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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 0-22879
BIORELIANCE CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(301) 738-1000
- ------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of May 5, 1999, 7,842,872 shares of registrant's Common Stock, par value $.01
per share, were outstanding.
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BIORELIANCE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999............................................................. 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1999.............................................. 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1999.............................................. 5
Notes to Consolidated Financial Statements................................. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risks........ 17
PART II OTHER INFORMATION............................................................. 18
SIGNATURES................................................................................ 19
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
1998 (UNAUDITED)
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 8,847 $ 13,123
Marketable securities.................................................... 18,250 13,351
Accounts receivable, net................................................. 21,399 18,729
Other current assets..................................................... 2,506 2,083
--------- ----------
Total current assets............................................ 51,002 47,286
Property and equipment, net................................................. 25,371 24,757
Intangible assets, net...................................................... 122 ---
Deposits and other assets................................................... 450 923
--------- ----------
Total assets.................................................... $ 76,945 $ 72,966
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................ $ 4,628 $ 4,397
Accounts payable......................................................... 2,685 1,193
Accrued employee compensation and benefits............................... 1,955 1,708
Other accrued liabilities................................................ 1,732 1,552
Customer advances........................................................ 2,632 2,384
Deferred income taxes.................................................... 1,551 1,551
--------- ----------
Total current liabilities....................................... 15,183 12,785
Deferred taxes.............................................................. 25 25
Long-term debt.............................................................. 7,914 7,863
--------- ----------
Total liabilities............................................... 23,122 20,673
--------- ----------
Commitments and contingencies
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;
7,821,344 and 7,835,960 shares issued and outstanding.................. 78 78
Additional paid-in capital............................................... 52,586 52,620
Retained earnings........................................................ 1,449 322
Accumulated other comprehensive income................................... (290) (727)
--------- ----------
Total stockholders' equity...................................... 53,823 52,293
--------- ----------
Total liabilities and stockholders' equity...................... $ 76,945 $ 72,966
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1999
---------- ---------
<S> <C> <C>
Revenue......................................................... $ 11,971 $ 10,316
---------- ---------
Expenses:
Cost of sales............................................... 7,146 7,590
Selling, general and administrative......................... 2,894 4,085
Research and development.................................... 386 355
---------- ---------
10,426 12,030
---------- ---------
Income (loss) from operations................................... 1,545 (1,714)
---------- ---------
Other (income) expense:
Interest income............................................. (486) (461)
Interest expense............................................ 159 193
Other (income) expense...................................... 132 47
---------- ---------
(195) (221)
---------- ---------
Income (loss) before income taxes............................... 1,740 (1,493)
Income tax provision (benefit).................................. 734 (366)
---------- ---------
Net income (loss)............................................... $ 1,006 $ (1,127)
---------- ---------
Net income (loss) per share:
Basic....................................................... $ 0.13 $ (0.14)
========== =========
Diluted..................................................... $ 0.12 $ (0.14)
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ 1,006 $ (1,127)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation.................................................................... 703 1,205
Amortization expense............................................................ 53 68
Amortization of bond premiums and discounts..................................... (79) (153)
Deferred income taxes, net...................................................... 760 ---
Changes in current assets and liabilities:
Accounts receivable, net.................................................... (401) 2,817
Other current assets........................................................ (2,126) 372
Accounts payable............................................................ (746) (1,581)
Accrued employee compensation and benefits.................................. (699) (245)
Other accrued liabilities................................................... (273) (145)
Customer advances........................................................... 289 (206)
Deposits and other assets....................................................... --- (473)
---------- ----------
Net cash provided by (used in) operating activities.................... (1,513) 532
---------- ----------
Cash flows from investing activities:
Purchases of marketable securities................................................ (11,500) (2,448)
Proceeds from the maturities of marketable securities............................. 14,500 7,500
Purchases of property and equipment............................................... (577) (556)
---------- ----------
Net cash provided by investing activities.............................. 2,423 4,496
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options.......................................... 154 34
Payments on debt................................................................. (180) (180)
Payments on capital lease obligations............................................ (199) (229)
Repurchase and cancellation of treasury stock.................................... (122) ---
---------- ----------
Net cash used in financing activities.................................. (347) (375)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents.......................... 10 (377)
---------- ----------
Net increase in cash and cash equivalents............................................. 573 4,276
Cash and cash equivalents, beginning of period........................................ 6,227 8,847
---------- ----------
Cash and cash equivalents, end of period.............................................. $ 6,800 $ 13,123
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract service
organization providing nonclinical testing and contract manufacturing services
for biologics to biotechnology and pharmaceutical companies worldwide.
