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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, 1998
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)
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DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal office) (zip code)
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(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. X
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The aggregate market value of the voting stock held by nonaffiliates of
the registrant (based on the closing price of such stock as reported on March 1,
1999 on the Nasdaq National Market) was approximately $24,652,843. There were
7,835,104 shares of common stock, $0.01 par value per share, outstanding as of
March 1, 1999.
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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
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Item 1. Business.......................................................... 4
Item 2. Properties........................................................ 12
Item 3. Legal Proceedings................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............... 13
Executive Officers of the Registrant.............................. 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................ 16
Item 6. Selected Financial Data........................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 18
Risk Factors...................................................... 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 33
Item 8. Financial Statements and Supplementary Data....................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant............... 35
Item 11. Executive Compensation............................................ 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 35
Item 13. Certain Relationships and Related Transactions.................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 36
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PART I
ITEM 1. BUSINESS
OVERVIEW
BioReliance Corporation ("BioReliance" or the "Corporation") is a leading
contract service organization ("CSO") that provides testing, development and
manufacturing services for biologics and other biomedical products to
biotechnology and pharmaceutical companies worldwide. Through its testing and
development business, the Corporation evaluates products to ensure that they are
free of disease-causing agents or do not cause adverse effects, characterizes
products' chemical structures, develops formulations for long-term stability,
and validates purification processes under regulatory guidelines. In its
manufacturing business, BioReliance develops unique production processes and
manufactures biologics on behalf of clients both for use in clinical trials and
for the worldwide commercial market.
The Corporation was founded in 1947 as Microbiological Associates, Inc.
It reincorporated in Delaware and changed its name to BioReliance in connection
with the initial public offering of its stock in 1997.
CSO INDUSTRY OVERVIEW
The CSO industry provides outsourced product development and licensed
product support services on a contract basis to pharmaceutical and biotechnology
companies. The CSO industry has evolved from providing primarily preclinical
services in the 1970s to a full service industry today consisting of many small,
limited-service providers and a handful of larger companies in four broad
service sectors: (i) nonclinical laboratory testing focused on product
characterization and identification of potential contaminants; (ii) animal-based
toxicology studies; (iii) contract manufacturing for clinical trials and
commercial purposes; and (iv) human clinical trials management. BioReliance
provides services in the first three of these categories, primarily for
biologics and other biomedical products.
BIOLOGICS DEVELOPMENT PROCESS
Under the regulatory system of the United States, the product cycle for
new pharmaceuticals can be divided into three distinct stages: preclinical
development, clinical development and licensed product. The preclinical
development stage involves the discovery, characterization, product formulation
and biological trials necessary to prepare an Investigational New Drug ("IND")
exemption application for submission to the FDA. The IND must be acceptable to
the FDA before either a biologic or chemical drug can be tested in humans. The
second, or clinical stage, of development follows a successful IND submission
and involves the activities necessary to demonstrate the safety, tolerability,
efficacy and dosage of the active substance in humans, as well as the ability to
manufacture the substance in accordance with the FDA's Good Manufacturing
Practices ("GMP") regulations. For biologics, data from these activities are
compiled in a Product License Application or, if a specified biologic, in a
Biologic License Application, and submitted to the Center for Biologics
Evaluation and Research (CBER) of the FDA requesting approval to market the
product. The third stage, or licensed product (approved product or commercial
product) stage, follows FDA approval of the Product License Application or
Biologics License Application, and involves the manufacture, distribution and
clinical monitoring of the product. The licensed product stage, during which the
biologic can be marketed as a product, also involves the
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development and regulatory approval of product modifications and line
extensions of the original product.
SERVICES
BioReliance provides two broad types of contract services, testing and
development services and manufacturing services, each of which spans the product
cycle from early preclinical development through licensed production. The only
significant CSO services not provided by BioReliance are chronic toxicology
studies and human clinical trials management.
Compared to CSOs specializing in human clinical trials management,
BioReliance's involvement with clients begins at a much earlier stage of product
development, most often well before any clinical trials are initiated. In the
Corporation's experience, preclinical services lead to increased business for
later stage services, including manufacturing, by providing an entry at the
earliest stage of product development. The Corporation provides these services
to clients at every stage of product development and manufacture, including
in-process and final testing of licensed biologics.
TESTING AND DEVELOPMENT SERVICES
BioReliance provides a broad range of testing and development services.
Testing services represent the more mature parts of its business, while
development services are a more recent outgrowth of the core testing business.
Testing Services
The Corporation's testing services include assessments of cell banks used
to manufacture biologics, validation of purification processes for clearance of
adventitious agents such as viruses, and testing of in-process and final
products. The Corporation pioneered biologics testing during the development of
the first products, including Genentech's Activase(R) and Ortho Pharmaceutical's
Orthoclone OKT(R)3, in the early 1980s. The Corporation believes that it has a
major share of the current outsourced international market for these services
and intends to increase its market share in this rapidly expanding field.
Cell Bank Characterization. The starting point for manufacture of a biologic is
a cell bank, consisting of a large number of vials of cryopreserved cells. Each
bank must be free of any detectable biologic contaminants. BioReliance performs
all the FDA-required tests to characterize cell banks with respect to the
presence of biologic agents such as viruses, mycoplasma and bacteria. The
Corporation also confirms the species and identity of cell lines. A biologic may
not proceed to human clinical trials without these tests.
In-Process and Final Product Testing. The Corporation tests the biologic during
intermediate states of manufacture (i.e., before purification) and as a final
purified product. Each production lot must be tested for the presence of
specified biological agents both before and after the purification process. In
addition, the Corporation tests the final purified (and vialed) product on a
lot-by-lot basis to detect the presence of microbial and other agents. This
FDA-required testing currently must be compliant with Good Laboratory Practices
("GLPs"). The Corporation, however, as a leader in ensuring the quality of
biologics, holds itself to the more stringent GMP requirements in its lot
release testing, which are the same requirements that must be met in
manufacturing processes. Tests are performed on each lot of a manufactured
product throughout its clinical development and commercial marketing.
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For over twenty years, BioReliance has provided both in vitro and in
vivo testing services to assess the genetic safety of pharmaceutical and
chemical products. With the advent of biotechnology, BioReliance has developed
specialized assays to assess the safety of a variety of biologic products, from
genetically engineered proteins to DNA plasmids used in gene therapy clinical
trials. The Corporation believes that the greatest future growth in in vivo
services will come from the application of molecular biological techniques.
In Vitro Studies. BioReliance conducts a wide array of preclinical biological
trials employing primarily in vitro ("test tube") approaches to assess
toxicological effects of biologics and other substances. These studies include
genetic safety assays for the detection of gene mutations, chromosome damage,
primary DNA damage and cell transformation. The Corporation is well positioned
to provide these services with its experienced scientific staff and
state-of-the-art laboratory facilities. BioReliance custom designs its testing
batteries and GLP compliant protocols to comply with international guidelines.
An additional in vitro service provided by the Corporation is the detection of
infectious agents, primarily viral, in laboratory animals used for research
purposes by clients worldwide.
In Vivo and Molecular Studies. BioReliance currently offers several types of
short-term in vivo ("animal") studies, primarily designed to refine dose levels
during the preclinical stage of product development. Many of these studies are
designed 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.
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.
Development Services
In 1995, the Corporation expanded its capabilities to better characterize
biologics in anticipation of new FDA regulations and guidelines. These
regulations, published in 1996, permit the development and manufacturing
processes for well-characterized biologics to be streamlined. This expansion
into development services was an outgrowth of the Corporation's testing
business. Development services include the analytical services and validation
services described below.
Product Characterization and Methods Validation. These services focus on protein
characterization to show that a molecule's structure meets predefined criteria
for identity, purity, concentration and molecular weight. The Corporation
routinely uses methods based on SDS PAGE, isoelectric focusing, N-terminal
sequencing, high performance liquid chromatography (HPLC), peptide mapping,
amino acid
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analysis, LC-electrospray mass spectrometry (LC-MS), and matrix
assisted laser desorption/ionization time-of-flight (MALDI-TOF) mass
spectrometry for clients in a GMP environment.
Each biologic product presents a unique set of analytical challenges. The
size, shape and internal structure of the molecule determine the methods
employed to fully characterize it in a manner suitable for regulatory
submission. Generally, several different methods are required to fully
characterize a biologic molecule. For a product license submission, it also is
necessary to develop and rigorously validate each analytical method.
Formulation Development, Product Stability and Consistency Testing. The
Corporation's development services include the full spectrum of formulation
development, stability testing and consistency testing services. Biologics are
extremely sensitive to their immediate environment, and a suitable, stable
formulation must be developed so that the product can be administered in active
form to patients. The structural uniqueness of each product demands its own
formulation -- a poor formulation can reduce therapeutic effect during clinical
trials. The formulation also plays a key role in the stability of the product.
Typically, several candidate formulations are developed and the relative product
stability is compared for each formulation over an extended period of time
(usually months to years) under a variety of conditions (temperature, humidity,
etc.). The product's stability is measured by the same validated analytical
techniques that are used to assess the product's structural integrity on a
lot-by-lot basis. The goal is a formulation in which the product remains active
through final packaging, inventory storage, distribution to clinical sites and
administration to patients. One of the major impacts of a successful formulation
will be to extend the shelf-life of a biologic -- an extended shelf-life can
have a significantly positive economic impact for the client. Finally, the FDA
requires that the product maintain its structural identity and activity from
lot-to-lot throughout the product's commercial lifetime.
Purification Process Validation. BioReliance validates client purification
processes to determine the capability of the process for clearance (removal or
inactivation) of certain biological agents 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 has expanded its existing German facilities to
include a laboratory.
MANUFACTURING SERVICES
BioReliance's manufacturing services currently include both viral
production and microbial fermentation. The Corporation has been providing
services in viral production since 1993 when it formed its Phase I/II
manufacturing department in the United States. The rapid progress of gene
therapy products into Phase I/II human clinical trials and the emergence of
cancer oncolytics have fueled the growth of manufacturing revenue for the
Corporation from viral production services from 1993 to present. The Corporation
began manufacturing microbial products in 1996 with its acquisition of BIOMEVA
GmbH, a contract manufacturer of microbial products located in Heidelberg,
Germany. 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
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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. Building on this early testing
capability, in 1993 the Corporation established an independent contract
manufacturing service for companies and research institutes developing gene
therapies, which it believes was the first of its kind. This expanded
manufacturing service drew upon the Corporation's many years of experience in
viral testing and small scale manufacturing. BioReliance now has two
GMP-compliant viral manufacturing laboratories in Rockville, Maryland and two
additional manufacturing laboratories in Stirling, Scotland (U.K.). Combined,
these facilities have manufactured more than 100 lots of human clinical trial
material for gene therapy clinical trials in the United States, Europe and
Japan. The Corporation has specific experience in manufacturing retroviruses,
adenoviruses, adeno-associated viruses and cells as tumor vaccines. The
early-stage nature of these therapies demands that specific production
techniques are developed for each product, much the same as with other biologic
products. BioReliance offers these production development services as part of
its manufacturing "package" to clients.
Currently, the most advanced of the Corporation's manufacturing
clients are engaged in Phase II clinical trials. However, the Corporation's
manufacturing capacities are at the 100 liter per lot size -- more than
sufficient for many Phase III viral therapy trials. As more gene therapy and
other viral products reach Phase III and the market, and their manufacturing
require scales beyond 100 liters, the Corporation plans to construct appropriate
facilities according to market demand.
In 1996, the Corporation expanded its manufacturing capabilities by
acquiring BIOMEVA, an established contract manufacturing company located in
Heidelberg, Germany. This operation has been serving clients since 1989 and
offers GMP-compliant contract fermentation services for recombinant and natural
microorganisms, with bioreactor working volumes up to 1,000 liters. These
microbial fermentation capabilities allow BioReliance to provide manufacturing
services not only to viral vector gene therapy companies, but also to gene
therapy companies that are employing "naked" DNA or plasmid DNA as a vector
(rather than viruses). Besides manufacturing, the Corporation's German facility
offers scale-up and development for production processes and provides analytical
testing of proteins and other biologics.
