allowances for doubtful accounts and unallowable
contract costs.............................................. (240) (242)
------- -------
Accounts receivable, net...................................... $13,645 $15,923
======= =======
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
F-10
45
costs by the United States Government. Government contract costs for 1995, 1996
and 1997 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.
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following amounts as of December 31:
1996 1997
---- ----
(IN THOUSANDS)
Land............................................................ $1,984 $1,984
Building........................................................ 7,859 7,859
Machinery, equipment, furniture and fixtures.................... 15,095 16,511
Leasehold improvements.......................................... 2,288 2,291
Construction in progress and assets not yet placed in service... 255 1,900
------- ------
Property and equipment, at cost................................. 27,481 30,545
Less accumulated depreciation and amortization.................. (12,536) (14,944)
------- -------
Property and equipment, net..................................... $ 14,945 $ 15,601
======== ========
(6) DEBT
Debt consisted of the following amounts as of December 31:
1996 1997
---- ----
(IN THOUSANDS)
Mortgage Loan.............................................. $3,581 $3,223
Promissory Note............................................ 1,620 1,260
Note payable to stockholder................................ 1,900 ----
Capital lease obligations.................................. 3,436 2,525
------ ------
Total debt................................................. 10,537 7,008
Less current portion....................................... (1,555) (1,574)
------ ------
Long-term portion.......................................... $8,982 $5,434
====== ======
BANK DEBT
In December 1993, the Corporation entered into a loan agreement with a
bank to refinance $1.6 million of outstanding indebtedness and to fund the
expansion of the Company's business. In December 1994, this loan agreement was
modified to provide term loan financing in the amount of $4,300,000 with a
maturity date of November 30, 1999 (the "Mortgage Loan"). In addition to a
principal payment of $30,000 per month, the note bears interest at the London
Inter-Bank Offering Rate ("LIBOR") plus the applicable LIBOR Rate Additional
Percentage ("LIBOR Rate Option"). The LIBOR Rate Option ranged from 1.25% to
2.0% depending on the Corporation achieving certain funded debt to EBITDA
ratios. At December 31, 1997, the interest rate was 6.94%.
In May 1995, the Corporation entered into an interest rate swap agreement
whereby the variable interest rate of the Mortgage Loan was effectively
converted into debt with a fixed rate of 9.05% per annum. Amounts to be paid or
received under the interest rate swap agreement are recognized as interest
income or expense in the periods in which they accrue and are recorded in the
same category as that arising from the Mortgage Loan. The agreement is a
straight forward contract that has no imbedded options or other terms involving
a higher level of complexity or risk. This agreement expires on November 30,
1999. The effect of the interest rate swap agreement on interest expense was
not material in 1995, 1996 or 1997.
In addition to the Mortgage Loan, the Corporation has entered into a
revolving loan agreement with the same bank with a maximum available balance
not to exceed $1,000,000. Amounts to be paid include interest only on the
unpaid Principal Sum, payable monthly, and unless paid sooner, the unpaid
Principal Sum, together with unpaid accrued
F-11
46
interest payable in full on May 31, 1998. The note bears interest at the same
rate as the Mortgage Loan. The Corporation has also agreed to pay a quarterly
commitment fee equaling 0.25% of the average unused portion of the revolving
bank loan. At December 31, 1997, no amounts were outstanding under the
facility. This line of credit expires in May 1998.
In June 1996, the Corporation entered into a promissory note with the same
bank for $1,800,000 with a maturity date of June 30, 1999 (the "Promissory
Note") and amended its loan agreement to provide for these borrowings. In
addition to a principal payment of $30,000 per month, the note bears interest
at the same rate as the Mortgage Loan. At December 31, 1997, the interest rate
was 6.94%.
In July 1996, the Corporation entered into a loan agreement with its
majority stockholder for $1,900,000. This note was repaid in March 1997.
The long-term portion of the Corporation's debt, excluding capital
lease obligations (see below), is payable as follows (in thousands):
Years ending December 31:
1998................. $718
1999................. 3,047
-------
Total............. $ 3,765
=======
The bank agreements are cross collateralized and are secured by a deed
of trust on the Corporation's facility in Rockville, Maryland. The agreements
require the Corporation to meet certain financial and restrictive covenants,
including maintaining certain tangible net worth levels and funded debt to
EBITDA ratios.