(2) INTERIM FINANCIAL STATEMENTS PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by the Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") regarding interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements, and therefore these consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and the notes
thereto, included in the Corporation's Annual Report on Form 10-K. In the
opinion of management, the unaudited consolidated financial statements for the
three-month period ended March 31, 1998 and 1999 include all normal and
recurring adjustments, which are necessary for a fair presentation of the
results of the interim period. The results of operations for the three-month
period ended March 31, 1998 and 1999 are not necessarily indicative of the
results for the entire year ending December 31, 1999.
(3) NET INCOME (LOSS) PER SHARE
The Corporation calculates earnings per share ("EPS") on both a basic and
diluted basis. Dilutive securities are excluded from the computation in periods
which they have an anti-dilutive effect. Net income available to common
stockholders and common equivalent stockholders is equal to net income for all
periods presented.
The following table represents reconciliations between the weighted average
common stock outstanding used in basic EPS and the weighted average common and
common equivalent shares outstanding used in diluted EPS for each of the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998 1999
------ --------
(IN THOUSANDS)
<S> <C> <C>
Weighted average common
stock outstanding............ 7,732 7,832
Stock options, as if
converted.................... 617 ---
------ ------
Weighted average common and
common equivalent shares
outstanding.................. 8,349 7,832
====== ======
</TABLE>
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(4) SEGMENT INFORMATION
Summarized financial information concerning the Corporation's reportable
segments, for the three months ended March 31, is shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
(IN THOUSANDS)
1998 1999
---- ----
<S> <C> <C>
Revenues:
Testing and Development $10,608 $ 8,937
Manufacturing 1,363 1,379
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Total $11,971 $10,316
======= =======
Gross Profit:
Testing and Development $ 4,828 $ 2,699
Manufacturing (3) 27
------- -------
Total $ 4,825 $ 2,726
======= =======
</TABLE>
The following table outlines the Corporation's revenues and gross profit by
geographic region for the three months ended March 31:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
(IN THOUSANDS)
1998 1999
---- ----
<S> <C> <C>
Revenues:
United States $10,115 $ 8,519
Europe 1,856 1,797
------- -------
Total $11,971 $10,316
======= =======
Gross Profit:
United States $ 4,074 $ 2,370
Europe 751 356
------- -------
Total $ 4,825 $ 2,726
======= =======
</TABLE>
(5) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivatives Instruments and for Hedging Activities." SFAS
No. 133 requires all derivatives to be recorded on the balance sheet at fair
value and establishes "special accounting" for the following three different
types of hedges: hedges of changes in the fair value of assets, liabilities or
firm commitments; hedges of the variable cash flows of forecasted transactions;
and hedges of foreign currency exposures of net investments in foreign
operations. SFAS No. 133 is effective for years beginning after June 15, 1999,
with earlier adoption permitted. The Corporation believes that the effect of
adoption of SFAS No. 133 will not be material.
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(6) CONTINGENCIES
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.
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ITEM 2. 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 that 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 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 Form 10-Q.
9
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Revenue was $10.3 million in the three months ended March 31, 1999, a
decrease of 14.2% over revenue of $12.0 million in the three months ended March
31, 1998. The decrease was attributable to a decrease in the revenue in the
testing and development segment. Testing and development services generated
revenue of $8.9 million in the three months ended March 31, 1999, a decrease of
16.0% from revenue of $10.6 million in the three months ended March 31, 1998.
Manufacturing services generated revenue of $1.4 million for the three months
ended March 31, 1999 and the three months ended March 31, 1998. The decrease in
testing and development revenue can be attributed to lower than expected
orders. Additionally, in the development area, a number of projects were
delayed by the customer or the scope of the planned projects was diminished by
the customer. In manufacturing services, increases in manufacturing revenue
generated in Germany were offset by decreases in U.S. manufacturing revenue.
The increase in German manufacturing revenue can be attributed to additional
revenues from a new contract in 1999. Testing and development services and
manufacturing services accounted for 86.6% and 13.4%, respectively, of the
Corporation's revenue for the three months ended March 31, 1999, and 88.6% and
11.4%, respectively, of the Corporation's revenue for the three months ended
March 31, 1998. Revenue generated in Europe decreased from $1.9 million for the
three months ended March 31, 1998, to $1.8 million for the three months ended
March 31, 1999, a 5.3% decrease.