Purification and Purification Development. Both U.S. and German operations
provide purification services for production clients. Similar to production
services, purification techniques must be developed on a product-by-product
basis. BioReliance has developed GMP-compliant chromatographic-based techniques
for the large-scale purification of viruses that will be necessary as emerging
gene therapy and other viral products progress to Phase III clinical trials.
Final Formulation and Filling. For its viral production clients, BioReliance
offers final formulation and filling services. Filling involves dispensing the
final purified clinical product into individual containers
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suitable for shipment to the client for further processing or into formulated,
individual dosage forms suitable for administration to individual patients in a
human clinical trial. For its microbial-based production clients, the
Corporation does not currently offer final filling services.
BACKLOG
The Corporation does not have a significant backlog, and does not believe
that backlog is a meaningful indicator of its future results.
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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 licensing process. The list of specified products includes
most of the biologics now under development by pharmaceutical and biotechnology
companies; namely, therapeutic monoclonal antibodies, therapeutic recombinant
DNA (protein) products, synthetic therapeutic peptides of less than 40 amino
acids, and synthetic plasmid nucleic acid therapeutics. The FDA recognizes that
reliable bioanalytical techniques now are available that enable accurate
characterization of these structurally complex products. Specified biologics for
which bioanalytical techniques have been developed, validated and accepted by
the FDA are often termed "well-characterized" products.
The FDA 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 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 for licensed products. BioReliance
believes that developers of biologics will pursue CSOs that understand these new
guidelines and can provide the full range of services to support the proper
characterization and documentation for biologics.
The services performed by BioReliance are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical
products, primarily under the Federal Food, Drug and Cosmetic Act and associated
GLP and GMP regulations which are administered by the FDA in accordance with
current industry standards. These regulations apply to all phases of drug
manufacture, testing and record keeping, including personnel, facilities,
equipment, control of materials, processes and laboratories, packaging, labeling
and distribution. Noncompliance with GLPs or GMPs by the Corporation in a
project could result in disqualification of data collected by the Corporation in
the project. Material violation of GLP or GMP requirements could result in
additional regulatory sanctions, and in 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. See
"Risk Factors -- Hazardous Materials."
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COMPETITION
The service industry is highly fragmented, with many providers ranging in
size from one person consulting firms to full-service global drug development
corporations. The Corporation primarily competes with in-house research and
development departments of biotechnology and pharmaceutical companies,
universities and medical centers, and other CSOs, some of which may possess
substantially greater capital, technical and other resources than the
Corporation. The Corporation's primary service competitors are different in each
of its service areas. For testing and development services, its primary
competitors are Covance Laboratories, Inc., SRI International, Inc., Charles
River Laboratories, Inc./Tektagen, Inc., Inveresk Research International Ltd.,
Q-One Biotech Ltd. and Applied Analytical Industries, Inc.; and for
manufacturing services, Bio-Intermediair Europe b.v., Molecular Medicine, Inc.
and Q-One Biotech Ltd.
As a result of competitive pressures, the industry has begun to
consolidate. This trend is likely to produce increased competition among the
larger competitors for both clients and acquisition candidates. In addition, the
service industry has attracted the attention of the investment community, which
could lead to heightened competition by increasing the availability of financial
resources for competitors. 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
Digital information systems are an important component of the
Corporation's technological leadership. The Corporation believes that superior
information systems are essential to expanding its operations and to providing
innovative services to clients, for timely, accurate reporting and to enable
clients to monitor their projects better.
During the last two years, BioReliance has made significant investments
in its information systems and personnel, in both the United States and Europe,
to maximize its relationships with its clients. Those investments have included
state of the art hardware and software that maximize compatibility and
integration internally and with the Corporation's clients, and an ORACLE
enterprise application suite of modules as the software foundation for its
business.
The FDA has become increasingly sophisticated with respect to information
systems and the integrity of all forms of data incorporated into regulatory
submissions. Correspondingly, BioReliance strives to be at the forefront of
nonclinical testing laboratories in validation of hardware and software systems.
INSURANCE
BioReliance maintains product liability and professional errors and
omissions liability insurance, providing $13 million in coverage on a
claims-made basis. In addition, in certain circumstances the Corporation seeks
to manage its liability risk through contractual provisions with clients
requiring the Corporation to be indemnified by the client or covered by clients'
product liability insurance. In addition, in certain types of engagements, the
Corporation seeks to limit contractual liability to its clients 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
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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. See
"Risk Factors -- Potential Liability."
EMPLOYEES
At December 31, 1998 the Corporation had 433 full-time equivalent
employees, of whom 215 were employed in testing and development services and 44
were employed in manufacturing services, with the remainder employed in support
roles. The Corporation believes that its relations with its employees are good.
None of the Corporation's employees is represented by a collective bargaining
agreement.
ITEM 2. PROPERTIES
BioReliance's corporate headquarters are located in Rockville, Maryland
in a new 51,000 square foot leased facility. In addition to this headquarters
building, the Corporation leases three other facilities in Rockville, Maryland,
providing approximately 150,000 square feet of operational and administrative
space. The Corporation also leases laboratory, manufacturing and administrative
facilities of approximately 13,000 square feet in Stirling, Scotland (U.K.), and
approximately 14,000 square feet in Heidelberg, Germany. BioReliance maintains
sales offices in Boston, Massachusetts; Chicago, Illinois; Los Angeles,
California; and European sales offices in Stirling, Scotland (U.K.), and
Heidelberg, Germany. See Notes 7 and 13 of Notes to Consolidated Financial
Statements for information concerning lease obligations.
The Corporation 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 fourth quarter of 1999. The Corporation is also
expanding its testing facility in Stirling, Scotland (U.K.) with scheduled
completion in the second quarter of 1999.
BioReliance believes that its facilities are adequate for the
Corporation's operations and that suitable additional space will be available
when needed.
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 was identified by the U.S. Environmental Protection
Agency ("EPA") as one of several hundred potentially responsible parties
("PRPs") under the Comprehensive Environmental Response, Compensation and
Liability Act ("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
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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, 1998.
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
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Capers W. McDonald............................ 47 President, Chief Executive Officer and Director
Patrick J. Spratt............................. 51 Vice President, Finance and Accounting; Chief Financial
Officer and Treasurer
Sherry L. Rhodes.............................. 43 Vice President, Administration; General Counsel and
Secretary
John E. McEntire, Ph.D........................ 52 Vice President, U.S. Testing and Development
Raymond F. Cosgrove, Ph.D......................51 Vice President, European Operations
Michael E. Wiebe, Ph.D.........................56 Vice President, Research and Development; and Chief
Scientific Officer
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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 during 1998 was 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.
Patrick J. Spratt joined the Corporation in November 1998 as Vice President,
Chief Financial Officer and Treasurer. From 1973 to 1998, Mr. Spratt held a
variety of senior management positions at Digital Equipment Corporation,
including Vice President, Investor Relations from 1996 to 1998, Vice President,
Business Operations, Computer Systems from 1994 to 1996, and Vice President,
Finance, Worldwide Engineering, and Software Business Manager prior to 1994. Mr.
Spratt holds a M.B.A. from Boston University.
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. Before 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.
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<PAGE> 15
John E. McEntire, Ph.D. joined the Corporation in September 1994 as Vice
President of the Biotechnology Group and, since January 1998, has served as Vice
President, U.S. Testing and Development. 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., a 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.
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.
Michael E. Wiebe, Ph.D. joined the Corporation in August 1998 as Vice President,
Research and Development and Chief Scientific Officer. From 1984 to 1998, Dr.
Wiebe held senior management positions at Genentech, Inc., including Senior
Director, Quality Control from 1996 to 1998, Director, Quality Control from 1990
to 1996 and Associate Director, Medicinal and Analytical Chemistry and Senior
Scientist prior to 1990. From 1973 until 1985, he was an Assistant Professor of
Microbiology and then an Associate Professor of Microbiology at Cornell
University Medical College. Dr. Wiebe was associated with the New York Blood
Center from 1980 to 1984 and became Director, Leukocyte Products R&D in 1983.
Dr. Wiebe earned a Ph.D. in Microbiology from the University of Kansas and
served as a NIH post-doctoral research fellow in molecular virology at Duke
University Medical School.
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<PAGE> 16
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.
<TABLE>
<CAPTION>
<S> <C> <C>
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 1998 $10.50 $7.00
September 30, 1998 $13.06 $7.75
June 30, 1998 $16.38 $10.75
March 31, 1998 $25.00 $16.00
December 31, 1997 $26.00 $18.13
September 30, 1997 (beginning July 29) $26.25 $17.88
</TABLE>
NUMBER OF STOCKHOLDERS
As of March 1, 1999, there were approximately 249 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 1,300
beneficial owners of the Corporation's common stock.
DIVIDENDS
The Corporation has never declared or paid any cash dividends on its
common stock, and the Corporation's existing credit facility prohibits the
payment of dividends without the prior consent of the lender. The Corporation
does not anticipate paying any cash dividends in the foreseeable future and
intends to retain future earnings for the development and expansion of its
business.
USE OF PROCEEDS - INITIAL PUBLIC OFFERING
During 1997, the Corporation received $32.2 million net proceeds from the
initial public offering. The common stock sold in the initial public offering
was registered on registration statement no. 333-25071, which became effective
on July 28, 1997. As of December 31, 1998, the Corporation had used
approximately $10.6 million of the net proceeds from the Corporation's initial
public offering toward debt repayment, purchases of laboratory equipment and
information systems hardware and software, and planning for manufacturing
expansion.
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<PAGE> 17
At December 31, 1998, $18.3 million of the net proceeds from the initial
public offering was invested in short-term United States government securities,
and the balance, $3.4 million, was invested in money market funds.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the five
years ended December 31, 1998 has been derived from the Corporation's
consolidated financial statements and audited by PricewaterhouseCoopers LLP,
independent accountants. The selected consolidated financial data set forth
below should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Corporation's audited consolidated financial statements and
related notes appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996(1) 1997 1998
---- ---- ------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Revenue $28,094 $30,078 $37,682 $47,888 $49,843
------- ------- ------- ------- -------
Cost of sales............................................. 19,094 20,570 24,860 29,452 29,738
Selling, general and administrative
expenses............................................... 5,947 7,071 7,852 10,093 13,627
Research and development expenses......................... 354 1,012 1,110 1,393 1,438
Nonrecurring charge....................................... --- --- 696(2) --- ---
------- ------- ------- ------- -------
Total expenses................................... 25,395 28,653 34,518 40,938 44,803
------- ------- ------- ------- ------
Income from operations................................... 2,699 1,425(3) 3,164 6,950 5,040
Interest and other (income) expenses, net................. 439 524 816 (67) (842)
------- ------- ------- ------- -------
Income before income taxes............................... 2,260 901 2,348 7,017 5,882
Provision for (benefit from) income taxes................ (2,192) 243 846 2,951 2,288
------- ------- ------- ------- -------
Net income................................................ $ 4,452 $ 658 $ 1,502 $ 4,066 $ 3,594
======= ======= ======= ======= =======
Net income per share (4):
Basic................................................. $ 15.46 $ 1.80 $ 4.41 $ 1.18 $ 0.46
======= ======= ======= ======= =======
Diluted............................................... $ 0.87 $ 0.11 $ 0.26 $ 0.60 $ 0.44
======= ======= ======= ======= =======
Weighted-average common stock outstanding................. 279 289 309 3,458 7,791
======= ======= ======= ======= =======
Weighted-average common and common
equivalent shares outstanding (5)...................... 5,108 4,619 5,679 6,833 8,233
======= ======= ======= ======= =======
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
marketable securities.................................. $ 1,676 $ 693 $ 2,965 $33,781 $27,097
Working capital............................................ 5,326 4,963 5,415 38,109 35,819
Total assets............................................... 23,551 24,938 35,827 68,651 76,945
Long-term debt............................................. 4,694 6,189 8,982 5,434 7,914
Stockholders' equity....................................... 11,452 12,121 14,091 49,795 53,823
</TABLE>
- - ----------
(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 3 of Notes to Consolidated Financial Statements.