CAPITAL LEASE OBLIGATIONS
The Corporation leases land and certain equipment under noncancelable
lease agreements accounted for as capital leases. The assets underlying such
capitalized leases are included with the Corporation's owned property and
equipment, and are summarized as follows as of December 31:
1996 1997
---- ----
(IN THOUSANDS)
Land................................................... $1,984 $1,984
Machinery and equipment................................ 4,575 4,407
------ -----
Total assets at cost................................... 6,559 6,391
Less accumulated depreciation.......................... (1,921) (2,760)
------ ------
Net capitalized assets................................. $4,638 $3,631
====== ======
The future minimum lease payments under capital lease obligations at
December 31, 1997 were as follows (in thousands):
Years ending December 31:
1998................................................................. $ 1,032
1999................................................................. 785
2000................................................................. 501
2001................................................................. 143
2002................................................................. 56
Thereafter........................................................... 723
-------
Total minimum lease payments........................................... 3,240
Less amount representing interest...................................... (715)
-------
Present value of minimum lease payments................................ 2,525
Less current portion................................................... (856)
-------
Long-term portion...................................................... $ 1,669
=======
F-12
47
(7) STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On August 1, 1997, the Corporation completed its initial public offering of
2,102,014 shares of its common stock (plus an additional 297,986 shares by a
selling stockholder) at an offering price of $15.00 per share. On August 7,
1997, the underwriters exercised an option to purchase an additional 315,302
shares. The net proceeds to the Corporation from the public offering and the
exercise of the over-allotment option by the underwriters, after deducting the
underwriting discounts and commissions and offering expenses payable by the
Corporation, were approximately $32.2 million. Upon the closing of the
offering, all outstanding shares of the Corporation's convertible preferred
stock were automatically converted into 4,778,072 shares of common stock.
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at December 31, 1996 and 1997 consisted of the
following:
Series A, $.01 par value, $100 liquidation value, 50,000 shares authorized,
20,698 and no shares issued and outstanding, respectively
Series B, $.01 par value, $3.00 liquidation value, 400,000 shares
authorized, 385,723 and no shares issued and outstanding, respectively
Series C, $.01 par value, $5.00 liquidation value, 2,450,000 shares
authorized, 2,425,438 and no shares issued and outstanding, respectively
Series D and E, $.01 par value, $1.89 liquidation value, 4,000,000 shares
authorized, 456,829 shares of Series D and no shares issued and
outstanding, respectively; and 3,181,433 shares of Series E and no
shares issued and outstanding, respectively
At August 1, 1997, each share of the preferred stock was convertible
into the following number of common shares: Series A 14.9366, Series B
(including adjustment for accumulated dividends of $1,162,000) 1.6947, Series C
1.0072, Series D 0.3772 and Series E 0.3772. Series A, B, C and D vote their
respective common share equivalents, and Series E is non-voting. Upon the
closing of the Corporation's initial public offering, all Series of Convertible
Preferred Stock outstanding were automatically converted into 4,778,072 shares
of common stock, based on the exchange ratios indicated above.
STOCK OPTION PLANS
In May 1997, and as amended in September 1997, the Board of Directors
of the Corporation approved the 1997 Incentive Plan ("the 1997 Plan"). The
1997 Plan replaced all of the Corporations's former stock option plans. 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, employee directors, consultants and advisors.
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 are vested
after three years and have ten-year terms. These Awards are exercisable as
determined by the Corporation's compensation committee 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.
F-13
48
As of December 31, 1997, 729,194 and 722,524 shares are authorized and
available for grants, respectively.