Cost of sales was $7.6 million for the three months ended March 31, 1999,
an increase of 7.0% over cost of sales of $7.1 million in the three months
ended March 31, 1998. As a percentage of total revenue, cost of sales increased
to 73.8% for the three months ended March 31, 1999 from 59.2% for the three
months ended March 31, 1998. The increase was primarily due to increases in
cost of sales related to the testing and development segment. The increase in
cost of sales relates to increased direct expenses such as labor and materials
and an increase in facilities costs. Gross profit for testing and development
services was $2.7 million for the three months ended March 31, 1999, a decrease
over gross profit of $4.8 million for the three months ended March 31, 1998.
The decrease in gross profit can be primarily attributed to a decrease in
revenues for testing and development combined with an increase in cost of
sales. Gross profit for manufacturing services was $27,000 for the three months
ended March 31, 1999, while manufacturing services generated a loss of $3,000
for the three months ended March 31, 1998. Gross profit for Europe decreased
from $.8 million for the three months ended March 31, 1998 to $.4 million for
the three months ended March 31, 1999, a decrease of 50%. The decrease in gross
profit can be primarily attributed to the combination of a decrease in revenues
and an increase in cost of sales.
Selling, general and administrative expense was $4.1 million for the
three months ended March 31, 1999, an increase of 41.4% over selling, general
and administrative expense of $2.9 million in the three months ended March 31,
1998. As a percentage of revenue, selling, general and administrative expenses
increased to 39.8% for the three months ended March 31, 1999 from 24.2% for the
three months ended March 31, 1998. The increase is due primarily to increased
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facilities costs as the Corporation moved to a new headquarters in the latter
half of 1998, as well as increased depreciation and other expenses related to
the Corporation's investment in an enterprise information system and increased
bad debt allowance.
Research and development expense remained constant at $.4 million for the
three months ended March 31, 1999 and March 31, 1998. These expenses represent
the investment of internal resources to develop new methods and tests to
support the Corporation's services.
The Corporation reported a loss from operations of $1.7 million for the
three months ended March 31, 1999, as compared to income from operations of
$1.5 million for the three months ended March 31, 1998. The change can be
attributed to decreases in revenue and increases in operating expenses.
The Corporation earned net interest and other income of $.2 million for
the three months ended March 31, 1999 and 1998. Interest income remained
constant at $.5 million for the three months ended March 31, 1999 and 1998.
Interest expense remained constant at $.2 million for the three months ended
March 31, 1999 and 1998.
The benefit from income taxes was $366,000 for the three months ended
March 31, 1999, compared to a provision for income taxes of $734,000 for the
three months ended March 31, 1998. The effective tax rate was 25% for the three
months ended March 31, 1999 and 42% for the three months ended March 31, 1998.
The benefit is the result of the loss before income taxes recorded for the
three months ended March 31, 1999.
The Corporation reported a net loss of $1.1 million for the three months
ended March 31, 1999, as compared to net income of $1.0 million for the three
months ended March 31, 1998. The loss can be attributed to decreased revenues
and increased operating expenses, which were slightly offset by an income tax
benefit for the three months ended March 31, 1999.
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 March 31, 1999,
the Corporation had cash, cash equivalents and marketable securities of $26.5
million, compared to cash, cash equivalents and marketable securities of $27.1
million at December 31, 1998.
The Corporation generated cash flows from operations of $.5 million for
the three months ended March 31, 1999, compared to using net cash from
operations of $(1.5) million in the three months ended March 31, 1998. Net
income (loss), as adjusted for depreciation and amortization, and deferred
income taxes, used $7,000 and provided $2.0 million of cash for the three
months ended March 31, 1999 and 1998, respectively. This decrease in adjusted
net income (loss) was due primarily to the Corporation's net loss for the three
months ended March 31, 1999. Changes in other assets and liabilities provided
cash of $.5 million for the three months ended March 31, 1999 primarily due to
a $2.8 million decrease in net accounts receivable partially offset by a
decrease in accounts payable of $1.6 million, while other assets and
liabilities used cash of $.7
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million. Changes in other assets and liabilities used cash of $4.0 million for
the three months ended March 31, 1998 primarily due to increases in other
current assets, decreases in accounts payable, and decreases in accrued
compensation and benefits.
Working capital decreased to $34.5 million at March 31, 1999, compared to
$35.8 million at December 31, 1998. The net decrease in working capital
primarily was due to a decrease in current assets, resulting primarily from a
decrease in net accounts receivable. This decrease in current assets was
partially offset by a decrease in current liabilities, resulting primarily from
payment of accounts payable and other accrued liabilities.
The Corporation spent $0.6 million for capital expenditures for the three
months ended March 31, 1999 and March 31, 1998. Capital expenditures for the
three months ended March 31, 1999 were primarily related to continued
investment in facilities and information systems.