(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 10 of Notes to
Consolidated Financial Statements.
(3) Income from operations includes the effect of $1.3 million of first-year
expenses for testing and development services.
(4) In certain years, net income has been reduced to reflect the assumed
dividend paid to preferred stockholders. See Note 12 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 12 of Notes to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements made in this Report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
similar words or phrases. Forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by BioReliance with the Securities and Exchange
Commission, including in its Prospectus, dated July 28, 1997, and its Forms 10-K
and 10-Q, and include, among others, the following: general economic and market
conditions; the size and growth of the overall markets for biopharmaceuticals,
including the
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<PAGE> 19
amounts spent on research and development by biotechnology and pharmaceutical
companies; changes in government regulations; the size, timing and mix of
contracts for the Corporation's products and services; the ability of
BioReliance to attract and retain qualified technical and management personnel;
seasonal demand for the Corporation's products and services; fluctuations and
difficulty in forecasting operating results; the ability of BioReliance to
sustain, manage or forecast its growth and utilize its facilities; the loss of
significant contracts or customers; business disruptions and other factors
referenced in the above reports. New risk factors emerge from time to time and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on the Corporation's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
While BioReliance does, from time to time, communicate with securities
analysts, it is against BioReliance's policy to disclose to them any material
non-public information or other confidential information. Accordingly,
shareholders should not assume that BioReliance agrees with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, BioReliance has a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of BioReliance.
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 is a leading contract service organization ("CSO") that
provides testing, development and manufacturing for biologics and other
biomedical products to biotechnology and pharmaceutical companies worldwide.
During 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and
Related Information," which changes the way the Corporation reports information
about its operating segments. The adoption of SFAS 131 did not affect the
Corporation's results of operations or financial position but did affect the
disclosure of segment information. The presentation of the Corporation's
financial results for 1997 and 1996 has been restated in order to conform to the
1998 presentation. See Note 14 of Notes to Consolidated Financial Statements.
Under SFAS 131, the Corporation reports the results of two operating
segments: testing and development services and manufacturing services. The
Corporation evaluates the performance of these operating segments based on
revenues and gross profit. Before 1998, testing and development services were
reported as "biotesting services" and included "biosafety testing" and
"analytical services," and manufacturing services were reported as
"biomanufacturing services." The Corporation also reports the results of its
U.S. operations and European operations.
The Corporation derived 91.8%, 92.1% and 90.1% of its revenue from
commercial contracts in 1998, 1997 and 1996, respectively, of which 88.6%, 88.3%
and 85.5% were testing and development contracts and 11.4%, 11.7% and 14.5% were
manufacturing contracts, respectively. Commercial contracts are either fixed
price or fixed rate, and their terms range from under a week to three or more
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<PAGE> 20
years. Testing and development services contracts are accounted for using the
percentage-of-completion over time method, except services that are completed
within approximately three days, which are accounted for using the
completed-contract method. Manufacturing services that provide for the delivery
of products are accounted for using the completed contract method while all
other manufacturing services are accounted for using the
percentage-of-completion over time method. No commercial client accounted for
more than 10% of the Corporation's revenue in 1998.
The Corporation derived 8%, 8% and 10% of its revenue from
government contracts in 1998, 1997 and 1996, respectively. Government contracts
generally are cost-plus-fixed-fee and have terms of three to five years. Revenue
from government contracts is recognized in an amount equal to reimbursable costs
plus a pro rata portion of the earned fee.
BioReliance enters into several different types of contractual
relationships with its clients. Contracts in the testing and development
business can be quotations, based upon established price lists for individual
services, or work proposals, most often for larger studies composed of a variety
of services. A majority of testing and development contracts range in length
from a few weeks to several months; however, certain stability testing and lot
release testing contracts may be one to three years in length. Manufacturing
contracts tend to be relatively long because of the length of time required to
create and characterize cell banks, perform pilot production runs, and produce
and test the products. These contracts require a formal statement of work and
range in length from six months to over two years. Government contracts, usually
multi-year, are consistent with the particular granting agency.
Clients generally are invoiced either as work is completed or, for
contracts in excess of $70,000, with a payment at the commencement of the
services and progress payments based on defined milestones. Contracts may be
terminated for a variety of reasons, including the client's decision to forego a
particular study or to cancel or delay particular product development program,
the failure of a clinical trial or unexpected or undesired results of product
testing, or by the government for convenience. Generally, service contracts may
be canceled by the client upon notice, with a partial charge commensurate with
the percentage of work completed at the time of cancellation.
A government contract may be modified or terminated at any time for the
convenience of the government, including for changes in requirements or
reductions in budgetary resources. If a contract 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.
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.
For both testing and development services and manufacturing services, the
major components of cost of sales are labor and related fringe benefits;
facilities, primarily rent or depreciation, utilities and maintenance; direct
materials; overhead costs, such as travel, office expenses and employee-related
expenses; consulting costs and subcontracted costs. Cost of sales includes these
expenses for laboratories directly providing the services and for supporting
services departments, principally regulatory affairs, quality assurance and
quality control. As a portion of the total cost of sales, labor and materials
costs are greater and facilities costs are less for testing and development
services than for manufacturing services.
Selling, general and administrative expense consists primarily of labor
and related fringe benefits, indirect materials, travel, legal, consulting,
costs related to managing investor relations, and bad debt expense. In addition,
a portion of facilities and information systems costs are allocated to general
and administrative departments. Research and development expense consists
primarily of labor and related fringe benefits, materials, travel, and a portion
of facilities cost.
In 1997, the Corporation completed an initial public offering of its
common stock, which resulted in net proceeds to the Corporation of $32.2
million.
20
<PAGE> 21
During 1998, the Corporation spent approximately $5.9 million on building
new facilities, expanding existing facilities and installing an enterprise
information management system. Also during 1998, the Corporation acquired an
additional $7.1 million of property and equipment under capital lease
agreements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenue was $49.8 million in 1998, an increase of 4.0% over revenue of
$47.9 million in 1997. Testing and development services generated revenue of
$42.7 million in 1998, an increase of 5.2% over revenue of $40.6 million in
1997. Manufacturing services generated revenue of $7.1 million in 1998, a
decrease of 2.7% from revenue of $7.3 million in 1997. Although testing and
development revenue grew modestly, the growth was slower than expected because
the number of new development contracts did not increase as rapidly as
anticipated. The decrease in 1998 manufacturing revenue is primarily
attributable to delays in the completion of manufacturing projects in both the
U.K. and Germany. Testing and development services and manufacturing services
accounted for 86% and 14%, respectively, of the Corporation's revenue in 1998,
and 85% and 15% respectively, of the Corporation's revenue in 1997. Revenue
generated in Europe remained constant at $7.7 million, accounting for 15.5% and
16.1% of the Corporation's revenue in 1998 and 1997, respectively.
Cost of sales was $29.7 million in 1998, relatively constant with cost of
sales of $29.5 million in 1997. As a percentage of total revenue, cost of sales
decreased to 59.7% in 1998 from 61.5% in 1997, and gross profit improved to
40.3% in 1998 from 38.5% in 1997. This decrease in cost of sales as a percentage
of total revenue and the corresponding improvement in gross profit was
primarily attributable to volume mix variances in favor of higher margin testing
and development business such as viral clearance, in vitro assays for viral
contamination, and lot release testing. Gross profit for testing and development
services was $19.8 million in 1998, a 13.1% increase over gross profit of $17.5
million in 1997. Gross profit for manufacturing services was $.4 million in
1998, a 60% decrease over gross profit of $1.0 million in 1997. This decrease
can be attributed to employee turnover and technical issues which necessitated
repeating work. Gross profit for Europe remained constant at $2.6 million for
1998 and 1997.
Selling, general and administrative expense was $13.6 million in 1998, an
increase of 34.7% over expense of $10.1 million in 1997. As a percentage of
revenue, selling, general and administrative expense increased to 27.3% in 1998
from 21.1% in 1997. These increases were due to administrative expense
associated with the Corporation's newly public status, consulting fees,
depreciation and expensed items for information systems, and facilities costs,
including completion of a new U.S. headquarters facility, expansion of the
Corporation's German testing facility and U.K. manufacturing operations and
increased bad debt allowance. The Corporation's accounts receivable aging
increased in 1998, due in part to personnel changes and billing delays
encountered in transitioning to a new ORACLE system. Management increased the
allowance for bad debts in response to the increase in aged accounts
receivables.
Research and development expense was $1.4 million in 1998, consistent
with $1.4 million in 1997. These expenses represent the investment of internal
resources to develop new methods and tests to support the Corporation's
services.
Operating income was $5.0 million in 1998, a decrease of 28.6% from
operating income of $7.0 million in 1997. This decrease was due to increased
selling, general and administrative expenses, slightly
21
<PAGE> 22
offset by an improvement in gross margin.
Net interest and other income was $0.8 million in 1998, compared to $0.1
million in 1997. The increase resulted primarily from an increase in interest
income and a decrease in interest expense, offset by an increase in other
expense. Interest income increased from $0.8 million in 1997 to $1.9 million in
1998, due to the investment of the proceeds from the Corporation's initial
public offering. Additionally, interest expense decreased to $0.6 million in
1998, from $0.7 million in 1997. The decrease can be attributed to the
renegotiation of the interest rate on the Corporation's bank debt during 1998.
The provision for income taxes was $2.3 million in 1998, compared to a
provision of $3.0 million in 1997. The Corporation's effective tax rate was
39.0% in 1998, compared to 42.0% in 1997. The decrease resulted primarily from
the use of existing tax credits in the United States and the successful
implementation of tax planning strategies in Europe.
Net income was $3.6 million in 1998, a decrease of 12.2% over net income
of $4.1 million in 1997. This decrease was due to decreased operating income
and decreased income before income taxes, offset by a decrease in the provision
for income taxes.
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 testing and development
services and manufacturing services. Testing and development services generated
revenue of $40.6 million in 1997, an increase of 24.2% over revenue of $32.7
million in 1996. The growth in revenue for testing and development services
primarily was due to volume growth in the biosafety testing and analytical
services divisions of the testing and development business. Manufacturing
services generated revenue of $7.3 million in 1997, an increase of 49.0% over
revenue of $4.9 million in 1996. The growth in revenue for manufacturing
services was due to volume and price increases in new viral production
business. Testing and development services and manufacturing services accounted
for 85% and 15%, respectively, of the Corporation's revenue in both 1997 and
1996. Revenue generated in Europe increased from $6.5 million to $7.7 million,
accounting for 16.1% and 17.2% of the Corporation's revenue in 1997 and 1996,
respectively.
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 profit increased to 38.5% from 34.0% in
1997 compared to 1996. This improvement in gross profit primarily was
attributable to the high incremental margins contributed by growth in revenues
in both testing and development services and manufacturing services, and more
efficient recovery of the fixed cost element of cost of sales. Gross profit for
testing and development services was $17.5 million in 1997, a 44.6% increase
over gross profit of $12.1 million in 1996. This increase can be attributed to
client demand for viral clearance studies and assays to determine the presence
of adventitious agents, both high margin businesses. Gross profit for
manufacturing services was $1.0 million in 1997, a 25% increase over gross
profit of $.8 million in 1996. This increase can be attributed to efficiencies
gained with the addition of a dedicated cell culture suite. Gross profit for
Europe increased to $2.6 million in 1997 from $2.2 million in 1996, an 18.2%
increase.
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 Corporation's initial public offering
and subsequent public status, depreciation and expensed items on information
systems, additional administrative employees and an increase in legal and
consulting fees for
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<PAGE> 23
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
manufacturing services.