Changes in options outstanding were as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
------- ---------
Balance, December 31, 1994........ 684,782 $1.59
Granted......................... 141,850 2.91
Exercised....................... (16,484) 2.43
Canceled........................ (15,667) 1.96
-------
Balance, December 31, 1995........ 794,481 1.89
Granted......................... 141,066 4.77
Exercised....................... (20,647) 1.96
Canceled........................ (43,536) 2.25
-------
Balance, December 31, 1996........ 871,364 2.43
Granted......................... 34,536 12.84
Exercised....................... (155,922) 1.58
Canceled........................ (40,742) 4.49
-------
Balance, December 31, 1997........ 709,236 3.34
=======
No pro forma disclosures of net income and net income per share using the
SFAS 123 fair-value based method to determine compensation expense have been
provided since the effect is not material. To determine fair value under SFAS
123, the Corporation used the Black-Scholes option-pricing model and the
following weighted-average assumptions for 1995, 1996 and 1997: a risk-free
interest rate of 6.35%, expected lives of 6 years, expected volatility of 35%,
and expected dividends of zero. The weighted average fair value of options
granted during 1995, 1996 and 1997 was $0.33, $0.60 and $1.81, respectively.
For options outstanding and exercisable at December 31, 1997, the following
number of options, range of exercise prices and weighted average exercise
prices were:
WEIGHTED WEIGHTED AVERAGE
SHARES EXERCISE REMAINING SHARES WEIGHTED
RANGE OF EXERCISE PRICES OUTSTANDING PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
------------------------ ----------- ----- ---------------- ----------- ----
$ 0.56 - 1.50 420,943 $ 1.47 2.17 360,449 $1.48
$ 2.25 - 4.50 217,222 $ 2.76 4.56 126,880 $2.62
$ 7.50 - 9.00 54,437 $ 7.89 5.90 11,927 $7.75
$13.41 - 21.25 16,634 $ 16.53 6.43 -
------- -------
Total 709,236 $ 2.71 3.29 499,256 $1.92
======= =======
F-14
49
(8) INCOME TAXES
INCOME TAX PROVISION
Income before income taxes consisted of the following amounts for the years
ended December 31:
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
Domestic............................. $878 $1,632 $5,839
Foreign.............................. 23 716 1,179
---- ------ -------
Income before income taxes........... $901 $2,348 $7,018
==== ====== ======
The provision for income taxes consisted of the following amounts for
the years ended December 31:
1995 1996 1997
----- ------ ------
(IN THOUSANDS)
Current:
Federal.............................. $64 $ -- $465
Foreign.............................. 4 323 464
State................................ 1 -- 233
---- ----- ------
Total current provision......... 69 323 1,162
---- ---- -----
Deferred:
Federal.............................. 280 540 1,116
Foreign.............................. (168) (90) 323
State................................ 62 73 350
---- ---- ---
Total deferred provisio......... 174 523 1,789
---- ---- -----
Total provision for
income taxes.................. $243 $846 $2,951
==== ==== ======
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
years ended December 31:
1995 1996 1997
---- ---- ----
Federal tax at statutory rate........... 34.0% 34.0% 34.0%
State tax, net of federal benefit....... -- -- 2.2
Adjustment for foreign income taxes..... -- 4.4 (0.1)
Change in valuation allowance........... (16.8) 0.9 12.2
Effect of tax loss carryforwards........ 14.4 -- --
Charitable contribution................. --- --- (7.5)
Nondeductible expenses.................. 0.3 1.5 0.1
Other................................... (4.9) (4.8) 1.1
----- ----- -----
Provision for income taxes.............. 27.0% 36.0% 42.0%
===== ===== =====
During 1997, the Corporation donated 100% of the outstanding stock of
one of its subsidiaries to a not-for-profit organization which resulted in a
permanent difference between income reported for tax purposes and financial
reporting purposes.
