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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[ 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)
DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal office) (zip code)
(Registrant's Telephone Number, Including Area Code): (301) 738-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- ---------
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
---------
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 Stock 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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TABLE OF CONTENTS
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ITEM PAGE
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PART II
Item 6. Selected Financial Data..................................................................... 3
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................. 16
Item 8. Financial Statements and Supplementary Data................................................. 16
PART IV
Index to Consolidated Financial Statements and Financial Schedules.......................... F-1
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PART II
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 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.
During the fourth quarter of 1999, the Corporation identified
approximately $342,000 in various credits in its accounts receivable sub-ledgers
that should have been recorded as revenue between 1996 and 1999. The financial
statements for the years ended December 31, 1996, 1997, and 1998 have been
restated to reflect the impact of the adjustments. The selected consolidated
financial data set forth below reflects all such restatements. See Note 3 to the
Notes of the Consolidated Financial Statements.
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YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996(1) 1997 1998
---- ---- ------- ---- ----
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF INCOME DATA:
Revenue ...................................... $ 28,094 $ 30,078 $ 37,789 $ 47,949 $ 50,017
-------- -------- -------- -------- --------
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) 3,271 7,011 5,214
Interest and other (income) expenses, net .... 439 524 816 (67) (842)
-------- -------- -------- -------- --------
Income before income taxes ................... 2,260 901 2,455 7,078 6,056
Provision for (benefit from) income taxes ... (2,192) 243 887 2,974 2,354
-------- -------- -------- -------- --------
Net income ................................... $ 4,452 $ 658 $ 1,568 $ 4,104 $ 3,702
======== ======== ======== ======== ========
Net income per share (4):
Basic .................................... $ 15.46 $ 1.80 $ 4.62 $ 1.19 $ 0.48
======== ======== ======== ======== ========
Diluted .................................. $ 0.87 $ 0.11 $ 0.28 $ 0.60 $ 0.45
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
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AS OF DECEMBER 31,
------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash, cash equivalents and
Marketable securities ...... $ 1,676 $ 693 $ 2,965 $33,781 $27,097
Working capital ............... 5,326 4,963 5,481 38,213 36,031
Total assets .................. 23,551 24,938 35,934 68,819 77,287
Long-term debt ................ 4,694 6,189 8,982 5,434 7,914
Stockholders' equity .......... 11,452 12,121 14,157 49,899 54,035
</TABLE>
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(1) In July 1996, the Corporation acquired all of the shares of
common stock of BIOMEVA GmbH. The acquisition has been accounted
for by the purchase method and, accordingly, BIOMEVA's results
of operations have been included in the consolidated financial
statements since the date of acquisition.
(2) Nonrecurring charge represents a charge of $0.7 million ($0.4
million after income taxes) in connection with the settlement of
a dispute with a landlord relating to the termination of a
lease.
(3) 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 13 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 13 of Notes to Consolidated Financial
Statements.
The following tables set forth unaudited consolidated quarterly
financial data for the periods indicated. We derived this data from unaudited
consolidated financial statements. Results of operations for any previous fiscal
quarter do not necessarily indicate what results may be for any future periods.