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 was $0.1 million 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 testing 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 income and net interest and other income and expenses, which more than
offset the increase in income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has funded its business through existing cash, cash flows
from operations, long-term bank loans and capital leases. At December 31, 1998,
the Corporation had cash, cash equivalents and marketable securities of $27.1
million, compared to cash, cash equivalents and marketable securities of $33.8
million and $3.0 million at December 31, 1997 and 1996, respectively.
In 1997, the Corporation received net proceeds of $32.2 million from the
initial public offering of its common stock. A 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 $18.3 million at December 31, 1998.
In 1998, the Corporation did not generate positive net cash flow from
operating activities. In 1997 and 1996, the Corporation generated net cash flows
from operations of $6.3 million and $4.5 million, respectively. Net income, as
adjusted for depreciation and amortization, deferred income taxes and other
non-cash adjustments, provided cash of $8.2 million, $9.1 million and $4.7
million in the years ended December 31, 1998, 1997 and 1996, respectively.
Changes in other assets and liabilities used cash of $8.2 million in 1998,
primarily due to an increase in accounts receivable to reflect increased aging
of accounts receivable and a decrease in customer advances and accrued employee
compensation and benefits; in 1997 changes in other assets and liabilities used
cash of $2.8 million, primarily due to an increase in accounts receivable
corresponding with an increase in revenue; and used cash of $0.3 million in 1996
where a similar increase in accounts receivable was largely offset by a
corresponding rise in customer advances and other current liabilities.
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<PAGE> 24
Working capital decreased to $35.8 million at December 31, 1998, from
$38.1 million at December 31, 1997. This decrease was due to a decrease in the
amount of marketable securities, which the Corporation applied toward
investments in facilities and equipment and the repayment of debt and capital
leases. Additionally, the current portion of long-term debt increased as of
December 31, 1998 as the Corporation's loans with NationsBank mature in 1999.
The Corporation invested $5.9 million, $4.2 million and $1.9 million in
capital expenditures during 1998, 1997 and 1996, respectively. Capital
expenditures in 1998 included new and expanded facilities and an enterprise
information system.
A new corporate headquarters facility in Rockville, Maryland, constructed
under a build-to-lease agreement with a developer, was completed in August 1998.
This new headquarters facility consolidates existing research and development
and administrative activities and expands the Corporation's laboratory and other
capacity for operations. The lease agreement requires the Corporation to make
noncancelable lease payments totaling approximately $11.8 million over the next
15 years.
During 1998, the Corporation commenced plans to construct a new
manufacturing facility in Rockville, Maryland under a build-to-lease
arrangement. In April 1998, the Corporation entered into third-party leasing
and subleasing arrangements with Montgomery County, Maryland and a developer
providing for the construction of the exterior shell of a new manufacturing
facility in Rockville, Maryland. These arrangements require the Corporation to
make net noncancelable lease payments totaling approximately $13.0 million over
the next twenty years and to guarantee indebtedness of approximately $4.4
million incurred by the developer to construct the facility.
At December 31, 1998, the Corporation had commitments to spend
approximately $17.2 million in capital expenditures, including leasehold
improvements and laboratory equipment during 1999 and the first quarter of 2000
related to this new manufacturing facility. The arrangements with Montgomery
County and the developer require the Corporation to account for the leases and
subleases of the manufacturing facility as capital leases. The assets underlying
the capital leases are included with the Corporation's owned property and
equipment as of December 31, 1998. Property and equipment at December 31, 1998
included approximately $6.9 million related to these capital leases. The related
lease obligation is included in the Corporation's liabilities at December 31,
1998.
A portion of the Corporation's capital expenditures during 1998 included
an investment in an enterprise information system, including ORACLE-based
applications. The Corporation expects to spend $2.1 million on information
systems during 1999. The Corporation believes that its information systems will
maximize compatibility and integration internally and with the Corporation's
clients.
The Corporation expects to finance its planned capital expenditures
through existing cash, cash from operations, borrowings under its credit
facility and lease or other financing from third-party sources to the extent
that funds are available on favorable terms and conditions. See Notes 7 and 13
of Notes to Consolidated Financial Statements.
The Corporation expects to continue expanding its operations through
internal growth, geographic expansion and possibly strategic acquisitions. The
Corporation expects to fund its growth from existing cash, 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
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Corporation may, from time to time, seek to obtain funds from public or private
issuances of equity or debt securities on a strategic basis. There can be no
assurances that such financing will be available on terms acceptable to the
Corporation.
Based on its current operating plan, the Corporation believes that
available liquid resources are sufficient to meet its foreseeable cash needs.
BORROWINGS AND CREDIT FACILITIES
In 1994, the Corporation obtained a loan of $4,300,000 from NationsBank
with a maturity date of November 30, 1999 (the "Mortgage Loan"). The terms of
the Mortgage Loan were amended in October 1997 and April 1998 to modify the
Corporation's financial covenants, release foreign subsidiaries as guarantors
and make other modifications. In addition to a principal payment of $30,000 per
month, the Mortgage Loan bears interest at the London Inter-Bank Offering Rate
("LIBOR") plus the applicable LIBOR Rate Additional Percentage ("LIBOR Rate
Option"). The LIBOR Rate Option ranges from .85% to 2.0% depending on the
Corporation achieving certain funded debt to EBITDA ratios. At December 31,
1998, the applicable interest rate on the Mortgage Loan was 6.63% and the LIBOR
Rate Option was 1.40%. Approximately $2.9 million was outstanding on the
Mortgage Loan at December 31, 1998.
In May 1995, the Corporation entered into an interest rate swap agreement
whereby the variable interest rate portion of the Mortgage Loan was effectively
converted into a fixed rate of 6.55% per annum. This agreement expires on
November 30, 1999. 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 swap agreement is a standard contract that has no imbedded
options or other terms involving a higher level of complexity or risk. The
effect of the interest rate swap agreement on interest expense was not material
in 1996, 1997 or 1998. The interest rate swap agreement and the LIBOR Rate
Option resulted in a 7.95% effective interest rate at December 31, 1998. The
Corporation believes that the effect of the interest rate swap agreement on
interest expense was not material in 1998, 1997 or 1996.
The Corporation has available borrowings up to $1,000,000 under the terms
of a revolving loan agreement with NationsBank. The revolving loan agreement
requires monthly interest payments on the unpaid principal. The unpaid principal
and all unpaid accrued interest is payable in full on May 31, 1999. Amounts
borrowed under the revolving loan agreement bear interest at the same rate as
the Mortgage Loan. The Corporation pays a quarterly commitment fee equaling
0.25% of the average unused portion of the revolving loan agreement. At December
31, 1998, no amounts were outstanding under this agreement. The revolving loan
agreement expires in May 1999.
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 in the amount of $1.8 million and a
subordinated note from Mr. Sidney R. Knafel, the Corporation's largest
stockholder, in the amount of $1.9 million, which was repaid in March 1997. The
NationsBank promissory note requires monthly principal payments of $30,000,
which bears interest at the same rate as the Mortgage Loan. At December 31,
1998, $0.9 million was outstanding on the note. The interest rate on the note
was 6.63% at December 31, 1998. The note matures on June 30, 1999.
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All of the Corporation's agreements with NationsBank are cross
collateralized and are secured by a deed of trust on one of the Corporation's
laboratory facilities in Rockville, Maryland. The agreements require the
Corporation to meet certain financial and restrictive covenants, including
maintaining profitability, certain tangible net worth levels and funded debt to
EBITDA ratios.
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 15.5%, 16.1%
and 17.2% of its revenue for 1998, 1997 and 1996, respectively, from services
performed outside of the United States. In addition, the Corporation may be
subject to currency risk when the Corporation's service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts.
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. See "Item 7A - Market Risk."
The revenue and identifiable assets attributable to the Corporation's
geographic segments are reported in Note 14 of Notes to Consolidated Financial
Statements.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non cash (banking) transactions. The existing local currencies, or legacy
currencies, are planned to remain legal tender through January 1, 2002.
Beginning on January 1, 2002, Euro-denominated bills and coins are planned to be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro are planned to be legal tender. On or before July
1, 2002, the participating countries are planned to withdraw all legacy currency
and use the Euro exclusively.
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The introduction of the Euro may have potential implications for the
Corporation's existing operations. Currently, Germany is the only participating
country in the EMU in which the Corporation has operations. While one cannot
predict such events, many authorities expect non-participating European Union
countries, such as Great Britain, to eventually join the EMU. The Corporation
does not currently expect to experience any operational disruptions or to incur
any costs as a result of the introduction of the Euro that would materially
affect the Corporation's liquidity or capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transaction; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS 133 is
effective for years beginning after June 15, 1999, with earlier adoption
permitted. The Corporation believes that the effect of adoption of SFAS 133 will
not be material.
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 READINESS
The Corporation uses a significant number of information technology
("IT") and non-IT computer systems in its operations. The IT systems include the
Corporation's accounting systems, office and administrative systems,
communications systems and other corporate systems. The non-IT systems include
embedded microprocessors that control laboratory equipment and facilities
equipment.
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Corporation's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Corporation has established a task force to address the year 2000
issue. The task force has implemented a three-phase approach. The first phase,
which is substantially complete, consists of an inventory of all IT and non-IT
systems. The second phase, which is also substantially complete, consists of
setting priorities and developing a test plan. The third phase, testing and
remediation, began during the fourth quarter of 1998 and is continuing.
The Corporation depends on various suppliers to continue its operations.
The Corporation is working with its suppliers to determine whether they and
their products are or will be year 2000 compliant. The Corporation has received
compliance certifications from some suppliers, and is following up with the
other suppliers to obtain such certificates. However, the Corporation does not
control its suppliers, the Corporation cannot fully audit their year 2000
compliance, and for some suppliers the Corporation may have no feasible
alternative supplier available. The failure of such suppliers to
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remediate year 2000 problems in a timely manner could have a material adverse
effect on the Corporation.
The Corporation has not completed its analysis of its most reasonably
likely worst case year 2000 scenarios. The Corporation's task force intends to
investigate these scenarios and, throughout 1999, to develop contingency plans
to reduce or avoid harm to the Corporation's business and operations.
The Corporation's historical costs for remediation are not material and
the Corporation does not anticipate that its future remediation costs will be
material. Starting in 1997, the Corporation began implementation of an
enterprise wide system that is year 2000 compliant. The Corporation does expect
to have to replace certain application software to be year 2000 compliant.
Estimates of these costs are preliminary, but could be as much as $.5 million,
none of which has been expended to date. The Corporation has not delayed any
material projects as a result of the year 2000 problem.
The Corporation's plans to complete the year 2000 modifications are based
on management's best estimates, which were derived utilizing assumptions of
future events including the continued availability of certain resources and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Failure by the
Corporation or its suppliers to complete year 2000 remediation in a timely
manner could have a material adverse effect on the Corporation. Specific factors
that might cause such material differences include, but are not limited to, the
cooperation of third party suppliers, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
RISK FACTORS
The business and future operating results of BioReliance could differ
materially from the descriptions in this Report due to the risks discussed below
and elsewhere in this Report.
DEPENDENCE ON OUTSOURCING FOR DEVELOPMENT OF BIOLOGICS; MARKET ACCEPTANCE OF
BIOLOGICS
The Corporation's revenues are highly dependent on research, development
and manufacturing expenditures by biotechnology and pharmaceutical companies for
the development of biologics. The Corporation has benefited to date from the
growing tendency of biotechnology and pharmaceutical companies to outsource
product development projects to CSOs. A decline in the development of biologics,
a general decline in research and development expenditures by these companies,
or a delay or reduction in the outsourcing to CSOs of research and development
expenditures due to market conditions, pharmaceutical industry consolidation or
other factors could have a material adverse effect on the Corporation's business
and results of operations.
The Corporation's business strategy is dependent upon market acceptance
of biologics. The market for biologics is still emerging, and most biologic
products are still in the research and development stage. The extent to which
biologics are accepted in commercial markets will affect the Corporation's
business, results of operations and financial condition.