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50
DEFERRED INCOME TAXES
Deferred income taxes consisted of the following amounts as of December 31:
1996 1997
---- ----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards......................... $ 2,371 $ 771
Accrued expenses......................................... 518 373
Tax credit carryforwards................................. 467 1,114
Other.................................................... 61 502
------- ------
Gross deferred tax assets.................................. 3,417 2,760
Valuation allowance........................................ (373) (771)
------ ------
Net deferred tax assets.................................. 3,044 1,989
------- ------
Deferred tax liabilities:
Unbilled accounts receivable............................. (1,121) (1,640)
Depreciation and amortization............................ (422) (643)
Other.................................................... (6) _
------ -------
Deferred tax liabilities................................. (1,549) (2,283)
------ -------
Deferred taxes, net........................................ $ 1,495 $ (294)
======= =======
Deferred income tax liabilities, current portion........... $ (859) $ (1,271)
Deferred income tax assets, current portion................ 355 --
Deferred income tax assets, long-term portion.............. 1,999 977
------- -------
Deferred taxes, net........................................ $ 1,495 $ (294)
======= =======
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 1997, the increase in the valuation allowance is due principally to
valuation allowances established for net operating losses in certain foreign
jurisdictions which are a result of recent investments made by the Corporation
to expand its operations.
TAX CARRYFORWARDS
At December 31, 1997, the Corporation had foreign net operating loss
carryforwards available to offset future taxable income of approximately $0.7
million and $0.4 million in the U.K. and in Germany, respectively. Additionally,
the Corporation had tax credit carryforwards of approximately $1.1 million
available to reduce future U.S. income taxes, and state net operating loss
carryforwards of approximately $4.9 million. These carryforwards do not have
an expiration period.
(9) NONRECURRING CHARGE
During 1996, the Corporation incurred a charge against operations of
$696,000 in connection with the Corporation's settlement of a dispute with a
landlord relating to the termination of a lease. This liability was included in
other accrued liabilities at December 31, 1996.
(10) RETIREMENT PLAN
The Corporation sponsors a defined-contribution retirement 401(k) plan
covering substantially all of its employees. Contributions made by the
Corporation in 1995, 1996 and 1997 equaled 50% of the voluntary employee
contributions up to a maximum of 6% of a participant's annual compensation. The
Corporation's retirement plan contributions were $228,000, $262,000 and $286,000
in 1995, 1996 and 1997, respectively.
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(11) NET INCOME PER SHARE
The following is a reconciliation between net income and net income
available to common stockholders used in the numerator for basic EPS for the
years ended December 31:
1995 1996 1997
----- ------- -------
(IN THOUSANDS)
Net income............................................ $658 $1,502 $4,066
Assumed dividends paid to
preferred stockholders.............................. (139) (139) ---
---- ------ ------
Net income available to
common stockholders................................. $519 $1,363 $4,066
==== ====== ======
The following is a reconciliation between net income available to common
stockholders and net income available per common and common equivalent
stockholders used in the numerator for diluted EPS for the years ended
December 31:
1995 1996 1997
----- ------ ------
(IN THOUSANDS)
Net income available to
common stockholders...................................... $519 $1,363 $4,066
Assumed dividends paid to
preferred stockholders................................... --- 139 ---
--- ------ ------
Net income available to common and common
equivalent stockholders................................ $519 $1,502 $4,066
==== ====== ======
The following is a reconciliation 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:
1995 1996 1997
----- ------ ------
(IN THOUSANDS)
Weighted average common stock outstanding..................... 289 309 3,458
Preferred stock, as if converted............................. 4,124 4,759 2,723
Stock options, as if converted............................... 206 611 652
--- --- ---
Weighted average common and common equivalent
shares outstanding....................................... 4,619 5,679 6,833
===== ===== =====
The Series B Convertible Preferred Stock was not included in the computation
for diluted EPS for the year ended December 31, 1995 because the accumulated
dividend exceeds the basic EPS per common share obtainable on conversion.
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(12) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Corporation leases certain 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:
1998................................................... $ 1,797
1999................................................... 1,987
2000................................................... 1,675
2001................................................... 1,606
2002................................................... 1,623
Thereafter............................................. 14,069
--------
Total future minimum lease payments................. $ 22,757
========
Total rent expense for all operating leases was $945,000, $1,573,000 and
$1,650,000 in 1995, 1996 and 1997, respectively.
COMMITMENTS
At December 31, 1997, the Corporation had commitments to spend $5
million for expansion of BioTesting and BioManufacturing facilities and an
additional $1.4 million for computer equipment and information systems.