The Corporation's corporate headquarters facility in Rockville, Maryland,
constructed under a build-to-lease agreement, was completed in August 1998. The
headquarters facility consolidated existing research and development and
administrative activities and expanded the Corporation's laboratory and other
capacity for operations. The lease agreement requires the Corporation to make
noncancelable lease payments totaling approximately $11.7 million over the next
15 years.
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 certain 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 March 31, 1999, the Corporation had commitments to spend
approximately $17.1 million in capital expenditures including leasehold
improvements and laboratory equipment during the remainder of 1999 and the
first quarter of 2000 related to this new manufacturing facility. The
Corporation accounts 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 March 31, 1999. Property
and equipment at March 31, 1999 includes approximately $7.0 million related to
these capital leases. The related obligation is included in the Corporation's
liabilities at March 31, 1999.
A portion of the Corporation's capital expenditures during the first
quarter of 1999 includes an investment in an enterprise information system. The
Corporation expects to spend an additional $2.2 million on information systems
during the remainder of 1999. The Corporation believes that its information
systems will maximize compatibility and integration internally and with the
Corporation's clients.
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In addition, at March 31, 1999, the Corporation had commitments to spend
approximately $261,000 for furniture and building fixtures and approximately
$412,000 for laboratory equipment.
The Corporation expects to continue expanding its operations through
internal growth, geographic expansion and possible 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 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 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 ranges from 0.85% to 2.0% depending on the Corporation
achieving certain funded debt to EBITDA ratios. At March 31, 1999 the
applicable interest rate was 6.34% and the LIBOR Rate Option was 1.4%. At March
31, 1999, approximately $2.8 million was outstanding on the loan.
In May 1995, the Corporation entered into an interest rate swap agreement
whereby the variable interest rate of the Mortgage Loan was effectively
converted into debt with a fixed rate of 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 interest rate swap agreement and the LIBOR Rate Option resulted in a 7.95%
effective interest rate at March 31, 1999. The effect of the interest rate swap
agreement on interest expense was not material in the quarters ended March 31,
1998 and 1999.
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
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fee equaling 0.25% of the average unused portion of the revolving loan
agreement. At March 31, 1999, no amounts were outstanding under the facility.
This line of credit 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 amounts of $1.8 million. The
note requires monthly principal payments of $30,000, which bears interest at
the same rate as the Mortgage Loan. At March 31, 1999, $.8 million was
outstanding on the note. The interest rate on the note was 6.34% at March 31,
1999. The note matures on June 30, 1999.
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 17.4% of its
revenue for the three months ended March 31, 1999 and 15.5% of its revenue for
the three months ended March 31, 1998 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.
14
<PAGE> 15
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.
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.
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.
15
<PAGE> 16
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, and 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 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 information 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
16
<PAGE> 17
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
ITEM 3. 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 March 31, 1999, the Corporation had $13.4
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 March 31, 1999, the
Corporation had total debt of $12.3 million. The Corporation's debt consists of
a mortgage loan with approximately $2.8 million outstanding; a promissory note
with approximately $.8 million outstanding and capital lease obligations of
approximately $8.7 million outstanding. 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 17.4% and 15.5% of its
revenue for the three months ended March 31, 1999 and 1998, respectively, from
services performed in the United Kingdom and Germany. Since the revenue and
expenses of the Corporation's international operations generally are
denominated in local currencies, exchange rate fluctuations between such local
currencies and the United States dollar will subject the Corporation to
currency translation risk with respect to the reported results of its foreign
operations as well as to risks sometimes associated with international
operations. In addition, the Corporation may be subject to currency risk when
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 currently does not hedge its foreign
currency exposure. Management does not believe that the Corporation's exposure
to foreign currency rate fluctuations is material.
17
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of March 31, 1999 the Corporation had used approximately $11.7
million of the net proceeds from the Corporation's initial public offering
toward debt repayment and purchases of laboratory equipment, information
systems hardware and software, and interior construction and furnishings of the
Corporation's new facility.
At March 31, 1999, approximately $13.4 million of the net proceeds of
the initial public offering were invested in short-term United States
government securities, and the balance was invested in money market funds
pending the purchase of additional United States government securities or in
other operating accounts of the Corporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
Dated: May 14, 1999
BioReliance Corporation
(Registrant)
By /s/ CAPERS W. MCDONALD
-----------------------
Capers W. McDonald
President and Chief Executive Officer
By /s/ PATRICK J. SPRATT
----------------------
Patrick J. Spratt
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
19
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