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SIGNIFICANT CAPITAL EXPENDITURES
During 1998, the Corporation invested $5.9 million in capital
expenditures primarily related to expansion of its facilities and development of
its information systems, and expects to spend approximately $17.2
million on capital expenditures during 1999. It is unknown what the return on
these capital expenditures will be.
RISKS ASSOCIATED WITH THE NATURE OF CONTRACTS
Most of the Corporation's contracts are short-term in duration. As a
result, the Corporation must continually replace its contracts with new
contracts to sustain its revenue. The Corporation's inability to generate new
contracts on a timely basis would have a material adverse effect on the
Corporation's business, financial condition and results of operation. See
"Revenues Difficult to Predict."
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 decision to forego a particular study. In
addition, the 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.
REVENUES DIFFICULT TO PREDICT
The Corporation's revenues are difficult to predict because they are
primarily generated on a contract-by-contract basis. Most of the contracts are
short-term, and the Corporation does not have a significant backlog. As a
result, the Corporation's revenues are not recurring from period to period,
which contributes to the variability of results from period to period.
VARIATION IN QUARTERLY OPERATING RESULTS; HIGH FIXED COSTS
The Corporation's revenues and operating results have fluctuated, and
could continue to fluctuate, on a quarterly basis. The operating results for a
particular quarter may be lower than expected as a result of a number of
factors, including the timing of contracts; the delay or cancellation of a
contract; the mix of services provided; seasonal slowdowns in Europe during the
summer months; the timing of start-up expenses for new services and facilities;
the timing and integration of acquisitions; and changes in regulations related
to biologics. Because a high percentage of the Corporation's costs are fixed
(such as the cost of maintaining facilities and compensating employees), any one
of these factors could have a significant impact on the Corporation's quarterly
results. In some quarters the Corporation's revenues and operating results may
fall below the expectations of securities analysts and investors due to any of
the factors described above. In such event, the trading price of the
Corporation's common stock would likely decline, even if the decline in revenues
did not reflect any long-term problems with the Corporation's business.
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MANAGEMENT OF GROWTH
The Corporation's operations -- both domestic and international -- have
grown in recent years. This growth has placed a strain on the Corporation's
management, operational, human and financial resources. In order to manage its
growth, the Corporation must continue to improve its operating and
administrative systems, including its financial and accounting systems, and to
attract and retain qualified management and professional, scientific and
technical operating personnel. There can be no assurance that the Corporation
will be able to manage its growth effectively. Any failure to effectively
anticipate, implement and manage the changes required to sustain its growth
could have a material adverse effect on the Corporation's business and results
of operations.
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.
COMPETITION; INDUSTRY CONSOLIDATION
The Corporation operates in a highly competitive industry. The CSO
industry is highly fragmented, with many providers ranging in size from one
person consulting firms to full-service global drug development corporations.
The Corporation primarily competes with in-house research departments of
biotechnology and pharmaceutical companies, universities and medical centers,
and other CSOs.
As a result of competitive pressures, the industry has begun to
consolidate. Mergers and acquisitions have resulted in the emergence of several
large, full-service CSOs that have greater capital, technical and financial
resources than BioReliance. As pharmaceutical and biotechnology companies
increasingly outsource development, they may increasingly turn to larger CSOs
that provide a full range of services. This trend is likely to produce
increased competition among the larger CSOs for both clients and acquisition
candidates and increased competitive pressures on smaller providers. In
addition, the CSO industry has attracted the attention of the investment
community, which could lead to heightened competition by increasing the
availability of financial resources for CSOs. Increased competition may lead to
price and other forms of competition that may have a material adverse effect on
the Corporation's business and results of operations.
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DEPENDENCE ON PERSONNEL
The Corporation depends on a number of key executives, including Capers
W. McDonald, its President and Chief Executive Officer. The loss of the services
of any of the Corporation's key executives could have a material adverse effect
on the Corporation's business. The Corporation also depends on its ability to
attract and retain qualified scientific and technical employees. There is a
significant shortage of, and intense competition for, qualified scientific and
technical employees. There can be no assurance the Corporation will be able to
retain its existing scientific and technical employees, or to attract and retain
additional qualified employees. The Corporation's inability to attract and
retain qualified scientific and technical employees would have a material
adverse effect on the Corporation's business and results of operations.
POTENTIAL LIABILITY
The Corporation formulates, tests and manufactures products intended for
use by the public. In addition, the Corporation's services include the
manufacture of biologic products to be tested in human clinical trials. 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, although applicable, is not performed in accordance with its terms or
if the Corporation's liability exceeds the amount of applicable insurance or
indemnity. In addition, the Corporation could be held liable for errors and
omissions in connection with the services it performs. The Corporation currently
maintains product liability and errors and omissions insurance with respect to
these risks. There can be no assurance that the Corporation's insurance coverage
will be adequate or that insurance coverage will continue to be available on
terms acceptable to the Corporation. 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. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of any
contamination or injury from these materials, the Corporation could be held
liable for any damages that result, including joint and several liability under
certain statutes such as CERCLA, and any such liability could exceed the
resources of the Corporation. Furthermore, the failure to comply with current or
future regulations could result in the imposition of substantial fines against
the Corporation, suspension of production, alteration of its manufacturing
processes or cessation of operations. There can be no assurance that the
Corporation will not be required to incur significant costs to comply with any
such laws and regulations in the future, or that such laws or regulations or
liability thereunder will not have a material adverse effect on the
Corporation's business and results of operations.
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. See "Legal Proceedings."
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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."
CONTROL BY EXISTING STOCKHOLDERS
As of March 1, 1999, Sidney R. Knafel, Chairman of the Board of
Directors of the Corporation, and related persons beneficially own an aggregate
of approximately 40.8% of the outstanding common stock (excluding shares
issuable upon the exercise of options). The Corporation's executive officers,
directors and related persons (including Sidney R. Knafel) beneficially own an
aggregate of approximately 43.7% 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.
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
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of its foreign operations as well as to risks sometimes associated with
international operations. The Corporation derived 15.5%, 16.1% and 17.2% of its
revenue for 1998, 1997 and 1996, respectively, from services performed outside
of the United States. In addition, the Corporation may be subject to currency
risk when the Corporation's service contracts are denominated in a currency
other than the currency in which the Corporation incurs expenses related to
such contracts. 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 that 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Corporation is exposed to market risk from adverse changes in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
The Corporation is exposed to interest rate risk primarily through its
investments in short-term marketable securities and cash equivalents and its
debt agreements. The Corporation's investment policy calls for investment in
short-term, low risk instruments. At December 31, 1998, the Corporation had
$18.3 million invested in government and governmental agency securities. A rise
in interest rates would have an adverse impact on the fair market value of fixed
rate securities. If interest rates fall, floating rate securities may generate
less interest income. The Corporation manages its exposure to interest rate
risks through investing in securities with maturities of one year or less.
Additionally, the Corporation is exposed to risk from changes in
interest rates as a result of its borrowing activities. At December 31, 1998,
the Corporation had total debt of $12.5 million. The Corporation's debt
consists of a mortgage loan with approximately $2.8 million outstanding; a
promissory note with approximately $.9 million outstanding and capital lease
obligations of approximately $8.8 million outstanding. See Note 7 of Notes to
Consolidated Financial Statements. The Corporation's exposure to losses is
partially managed through an interest rate swap agreement related to the
mortgage loan.
FOREIGN CURRENCY EXCHANGE RISK
The Corporation's international operations are subject to foreign
exchange rate fluctuations. The Corporation derived 15.5%, 16.1% and 17.2% of
its revenue for 1998, 1997 and 1996, respectively, from services performed in
the United Kingdom and Germany. Since the revenue and expenses of the
Corporation's international operations generally are denominated in local
currencies, exchange rate fluctuations between such local currencies and the
United
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States dollar will subject the Corporation to currency translation risk with
respect to the reported results of its foreign operations as well as to risks
sometimes associated with international operations. In addition, the Corporation
may be subject to currency risk when the Corporation's service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts. The United Kingdom and Germany have
traditionally had relatively stable currencies. The Corporation does not hedge
its foreign currency exposure. Management does not believe that the
Corporation's exposure to foreign currency rate fluctuations is material. See
"Risk Factors -- Exchange Rate Fluctuations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Corporation are listed in the Index to Financial Statements and Financial
Statement Schedules appearing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated 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 Item 11 is incorporated by reference to the
information to be set forth under the caption "Executive Compensation" in the
Corporation's definitive proxy statement, which is expected to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Corporation's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information to be set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Corporation's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Corporation's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the information to be set forth under the caption "Certain Relationships and
Related Transactions" in the Corporation's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission within 120 days
after the close of the Corporation's fiscal year.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The financial statements and financial statement schedule required to be
filed as part of this Report are listed in the Index to Consolidated Financial
Statements elsewhere in this Report, which list is incorporated herein by
reference.
EXHIBITS
The documents required to be filed as exhibits to this Report under Item
601 of Regulation S-K are listed in the Exhibit Index included elsewhere in this
Report, which list is incorporated herein by reference.
REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER
The Corporation did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Rockville,
Maryland, on this 30th day of March, 1999.
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, Patrick J. Spratt 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.
37
<PAGE> 38
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Sidney R. Knafel Chairman of the Board March 30, 1999
- - -----------------------------
SIDNEY R. KNAFEL
/s/ Capers W. McDonald President, Chief Executive March 30, 1999
- - ----------------------------- Officer and a Director
CAPERS W. MCDONALD
/s/ Patrick J. Spratt Vice President, Finance and March 30, 1999
- - ----------------------------- Accounting; Chief Financial
PATRICK J. SPRATT Officer and Treasurer (Chief
Accounting Officer)
/s/ William J. Gedale Director March 30, 1999
- - -----------------------------
WILLIAM J. GEDALE
/s/ Victoria Hamilton Director March 30, 1999
- - -----------------------------
VICTORIA HAMILTON
/s/ Gordon J. Louttit Director March 30, 1999
- - -----------------------------
GORDON J. LOUTTIT
/s/ Leonard Scherlis Director March 30, 1999
- - -----------------------------
DR. LEONARD SCHERLIS
</TABLE>
38
<PAGE> 39
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
3.1 Amended and Restated Certificate of Incorporation of BioReliance
Corporation.(1)
3.2 Bylaws of BioReliance Corporation. (1)
10.1 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)
10.2 Second Modification Agreement -- Leasehold Deed of Trust and Security
Agreement, dated as of October 31, 1997, by and among BioReliance
Corporation, Elizabeth Shore and NationsBank, N.A. (2)
10.3 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)
10.4 International Swap Dealers Association, Inc. Master Agreement, dated as
of May 10, 1995, by and among NationsBank, N.A., Microbiological
Associates, Inc. and MAGENTA Corporation. (1)
10.5 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. (2)
10.6 Lease Agreement, dated as of December 1, 1983, by and between Montgomery
County, Maryland and Dynasciences Corp. n/k/a BioReliance Corporation.
(1)
10.7 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)
10.8 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. (2)
10.9 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. (2)
10.10 Microbiological Associates, Inc. 1995 Non-Qualified Stock Option Plan.
(3)
10.11 MAGENTA Corporation, 1994 Incentive Stock Option Plan. (3)
10.12 Microbiological Associates, Inc., 1988 Incentive Stock Option Plan. (3)
39
<PAGE> 40
10.13 Lease Agreement, dated as of October 16, 1997, between FP Rockledge,
L.L.C. and MA BioServices, Inc. (2)
10.14 First Amendment to Lease Agreement, dated as of February 12, 1998,
between FP Rockledge, L.L.C. and MA BioServices, Inc. (2)
10.15 Consent of Guarantor, dated as of February 12, 1998, to First Amendment
to Lease Agreement. (2)
10.16 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. (2)
10.17 Lease-Purchase Agreement, dated April 1, 1998, between Montgomery County,
Maryland and BioReliance Corporation. (4)
10.18 Lease, dated April 1, 1998, between BioReliance Corporation and BPG
Industrial Partners II, LLC. (4)
10.19 Project Lease, dated April 1, 1998, between BPG Industrial Partners II,
LLC and MAGENTA Corporation. (4)
10.20 Leasehold Deed of Trust, dated April 1, 1998, by BioReliance Corporation
and MAGENTA Corporation, to Cynthia Flanders and Eileen Chow (trustees)
and NationsBank, N.A. (4)
10.21 Guaranty Agreement, dated April 1, 1998, by BioReliance Corporation in
favor of NationsBank, N.A. (4)
10.22 Loan Agreement, dated April 1, 1998, between BPG Industrial Partners II,
LLC, NationsBank, N.A. and, for certain purposes, BioReliance
Corporation. (4)
10.23 First Amendment to Amended and Restated Replacement Loan Agreement, dated
April 1, 1998, among BioReliance Corporation, MA BioServices, Inc.,
MAGENTA Corporation, MAGENTA Viral Production, Inc. and NationsBank, N.A.