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<TABLE>
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1996 1997
------------------------------------------------- -------------------------------------------------
Statement of Income 1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr 1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr
Data: (Restated) (Restated) (Restated) (Restated) (Restated)
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Revenue .................. 7,599 8,675 9,228 12,287 11,781 12,602 11,702 11,864
Expenses ................. 7,433 8,069 8,519 10,497 10,380 10,602 10,015 9,941
Income (loss) from
operations ............... 166 606 709 1,790 1,401 2,000 1,687 1,923
Other (income) expense ... 158 174 249 235 200 117 (131) (253)
Income before
income taxes ............. 8 432 460 1,555 1,201 1,883 1,818 2,176
Income tax provision ..... 3 180 205 499 511 783 763 917
Net income ............... 5 252 255 1,056 690 1,100 1,055 1,259
Net income (loss) per
share:
Basic ................. (.07) .44 .49 3.55 1.89 2.89 .20 .16
Diluted ............... (.07) .03 .04 .19 .12 .19 .14 .15
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1998
----------------------------------------------------
Statement of Income 1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr
Data: (Restated) (Restated) (Restated) (Restated)
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Revenue .................. 12,089 12,731 12,978 12,219
Expenses ................. 10,426 10,768 11,324 12,285
Income (loss) from
operations ............... 1,663 1,963 1,654 (66)
Other (income) expense ... (195) (222) (149) (276)
Income before
income taxes ............. 1,858 2,185 1,803 210
Income tax provision ..... 779 834 675 66
Net income ............... 1,079 1,351 1,128 144
Net income (loss) per
share:
Basic ................. .14 .17 .14 .02
Diluted ............... .13 .16 .14 .02
</TABLE>
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1997 1998
------------------------------------------------ -------------------------------------------------
1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr 1ST Qtr 2ND Qtr 3RD Qtr 4TH Qtr
Balance Sheet Data: .......... (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
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Accounts receivable, net ..... 14,020 14,509 17,493 16,091 16,702 20,177 22,098 21,741
Total current assets ......... 18,840 18,232 53,642 51,699 52,048 53,455 52,838 51,344
Total assets ................. 35,855 35,388 69,281 68,819 68,236 74,760 78,535 77,287
Other accrued liabilities .... 2,391 2,607 2,816 2,366 2,185 3,224 1,654 1,862
Total current liabilities .... 14,628 13,737 14,605 13,486 12,216 13,294 13,103 15,313
Total liabilities ............ 21,330 20,020 20,482 18,920 17,306 22,311 24,395 23,252
Retained earnings (deficit) .. (5,455) (4,355) (3,300) (2,041) (962) 389 1,517 1,661
Total stockholders' equity ... 14,525 15,368 48,799 49,899 50,930 52,449 54,140 54,035
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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 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 or in this Form 10-K. 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
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restated in order to conform to the 1998 presentation. See Note 15 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 88.5%, 88.3%
and 85.2% were testing and development contracts and 11.5%, 11.7% and 14.8% 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
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 8.2%, 7.9% and 9.9% 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
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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.
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 $50.0 million in 1998, an increase of 4.4% over revenue of
$47.9 million in 1997. Testing and development services generated revenue of
$42.8 million in 1998, an increase of 5.2% over revenue of $40.7 million in
1997. Manufacturing services generated revenue of $7.2 million in 1998, a
decrease of 1.4% 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 85.6% and 14.4%, respectively, of the Corporation's revenue in
1998, and 85.0% and 15.0% respectively, of the Corporation's revenue in 1997.
Revenue generated in Europe remained constant at $7.7 million, accounting for
15.4% 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 59.4% in 1998 from 61.6% in 1997,
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and gross profit improved to 40.6% in 1998 from 38.4% 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. The Corporation generated a gross
profit of $0.4 million from manufacturing services in 1998, compared to a gross
profit $1.0 million in 1997. This decrease can be attributed to personnel
changes 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 $5.2 million in 1998, a decrease of 25.7% from
operating income of $7.0 million in 1997. This decrease was due to increased
selling, general and administrative expenses, slightly 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 $2.4 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 $3.7 million in 1998, a decrease of 9.8% from 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 26.7% over revenue of
$37.8 million in 1996, reflecting increases in both testing and development
services and manufacturing services. Testing and
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development services generated revenue of $40.7 million in 1997, an increase of
24.5% 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 46.0% over revenue of $5.0 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 1997
and 86.5% and 13.5%, respectively, of the Corporation's revenue in 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 61.6% from 65.9% and gross profit increased to 38.4% from 34.1% 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, an 11.1% increase over gross
profit of $0.9 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 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 112.1% over
operating income of $3.3 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 $0.9 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.
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Net income was $4.1 million in 1997, an increase of 156.3% over net
income of $1.6 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 $8.3 million, $9.1 million and $4.8
million in the years ended December 31, 1998, 1997 and 1996, respectively.
Changes in other assets and liabilities used cash of $8.3 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 $0.4 million in 1996
where a similar increase in accounts receivable was largely offset by a
corresponding rise in customer advances and other current liabilities.