LEGAL
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.
The Corporation has been identified by the U.S. Environmental
Protection Agency ("EPA") as one of several hundred potentially responsible
parties ("PRPs") under CERCLA with respect to the Ramp Industries, Inc. site in
Denver, Colorado. Although the Corporation believes that it sent only a small
quantity of waste to this site, liability under CERCLA can exceed a PRP's pro
rata share of cleanup costs. The EPA has incurred approximately $5 million to
date to remove wastes from this site and expects to incur approximately an
additional $1.3 million to remove the remaining wastes. However, the estimated
total cleanup costs have not been determined. A joint settlement proposal was
developed in October 1997 and submitted to EPA Region VIII representatives, who
have agreed to support the proposal to Senior EPA management and the Department
of Justice. There can be no assurance at this time that the joint settlement
proposal 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.
(13) GEOGRAPHIC SEGMENTS AND SIGNIFICANT CUSTOMERS
GEOGRAPHIC SEGMENT
The Corporation operates in one business segment, but has operations located
in the United States and Europe. Transfers between geographic areas are not
material to the Corporation's operations. The following table outlines the
Corporation's revenues, income from operations and identifiable assets by
geographic region as of or for the years ended December 31:
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53
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
Revenues
United States.................................. $26,420 $31,896 $40,183
Europe......................................... 3,658 5,786 7,705
------- ------- -------
Total....................................... $30,078 $37,682 $47,888
======= ======= =======
Income from operations
United States.................................. $1,414 $2,333 $5,692
Europe......................................... 11 831 1,258
------ ------ ------
Total....................................... $1,425 $3,164 $6,950
====== ====== ======
Identifiable assets
United States.................................. $21,038 $24,521 $56,717
Europe......................................... 3,900 11,306 11,934
----- ------ ------
Total....................................... $24,938 $35,827 $68,651
======= ======= =======
SIGNIFICANT CUSTOMERS
Sales to the U.S. Government represented 13%, 10% and 8% of consolidated
revenue in 1995, 1996 and 1997, respectively.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
Cash paid during the year for:
Income tax payments........................................ $ 32 $ 4 $475
Interest payments.......................................... $ 563 $ 844 $713
Noncash investing and financing activities:
Equipment acquired under capital lease agreements
(Note 6)................................................ $2,735 $ 903
Details of acquisition (Note 2):
Fair value of assets acquired.............................. $3,857
Liabilities assumed........................................ (595)
Stock issued............................................... (198)
------
Cash paid.................................................. 3,064
Less cash acquired......................................... (312)
------
Net cash paid for acquisition................................ $2,752
======
(15) SUBSEQUENT EVENTS (UNAUDITED)
In March 1998, the Corporation entered into certain third-party leasing and
subleasing arrangements relating to the construction of new laboratory space.
These arrangements require the Corporation to make certain net noncancelable
lease payments totaling approximately $8.5 million over the next twenty years
and to guarantee indebtedness of approximately $4.4 million. In addition, the
Company intends to incur approximately $20.0 million in leasehold improvements
and laboratory equipment relating to the new laboratory and the new
headquarters facilities.
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54
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF YEAR EXPENSES -DESCRIBE -DESCRIBE END OF YEAR
----------- ---------- ----------- ---------- ---------- ------------
Year Ended December 31, 1995
Allowance for doubtful accounts.... $284,000 $ 20,000 $ --- $ 61,000(1) $243,000
Deferred tax valuation allowance... 501,000 --- --- 151,000(2) 350,000
Year Ended December 31, 1996
Allowance for doubtful accounts.... 243,000 32,000 --- 35,000(1) 240,000
Deferred tax valuation allowance... 350,000 23,000 --- --- 373,000
Year Ended December 31, 1997
Allowance for doubtful accounts.... 240,000 16,000 --- 14,000(1) 242,000
Deferred tax valuation allowance... 373,000 398,000 --- --- 771,000
- ----------------------------
(1) Amounts are write-offs of uncollectible accounts receivable.
(2) Amounts represent reductions in the valuation allowance attributable to
the realization of net operating loss carryforwards.
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