(4)
10.24 Second Note Modification Agreement, dated April 1, 1998, among
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation,
MAGENTA Viral Production, Inc. and NationsBank, N.A. (4)
10.25 Second Deed of Trust Note Modification, dated April 1, 1998, among
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation,
MAGENTA Viral Production, Inc. and NationsBank, N.A. (4)
10.26 Second Replacement Revolving Promissory, dated April 1, 1998, by
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation and
MAGENTA Viral Production, Inc. in favor of NationsBank, N.A. in the
amount of $1 million. (4)
10.27 Third Modification Agreement - Leasehold Deed of Trust and Security
Agreement, dated April 1,
40
<PAGE> 41
1998, among BioReliance Corporation, Elizabeth Shore (trustee) and
NationsBank, N.A. (4)
10.28 BioReliance Corporation 1997 Incentive Stock Plan (as adopted May 28,
1997 and amended and restated September 24, 1997 and May 21, 1998). (5)
10.29 Employment Agreement, dated October 1, 1998, by and between BioReliance
Corporation and Michael R.N. Thomas. (6)
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
- - -----------
(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 Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, which is incorporated herein by
reference.
(3) Indicates an Exhibit to the Corporation's Registration Statement on Form
S-8 (Registration No. 333-34341), which is incorporated herein by
reference.
(4) Indicates as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, which is incorporated herein by
reference.
(5) Indicated an Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, which is incorporated herein by
reference.
(6) Indicated as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which is incorporated herein by
reference.
41
<PAGE> 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL SCHEDULE
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants............................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1996,
1997 and 1998................................................................. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998................................................................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1997 and 1998........................................................... F-6
Notes to Consolidated Financial Statements...................................... F-7
Financial Statement Schedule:
For the Three Years Ended December 31, 1998
II - Valuation and Qualifying Accounts.................................. F-23
</TABLE>
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
<PAGE> 43
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, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 18, 1999
F-2
<PAGE> 44
<TABLE>
<CAPTION>
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1997 1998
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 6,227 $ 8,847
Marketable securities................................................. 27,554 18,250
Accounts receivable, net.............................................. 15,923 21,399
Other current assets.................................................. 1,827 2,506
----------- -----------
Total current assets........................................ 51,531 51,002
Property and equipment, net.............................................. 15,601 25,371
Intangible assets, net................................................... 256 122
Deposits and other assets................................................ 286 450
Deferred income taxes.................................................... 977 ---
----------- -----------
Total assets................................................ $ 68,651 $ 76,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................... $ 1,574 $ 4,628
Accounts payable...................................................... 1,811 2,685
Accrued employee compensation and benefits............................ 2,829 1,955
Other accrued liabilities............................................. 2,302 1,732
Customer advances..................................................... 3,635 2,632
Deferred income taxes................................................. 1,271 1,551
----------- -----------
Total current liabilities................................... 13,422 15,183
Deferred taxes........................................................... --- 25
Long-term debt........................................................... 5,434 7,914
----------- -----------
Total liabilities........................................... 18,856 23,122
----------- -----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Convertible preferred stock, $.01 par value: 6,900,000 shares
authorized; no shares issued and outstanding....................... --- ---
Common stock, $.01 par value: 15,000,000 shares authorized;
7,685,208 and 7,821,344 shares issued and outstanding............... 77 78
Additional paid-in capital............................................ 52,457 52,586
Retained earnings/(accumulated deficit)............................... (2,145) 1,449
Accumulated other comprehensive income................................ (594) (290)
----------- -----------
Total stockholders' equity.................................. 49,795 53,823
----------- -----------
Total liabilities and stockholders' equity.................. $ 68,651 $ 76,945
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
F-3
<PAGE> 45
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Revenue.............................................. $ 37,682 $ 47,888 $ 49,843
---------- ----------- -----------
Expenses:
Cost of sales.................................. 24,860 29,452 29,738
Selling, general and administrative............ 7,852 10,093 13,627
Research and development....................... 1,110 1,393 1,438
Nonrecurring charge............................ 696 --- ---
---------- ----------- -----------
34,518 40,938 44,803
---------- ----------- -----------
Income from operations............................... 3,164 6,950 5,040
---------- ----------- -----------
Other (income) expense:
Interest income................................ (18) (817) (1,891)
Interest expense............................... 844 717 551
Other (income) expense......................... (10) 33 498
---------- ----------- -----------
816 (67) (842)
---------- ----------- -----------
Income before income taxes........................... 2,348 7,017 5,882
Provision for income taxes........................... 846 2,951 2,288
---------- ----------- -----------
Net income........................................... $ 1,502 $ 4,066 $ 3,594
---------- ----------- -----------
Net income per share:
Basic.......................................... $ 4.41 $ 1.18 $ 0.46
========== =========== ===========
Diluted........................................ $ 0.26 $ 0.60 $ 0.44
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 46
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 1,502 $ 4,066 $ 3,594
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation................................................... 2,626 2,991 3,340
Amortization expense........................................... 92 212 227
Amortization of bond premiums and discounts.................... --- (173) (276)
Compensation element of stock option grants.................... 22 --- ---
Loss on disposal of fixed assets............................... --- 190 22
Deferred income taxes, net..................................... 523 1,789 1,282
Changes in current assets and liabilities:
Accounts receivable, net................................... (4,303) (2,259) (5,763)
Other current assets....................................... 37 (678) (640)
Accounts payable........................................... 905 (94) 975
Accrued employee compensation and benefits................. 408 615 (874)
Other accrued liabilities.................................. 1,031 26 (606)
Customer advances.......................................... 1,825 (320) (1,026)
Deposits and other assets...................................... (203) (89) (259)
---------- ----------- -----------
Net cash provided by (used in) operating activities... 4,465 6,276 (4)
---------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities............................... --- (32,381) (41,070)
Proceeds from the maturities of marketable securities............ --- 5,000 50,650
Acquisition of BIOMEVA GmbH, net of cash acquired................ (2,752) --- ---
Purchases of property and equipment.............................. (1,850) (4,201) (5,888)
---------- ----------- -----------
Net cash provided by (used in) investing activities... (4,602) (31,582) 3,692
---------- ----------- -----------
Cash flows from financing activities:
Net proceeds from initial public offering ...................... --- 32,247 ---
Proceeds from exercise of stock options......................... 34 223 268
Proceeds from debt.............................................. 1,800 --- ---
Payments on debt................................................ (539) (717) (832)
Proceeds from (repayment on) note payable to stockholder........ 1,900 (1,900) ---
Payments on capital lease obligations........................... (813) (912) (754)
Repurchase and cancellation of treasury stock................... (3) (77) (138)
---------- ----------- -----------
Net cash provided by (used in) financing activities... 2,379 28,864 (1,456)
---------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents......... 30 (296) 388
---------- ----------- -----------
Net increase in cash and cash equivalents............................ 2,272 3,262 2,620
Cash and cash equivalents, beginning of period....................... 693 2,965 6,227
---------- ----------- -----------
Cash and cash equivalents, end of period............................. $ 2,965 $ 6,227 $ 8,847
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 47
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK RETAINED
--------------- ------------ ADDITIONAL EARNINGS/
PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
----------- ------------ ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995.............................. 6,470,121 $ 65 297,002 $ 3 $ 19,822 $ (7,713)
Issuance of common stock in
Connection with acquisition -- -- 23,333 -- 198 --
Exercise of stock options......... -- -- 20,647 -- 34 --
Compensation element of stock
option grants................... -- -- -- -- 22 --
Stock repurchase and cancellation. -- -- (1,052) -- (3) --
Equity adjustment from foreign
currency translation............ -- -- -- -- -- --
Net income........................ -- -- -- -- -- 1,502
----------- ------------ ---------- --------- ---------- ------------
BALANCE AT DECEMBER 31,
1996.............................. 6,470,121 $ 65 339,930 3 20,073 (6,211)
Issuance of common stock in
Initial Public Offering ("IPO"),
net of offering costs of $1.5 -- -- 2,417,316 24 32,223 --
million........................ --
Conversion of preferred stock, --
concurrent with IPO............. (6,470,121) (65) 4,778,072 48 17 --
Exercise of stock options......... -- -- 155,922 2 221 --
Stock repurchase and cancellation. -- -- (6,032) -- (77) --
Equity adjustment from foreign
currency translation............ -- -- -- -- -- --
Net income........................ -- -- -- -- -- 4,066
----------- ------------ ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31,
1997.............................. -- -- 7,685,208 77 52,457 (2,145)
Exercise of stock options......... -- -- 142,245 1 267 --
Stock repurchase and cancellation -- -- (6,109) -- (138) --
Equity adjustment from foreign
currency translation............ -- -- -- -- -- --
Net income........................ -- -- -- -- -- 3,594
----------- ------------ ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31,
1998.............................. -- $ -- 7,821,344 $ 78 $ 52,586 $ 1,449
=========== ============ ========== ========= ========== ============
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31,
1995.............................. $ (56) $ 12,121
Issuance of common stock in
Connection with acquisition -- 198
Exercise of stock options......... -- 34
Compensation element of stock
option grants................... -- 22
Stock repurchase and cancellation. -- (3)
Equity adjustment from foreign
currency translation............ 217 217
Net income........................ -- 1,502
----------- -----------
BALANCE AT DECEMBER 31,
1996.............................. 161 14,091
Issuance of common stock in
Initial Public Offering ("IPO"),
net of offering costs of $1.5
million........................ -- 32,247
Conversion of preferred stock,
concurrent with IPO............. -- --
Exercise of stock options......... -- 223
Stock repurchase and cancellation. -- (77)
Equity adjustment from foreign
currency translation............ (755) (755)
Net income........................ -- 4,066
----------- -----------
BALANCE AT DECEMBER 31,
1997.............................. (594) 49,795
Exercise of stock options......... -- 268
Stock repurchase and cancellation. -- (138)
Equity adjustment from foreign
currency translation............ 304 304
Net income........................ -- 3,594
----------- ------------
BALANCE AT DECEMBER 31,
1998.............................. $ (290) $ 53,823
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 48
BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract service
organization providing testing, development and manufacturing services for
biologics and other biomedical products 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.
SEGMENT INFORMATION
In 1998, BioReliance Corporation adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supercedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise", replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Corporation's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information (see Note 14).
REVENUE RECOGNITION
Revenue recognized from commercial contracts, which are principally
fixed-price or fixed-rate, is recorded using the percentage-of-completion over
time or the completed-contract method, depending on the nature and duration of
the contract. Testing and development services are accounted for using the
percentage-of-completion over time method, except for services that are
generally completed within three days which are accounted for using the
completed-contract method. Manufacturing services providing for the delivery of
products are accounted for using the completed-contract method, while all other
manufacturing services are accounted for using the percentage-of-completion over
time method. Percentage-of-completion over time is determined using total
project costs as a cost input measure. Revenue recognized from government
contracts, which are principally cost-plus-fixed-fee, is recognized
F-7
<PAGE> 49
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.