Working capital decreased to $36.0 million at December 31, 1998, from
$38.2 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,
11
<PAGE> 12
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 8 and 14
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 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
12
<PAGE> 13
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.
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 15.4%, 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
13
<PAGE> 14
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 15 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.
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.
14
<PAGE> 15
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 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
15
<PAGE> 16
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
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 8 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 15.4%, 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 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.
16
<PAGE> 17
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, 2000.
BIORELIANCE CORPORATION
(Registrant)
By: /s/Capers W. McDonald
-------------------------------
Name: Capers W. McDonald
Title: President, Chief Executive Officer and Acting Chief Financial
Officer
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 indicated below on March 30, 2000.
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- - - - -----------------------------------------
SIDNEY R. KNAFEL
/s/Capers W. McDonald President, Chief Executive
- - - - ----------------------------------------- Officer, Director and Acting
CAPERS W. McDONALD Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
* Director
- - - - -----------------------------------------
WILLIAM J. GEDALE
* Director
- - - - -----------------------------------------
VICTORIA HAMILTON
* Director
- - - - -----------------------------------------
GORDON J. LOUTTIT
* Director
- - - - -----------------------------------------
DR. LEONARD SCHERLIS
* /s/ Capers W. McDonald
- - - - -----------------------------------------
CAPERS W. McDONALD, ATTORNEY-IN-FACT
President, Chief Executive Officer and
Acting Chief Financial Officer
17
<PAGE> 18
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> 19
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
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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.
The consolidated financial statements as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 have been restated
as described in Note 3.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 18, 1999, except for
Note 3 which is as of
February 23, 2000.
F-2
<PAGE> 20
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
(RESTATED) (RESTATED)
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 6,227 $ 8,847
Marketable securities ........................................... 27,554 18,250
Accounts receivable, net ........................................ 16,091 21,741
Other current assets ............................................ 1,827 2,506
----------- -----------
Total current assets ................................ 51,699 51,344
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 ........................................ $ 68,819 $ 77,287
=========== ===========
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 ....................................... 2,366 1,862
Customer advances ............................................... 3,635 2,632
Deferred income taxes ........................................... 1,271 1,551
----------- -----------
Total current liabilities ........................... 13,486 15,313
Deferred taxes ...................................................... --- 25
Long-term debt ...................................................... 5,434 7,914
----------- -----------
Total liabilities ................................... 18,920 23,252
----------- -----------
Commitments and contingencies (Note 14)
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) ....................... (2,041) 1,661
Accumulated other comprehensive income ........................ (594) (290)
----------- -----------
Total stockholders' equity .......................... 49,899 54,035
----------- -----------
Total liabilities and stockholders' equity .......... $ 68,819 $ 77,287
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 21
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998
(RESTATED) (RESTATED) (RESTATED)
---------- ---------- ----------
<S> <C> <C> <C>
Revenue ..................................... $ 37,789 $ 47,949 $ 50,017
---------- ---------- ----------
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 ...................... 3,271 7,011 5,214
---------- ---------- ----------
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 .................. 2,455 7,078 6,056
Provision for income taxes .................. 887 2,974 2,354
---------- ---------- ----------
Net income .................................. $ 1,568 $ 4,104 $ 3,702
---------- ---------- ----------
Net income per share:
Basic ................................... $ 4.62 $ 1.19 $ 0.48
========== ========== ==========
Diluted ................................. $ 0.28 $ 0.60 $ 0.45
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 22
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997 1998