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 twenty-year period. Leasehold improvements
are depreciated or amortized over the shorter of the useful life or the lease
term with useful lives up to twenty years. Other fixed assets are depreciated or
amortized over periods ranging from three to ten years. Equipment is depreciated
over five years; and, computer hardware and software is depreciated over three
to five years. 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, 1997 and 1998 was $304,000 and $438,000, 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
The Corporation follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method of SFAS 109, deferred income taxes are recognized for the expected future
tax consequences of temporary differences by applying enacted statutory tax
rates, in effect for the year in which the differences are expected to reverse,
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
F-8
<PAGE> 50
Valuation allowances are provided if it is anticipated that some or all of a
deferred tax asset may not be realized.
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.
In February 1998, the SEC 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 twelve months immediately preceding the filing of the
Corporation's initial registration statement and through the effective date of
the 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 25") and related
interpretations. Under APB 25, compensation cost is measured as the excess,
if any, of the market price of the Corporation's stock at the date of the grant
over the exercise price of the option granted. Compensation cost for stock
options, if any, is recognized ratably over the vesting period. The Corporation
provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Transactions for which non-employees are issued equity instruments for
goods or services are recorded by the Corporation based upon the value of the
goods or services received or fair value of the equity instruments issued
whichever is more reliably measured.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's cash and cash equivalents,
marketable securities, accounts receivable, other current assets, deposits and
other assets, accounts payable, accrued expenses, and customer advances
approximate their carrying values due to their short-term nature. Since the
interest rates paid by the Corporation approximate current market rates, the
carrying value of its long-term debt approximates fair value.
F-9
<PAGE> 51
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) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. SFAS 130 requires that all components of
comprehensive income be reported in the financial statements in the period in
which they are recognized. The statement requires reclassification of earlier
statements in comparative financial statements and is effective for fiscal years
beginning after December 15, 1997.
The Corporation adopted this statement during the first quarter of 1998.
The Corporation restated the Statements of Financial Position and the Statements
of Stockholders' Equity for the years ended December 31, 1996 and 1997.
(3) ACQUISITION
In July 1996, the Corporation acquired all of the shares of BIOMEVA, a
contract manufacturer of microbial products located in Germany. Total
consideration for the acquisition was $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 was 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 approximately $600,000 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, 1996 are as follows for the year ended December
31:
<TABLE>
<CAPTION>
1996
----
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Revenue.................................. $ 39,165
Net income............................... $ 1,386
Net income per basic share............... $ 4.49
Net income per diluted share............. $ 0.25
</TABLE>
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, 1996; and (2) a net increase in interest expense,
assuming that, as of January 1, 1996, the debt incurred by the Corporation to
finance the acquisition was outstanding and the pre-acquisition BIOMEVA debt was
repaid.
F-10
<PAGE> 52
(4) MARKETABLE SECURITIES
Marketable securities consisted of the following amounts at December 31:
<TABLE>
<CAPTION>
GROSS ESTIMATED
1997 AMORTIZED UNREALIZED MARKET
- - ---- COST (LOSSES) VALUE
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Government and Government Agencies............... $24,957 $(2) $ 24,955
Commercial paper................................. 2,597 --- 2,597
------- ---- --------
$27,554 $(2) $ 27,552
======= ==== ========
1998
- - ----
Government and Government Agencies............... $18,250 $(4) $ 18,246
Commercial paper................................. --- --- ---
------- ---- --------
$18,250 $(4) $ 18,246
======= ==== ========
</TABLE>
All securities have maturities of one year or less.
(5) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following amounts as of December 31:
<TABLE>
<CAPTION>
1997 1998
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Billed accounts receivable:
Commercial..................................................... $ 6,678 $ 11,997
Government..................................................... 506 1,072
--------- ----------
7,184 13,069
--------- ----------
Unbilled accounts receivable:
Commercial..................................................... 7,923 8,080
Government..................................................... 1,058 1,086
--------- ----------
8,981 9,166
--------- ----------
Less allowances for doubtful accounts and unallowable
contract costs................................................. (242) (836)
--------- ----------
Accounts receivable, net......................................... $ 15,923 $ 21,399
========= ==========
</TABLE>
Unbilled commercial receivables represent revenue from commercial
contracts (recorded using the percentage-of-completion method) which are not yet
billable to the client. Generally, these amounts become billable within the next
one to three months upon the attainment of a milestone or the completion of the
contract.
Unbilled government receivables represent amounts which are billed on
government contracts shortly after the end of each month, based on costs
incurred and fees earned during the month, or revenues recognized in excess of
billings on government contracts which generally become billable upon final
determination of allowable costs by the United States government. Government
contract costs for 1996, 1997 and 1998 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.
F-11
<PAGE> 53
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following amounts as of December
31:
<TABLE>
<CAPTION>
1997 1998
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 1,984 $ 2,704
Building................................................ 7,859 9,827
Equipment, furniture, fixtures, and computer hardware
and software............................................ 16,511 21,408
Leasehold improvements.................................. 2,291 2,463
Construction in progress and assets not yet placed in
service................................................. 1,900 7,358
------------ ------------
Property and equipment, at cost......................... 30,545 43,760
Less accumulated depreciation and amortization.......... (14,944) (18,389)
------------ ------------
Property and equipment, net............................. $ 15,601 $ 25,371
============ ============
</TABLE>
(7) DEBT
Debt consisted of the following amounts as of December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage Loan..................... $ 3,223 $ 2,867
Promissory Note................... 1,260 900
Capital lease obligations......... 2,525 8,775
----------- -----------
Total debt........................ 7,008 12,542
Less current portion.............. (1,574) (4,628)
----------- -----------
Long-term portion................. $ 5,434 $ 7,914
=========== ===========
</TABLE>
BANK DEBT
The Corporation has a loan agreement with a bank 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
0.85% to 2.0% depending on the Corporation achieving certain funded debt to
EBITDA ratios. At December 31, 1998, the interest rate was 6.63% and the LIBOR
Rate Option was 1.40%.
In May 1995, the Corporation entered into an interest rate swap agreement
whereby the variable interest rate portion of the Mortgage Loan was effectively
converted into a fixed rate of 6.55% per annum. This agreement expires on
November 30, 1999. 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. The
effect of the interest rate swap agreement on interest expense was not material
in 1996, 1997 or 1998. The effect of the interest rate swap agreement and the
LIBOR Rate Option resulted in a 7.95% effective interest rate at December 31,
1998.
In addition to the Mortgage Loan, the Corporation has available
borrowings up to $1,000,000 under the terms of a revolving loan agreement with
the same bank. The revolving loan agreement requires monthly interest payments
on the unpaid Principal Sum, and the unpaid Principal Sum, together with unpaid
accrued interest payable in full on May 31, 1999. 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
F-12
<PAGE> 54
the average unused portion of the revolving bank loan. At December 31, 1998, no
amounts were outstanding under the facility. This revolving loan agreement
expires in May 1999.
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, 1998, the interest rate was
6.63%.
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 bank agreements are cross collateralized and are secured by a deed of
trust on one of the Corporation's facilities 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. In April 1998, the Corporation
entered into certain third-party leasing and subleasing arrangements relating to
the construction of new manufacturing space in Rockville, MD. These arrangements
require the Corporation to make certain noncancelable lease payments over the
next twenty years and to guarantee indebtedness of approximately $4.4 million.
The terms of the arrangements require that the leases be accounted for as
capital leases. The assets underlying capitalized leases are included with the
Corporation's owned property and equipment, and are summarized as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1998
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Land................................ $ 1,984 $ 2,704
Construction in progress............ --- 6,160
Machinery and equipment............. 4,407 4,609
---------- ----------
Total assets at cost................ 6,391 13,473
Less accumulated depreciation....... (2,760) (3,585)
---------- ----------
Net capitalized assets.............. $ 3,631 $ 9,888
========== ==========
</TABLE>
The future minimum lease payments under capital lease obligations at
December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999............................................ $ 1,365
2000............................................ 1,182
2001............................................ 824
2002............................................ 737
2003............................................ 721
Thereafter...................................... 10,726
---------
Total minimum lease payments...................... 15,555
Less amount representing interest................. (6,780)
---------
Present value of minimum lease payments........... 8,775
Less current portion.............................. (861)
---------
Long-term portion................................. $ 7,914
=========
</TABLE>
F-13
<PAGE> 55
(8) 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
The Board of Directors of the Corporation adopted the 1997 Incentive Plan
("the 1997 Plan") in May 1997, and approved amendments to the 1997 Plan in
September 1997 and May 1998. The 1997 Plan replaced all of the Corporation'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, non-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 vest in one-third increments over three years and have seven-year
terms. These Awards are exercisable as
F-14
<PAGE> 56
determined by the Corporation's compensation committee and expire no later than
seven 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.
As of December 31, 1998, 712,277 and 397,346 shares were authorized and
available for grants, respectively.
Changes in options outstanding were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------ -----------------
<S> <C> <C>
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
Granted.......................... 418,040 13.00
Exercised........................ (142,245) 1.90
Canceled......................... (92,879) 11.83
-------------
Balance, December 31, 1998......... 892,152 6.71
=============
</TABLE>
To determine fair value under SFAS 123, the Corporation used the
Black-Scholes option-pricing model and the following weighted-average
assumptions for 1996, 1997 and 1998: a risk-free interest rate of 5.88%,
expected lives of 6 years, expected volatility of 82%, and expected dividends of
zero. The weighted average fair value of options granted during 1996, 1997 and
1998 was $1.80, $5.44 and $9.27, respectively.
For options outstanding and exercisable at December 31, 1998, the
following number of options, range of exercise prices and weighted average
exercise prices were:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF SHARES REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE
- - -------------------------- ------------------- ------------------------ --------------------
<S> <C> <C> <C>
$ 0.56 - 1.50 317,205 1.7 $ 1.47
$ 2.25 - 4.50 163,870 3.5 $ 2.74
$ 7.25 - 11.88 187,479 6.3 $ 9.19
$13.41 - 19.75 212,448 6.7 $ 14.58
$21.25 - 23.00 11,150 7.5 $ 22.48
-------
Total 892,152 4.3 $ 6.71
=======
<CAPTION>
WEIGHTED-AVERAGE
EXERCISABLE EXERCISE PRICE
----------------- -------------------
<C> <C>
316,205 $ 1.48
120,918 $ 2.66
21,532 $ 7.96
2,551 $13.41
662 $21.25
------
461,868 $ 2.18
=======
</TABLE>
As permitted by SFAS 123, the Corporation's has chosen to continue
accounting for stock options at their intrinsic value. Accordingly no
compensation expense has been recognized for its stock option compensation
plans. Had the fair value method of accounting been applied to the Corporation's
stock option plans the impact would be as follows:
F-15
<PAGE> 57
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income as reported................................. $ 1,502 $ 4,066 $3,594
Estimated fair value of the year's option grants....... (34) (61) (453)
--------- --------- ---------
Proforma net income.................................... 1,468 4,005 3,141
Adjusted net income per share
Basic ............................................. 4.30 1.16 0.40
Diluted........................................... 0.23 0.59 0.38
</TABLE>
(9) INCOME TAXES
INCOME TAX PROVISION
Income before income taxes consisted of the following amounts for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................... $ 1,632 $ 5,839 $5,062
Foreign........................... 716 1,179 820
--------- ------- ------
Income before income taxes........ $ 2,348 $ 7,018 $5,882
========= ======= ======
</TABLE>
The provision for income taxes consisted of the following amounts for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ 465 $ 533
Foreign................................................ 323 464 222
State.................................................. -- 233 251
-------- -------- ------
Total current provision........................... 323 1,162 1,006
-------- -------- ------
Deferred:
Federal................................................ 540 1,116 1,223
Foreign................................................ (90) 323 (192)
State.................................................. 73 350 251
-------- -------- ------
Total deferred provision ......................... 523 1,789 1,282
-------- -------- ------
Total provision for income taxes.................. $ 846 $ 2,951 $2,288
======== ======== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------ --------
<S> <C> <C> <C>
Federal tax at statutory rate..................... 34.0% 34.0% 34.0%
State tax, net of federal benefit................. -- 2.2 2.8
Adjustment for foreign income taxes............... 4.4 (0.1) 0.1
U.K. consolidation................................ -- -- 5.2
Change in valuation allowance..................... 0.9 12.2 4.8
Charitable contribution........................... -- (7.5) --
Tax credits....................................... -- -- (13.4)
Nondeductible expenses............................ 1.5 0.1 3.6
Other............................................. (4.8) 1.1 1.9
-------- ------- -------
Provision for income taxes........................ 36.0% 42.0% 39.0%
====== ====== ========
</TABLE>
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.
F-16
<PAGE> 58
Effective January 1, 1998, BioReliance Holding GmbH ("BRH") and BIOMEVA
may consolidate income for German tax purposes pursuant to an agreement dated
November 30, 1998, which continues for five years. In addition BRH declared a
distribution to the Corporation during 1998 which entitles BRH to a German tax
refund.
Effective December 31, 1998, BioReliance, Ltd. ("BREL, Ltd.") and
BioReliance Manufacturing, Ltd. (formerly MAGENTA Services, Ltd.) were merged
for U.K. tax purposes. In addition to the business strategy benefits of this
merger, it allows for the efficient use of certain tax assets.
DEFERRED INCOME TAXES
Deferred income taxes consisted of the following amounts as of December
31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 771 $ 838
Accrued expenses............................................ 373 527
Tax credit carryforwards.................................... 1,114 --
Other....................................................... 502 1,105
---------- --------
Gross deferred tax assets..................................... 2,760 2,470
Valuation allowance........................................... (771) (1,089)
---------- --------
Net deferred tax assets..................................... 1,989 1,381
---------- --------
Deferred tax liabilities:
Unbilled accounts receivable................................ (1,640) (2,337)
Depreciation and amortization............................... (643) (620)
Other....................................................... -- --
---------- --------
Deferred tax liabilities.................................... (2,283) (2,957)
---------- --------
Deferred taxes, net........................................... $ (294) $ (1,576)
=========== ========
Deferred income tax liabilities, current portion.............. $ (1,271) $ (2,337)
Deferred income tax liabilities, long-term portion............ -- (620)
Deferred income tax assets, current portion................... -- 786
Deferred income tax assets, long-term portion................. 977 595
---------- --------
Deferred taxes, net........................................... $ (294) (1,576)
========== ========
</TABLE>
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 1998, the increase
in the valuation allowance is due principally to valuation allowances
established for net operating losses in certain foreign jurisdictions.
Additionally, in 1998 the Corporation established a valuation allowance in
recognition of the impact of certain other tax strategies.
TAX CARRYFORWARDS
At December 31, 1998, the Corporation had foreign net operating loss
carryforwards available to offset future taxable income of approximately
$700,000 and $400,000 in the U.K. and in Germany, respectively which may be
carried forward indefinitely.
F-17
<PAGE> 59
(10) 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.
(11) RETIREMENT PLAN
The Corporation sponsors a defined-contribution retirement 401(k) plan
covering substantially all of its employees. Contributions made by the
Corporation in 1996, 1997 and 1998 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 $262,000, $286,000 and $282,000
in 1996, 1997 and 1998, respectively.
(12) 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:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................... $ 1,502 $4,066 $3,594
Assumed dividends paid to preferred stockholders......... (139) --- ---
---------- --------- ---------
Net income available to common stockholders.............. $ 1,363 $ 4,066 $ 3,594
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income available to common stockholders.............. $ 1,363 $4,066 $ 3,594
Assumed dividends paid to preferred stockholders......... 139 --- ---
--------- --------- ---------
Net income available to common and common
equivalent stockholders.............................. $ 1,502 $4,066 $ 3,594
======== ====== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average common stock outstanding................ 309 3,458 7,791
Preferred stock, as if converted......................... 4,759 2,723 ---
Stock options, as if converted.......................... 611 652 442
-------- -------- --------
Weighted average common and common equivalent
shares outstanding................................... 5,679 6,833 8,233
========= ======== ========
</TABLE>
F-18
<PAGE> 60
(13) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Corporation leases certain facilities and equipment under
noncancelable operating leases that expire at various dates through 2017. In
October 1997, the Corporation entered into a lease agreement with a developer to
construct a new facility in Rockville, MD. Construction was completed in August
1998. The new facility is the Corporation's headquarters and will also provide
expanded laboratories and other capacities for operational businesses. The lease
requires the Corporation to make certain noncancelable lease payments over the
next 15 years. The terms of the agreement require that the lease be accounted
for as an operating lease. Future minimum lease payments under operating leases
were as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999............................................ $ 1,704
2000............................................ 1,751
2001............................................ 1,748
2002............................................ 1,789
2003............................................ 1,839
Thereafter...................................... 13,683
-----------
Total future minimum lease payments.......... $ 22,514
===========
</TABLE>
Total rent expense for all operating leases was $1,573,000, $1,650,000
and $1,864,000 in 1996, 1997 and 1998, respectively.
COMMITMENTS
At December 31, 1998, the Corporation had formulated capital spending
plans of approximately $17.2 million, primarily for a new manufacturing
facility, relating to building improvements and equipment.
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.
F-19
<PAGE> 61
(14) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
SEGMENT INFORMATION
During 1998, the Corporation adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information", which changes the way the
Corporation reports information about its operating segments. The information
for 1997 and 1996 has been restated from the prior year's presentation in order
to conform to the 1998 presentation.
The Corporation has two reportable segments: Testing and Development
Services and Manufacturing Services each of which spans the product cycle from
early preclinical development through licensed production. BioReliance provides
a broad range of Testing and Development Services. Testing Services are the
core, mature parts of its business, while Development Services represent an
outgrowth of prior biotesting relationships with clients and regulators. Testing
Services include assessment 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. Development Services
were expanded 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.
Manufacturing Services currently include both viral production, microbial
fermentation, cell banking and biorepository services.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies". Segment data includes
intersegment revenues. The Corporation evaluates the performance of its
operating segments based on revenues and gross profit.
Summarized financial information concerning the Corporation's reportable
segments is shown in the following table (in thousands). Asset information by
reportable segment is not reported, since the Corporation does not produce such
information internally.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Testing and Development $ 32,746 $ 40,613 $ 42,736
Manufacturing 4,936 7,275 7,107
-------- -------- --------
Total $ 37,682 $ 47,888 $ 49,843
======== ======== ========
Gross Profit:
Testing and Development $ 12,066 $ 17,471 $ 19,754
Manufacturing 756 965 351
-------- -------- --------
Total $ 12,822 $ 18,436 $ 20,105
======== ======== ========
</TABLE>
The following table outlines the Corporation's revenues, gross profit and
identifiable assets by geographic region as of or for the years ended December
31 (in thousands):
F-20
<PAGE> 62
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States $ 31,173 $ 40,183 $ 42,117
Europe 6,509 7,705 7,726
-------- -------- --------
Total $ 37,682 $ 47,888 $ 49,843
======== ======== ========
Gross Profit:
United States $ 10,635 $ 15,842 $ 17,476
Europe 2,187 2,594 2,629
-------- -------- --------
Total $ 12,822 $ 18,436 $ 20,105
======== ======== ========
Identifiable Assets:
United States $ 11,548 $ 12,371 $ 22,063
Europe 3,396 3,230 3,308
-------- -------- --------
Total $ 14,944 $ 15,601 $ 25,371
======== ======== ========
</TABLE>
SIGNIFICANT CUSTOMERS
Sales to the U.S. Government represented 10%, 8% and 8% of consolidated
revenue in 1996, 1997 and 1998, respectively.
(15) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Income tax payments......................................... $ 4 $ 475 $ 1,317
Interest payments........................................... $ 844 $ 713 $ 553
Noncash investing and financing activities:
Equipment acquired under capital lease agreements
(Note 7)................................................. $ 903 --- $ 240
Land acquired under capital lease agreement................... --- --- $ 720
Building acquired under capital lease agreement............... --- --- $ 6,160
Details of acquisition (Note 3):
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
=========
</TABLE>
(16) NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS 132") - an amendment of
FASB Statements No. 87, 88, and 106. The statement revises employers'
disclosures about pension and other postretirement benefit plans. SFAS 132 is
effective for fiscal years beginning after December 15, 1997, with earlier
application encouraged. The Corporation adopted SFAS 132 in 1998.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transactions;
F-21
<PAGE> 63
and hedges of foreign currency exposures of net investments in foreign
operations. SFAS 133 is effective for years beginning after June 15, 1999, with
earlier adoption permitted. The Corporation believes that the effect of
adoption of SFAS 133 will not be material.
(17) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998, the Corporation recorded an adjustment
impacting the allowance for bad debt, and the related expense. The Corporation
increased its allowance for doubtful accounts and related expense by $200,000,
which is included in selling, general and administrative cost for the year.
F-22
<PAGE> 64
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C
- - ----------------------------------------------- ------------------ ------------------
ADDITIONS
------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER ACCOUNTS
DESCRIPTION OF YEAR AND EXPENSES -DESCRIBE
- - ----------------------------------------------- ------------------ ------------------ ------------------
Year Ended December 31, 1996
<S> <C> <C> <C>
Allowance for doubtful accounts................ $ 243,000 $ 32,000 $ ---
Deferred tax valuation allowance............... 350,000 23,000 ---
Year Ended December 31, 1997
Allowance for doubtful accounts................ 240,000 16,000 ---
Deferred tax valuation allowance............... 373,000 398,000 ---
Year Ended December 31, 1998
Allowance for doubtful accounts................ 242,000 510,000 84,000 (2)
Deferred tax valuation allowance............... 771,000 318,000 ---
- - ----------------------------
<CAPTION>
COLUMN D COLUMN E
-------------- --------------
DEDUCTIONS - BALANCE AT
DESCRIBE END OF YEAR
--------------- ----------------
Year Ended December 31, 1996
<S> <C> <C>
Allowance for doubtful accounts................ $ 35,000(1) $240,000
Deferred tax valuation allowance............... --- 373,000
Year Ended December 31, 1997
Allowance for doubtful accounts................ 14,000(1) 242,000
Deferred tax valuation allowance............... --- 771,000
Year Ended December 31, 1998
Allowance for doubtful accounts................ --- 836,000
Deferred tax valuation allowance............... --- 1,089,000
</TABLE>
- - ----------------------------
(1) Amounts are write-offs of uncollectible accounts receivable.
(2) Amounts represent a reclassification of excess intercompany work in
process reserves.
F-23
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF BIORELIANCE CORPORATION
U.S.A.
- - ------
BioReliance Testing and Development, Inc.
BioReliance Manufacturing, Inc.
Rockville, MD 20850-3349
UNITED KINGDOM
- - --------------
BioReliance Ltd.
Innovation Park
Hillfoots Road
Stirling, Scotland FK9 4NF
GERMANY
- - -------
BioReliance GmbH
BioReliance Holding GmbH
BioReliance Manufacturing GmbH
Czernyring 22
D-69115 Heidelberg, Germany
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-3434) of BioReliance Corporation of our report
dated February 18, 1999 appearing on page F-2 of this annual report on Form
10-K.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31,1998 CONSOLIDATED BALANCE SHEETS AND
CONSOLIDATED STATEMENTS OF INCOME.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,847
<SECURITIES> 18,250
<RECEIVABLES> 21,399
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,002
<PP&E> 25,371
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,945
<CURRENT-LIABILITIES> 15,183
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 53,745
<TOTAL-LIABILITY-AND-EQUITY> 76,945
<SALES> 49,843
<TOTAL-REVENUES> 49,843
<CGS> 29,738
<TOTAL-COSTS> 29,738
<OTHER-EXPENSES> 15,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 551
<INCOME-PRETAX> 5,882
<INCOME-TAX> 2,288
<INCOME-CONTINUING> 3,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,594
<EPS-PRIMARY> .46
<EPS-DILUTED> .44
</TABLE>