(RESTATED) (RESTATED) (RESTATED)
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 1,568 $ 4,104 $ 3,702
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 ...................................... (4,410) (2,320) (5,937)
Other current assets .......................................... 37 (678) (640)
Accounts payable .............................................. 905 (94) 975
Accrued employee compensation and benefits .................... 408 615 (874)
Other accrued liabilities ..................................... 1,072 49 (540)
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> 23
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
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995 ................................. 6,470,121 $ 65 297,002 $ 3
Issuance of common stock in
Connection with acquisition ........ -- -- 23,333 --
Exercise of stock options ............ -- -- 20,647 --
Compensation element of stock
option grants ...................... -- -- -- --
Stock repurchase and cancellation .... -- -- (1,052) --
Equity adjustment from foreign
currency translation ............... -- -- -- --
Net income ........................... -- -- -- --
---------- ---- --------- -----
BALANCE AT DECEMBER 31,
1996 (RESTATED) ...................... 6,470,121 65 339,930 3
Issuance of common stock in
Initial Public Offering ("IPO"),
net of offering costs of $1.5
million ........................... -- -- 2,417,316 24
Conversion of preferred stock,
concurrent with IPO ................ (6,470,121) (65) 4,778,072 48
Exercise of stock options ............ -- -- 155,922 2
Stock repurchase and cancellation .... -- -- (6,032) --
Equity adjustment from foreign
currency translation ............... -- -- -- --
Net income ........................... -- -- -- --
---------- ---- --------- -----
BALANCE AT DECEMBER 31,
1997 (RESTATED) ...................... -- -- 7,685,208 77
Exercise of stock options ............ -- -- 142,245 1
Stock repurchase and cancellation .... -- -- (6,109) --
Equity adjustment from foreign
currency translation ............... -- -- -- --
Net income ........................... -- -- -- --
---------- ---- --------- -----
BALANCE AT DECEMBER 31,
1998 (RESTATED) ...................... -- $ -- 7,821,344 $ 78
========== ==== ========= =====
<CAPTION>
RETAINED ACCUMULATED
ADDITIONAL EARNINGS/ OTHER TOTAL
PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
CAPITAL DEFICIT) INCOME EQUITY
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995 ................................. $ 19,822 $ (7,713) $ (56) $ 12,121
Issuance of common stock in
Connection with acquisition ........ 198 -- -- 198
Exercise of stock options ............ 34 -- -- 34
Compensation element of stock
option grants ...................... 22 -- -- 22
Stock repurchase and cancellation .... (3) -- -- (3)
Equity adjustment from foreign
currency translation ............... -- -- 217 217
Net income ........................... -- 1,568 -- 1,568
---------- ---------- ------- ----------
BALANCE AT DECEMBER 31,
1996 (RESTATED) ...................... 20,073 (6,145) 161 14,157
Issuance of common stock in
Initial Public Offering ("IPO"),
net of offering costs of $1.5
million ........................... 32,223 -- -- 32,247
Conversion of preferred stock,
concurrent with IPO ................ 17 -- -- --
Exercise of stock options ............ 221 -- -- 223
Stock repurchase and cancellation .... (77) -- -- (77)
Equity adjustment from foreign
currency translation ............... -- -- (755) (755)
Net income ........................... -- 4,104 -- 4,104
---------- ---------- ------- ----------
BALANCE AT DECEMBER 31,
1997 (RESTATED) ...................... 52,457 (2,041) (594) 49,899
Exercise of stock options ............ 267 -- -- 268
Stock repurchase and cancellation .... (138) -- -- (138)
Equity adjustment from foreign
currency translation ............... -- -- 304 304
Net income ........................... -- 3,702 -- 3,702
---------- ---------- ------- ----------
BALANCE AT DECEMBER 31,
1998 (RESTATED) ...................... $ 52,586 $ 1,661 $ (290) $ 54,035
========== ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 24
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 15).
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> 25
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> 26
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.
FOREIGN CURRENCY TRANSLATION
F-9
<PAGE> 27
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) PRIOR PERIOD ADJUSTMENTS
During the fourth quarter of 1999, the Corporation identified approximately
$342,000 in various credits in the accounts receivable subsidiary ledgers that
should have been recorded as revenue over the three-year period 1996-1998. The
financial statements and related notes reflect all such restatements. A summary
of the impact of the restatements for the years ended December 31, 1998, 1997
and 1996 follows (in thousands except per share amounts):
F-10
<PAGE> 28
<TABLE>
<CAPTION>
Results of Operations
- - - - ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ..................... $37,682 $37,789 $47,888 $47,949 $49,843 $50,017
Income from operations ....... 3,164 3,271 6,950 7,011 5,040 5,214
Income before income taxes ... 2,348 2,455 7,017 7,078 5,882 6,056
Income tax provision ......... 846 887 2,951 2,974 2,288 2,354
Net income ................... 1,502 1,568 4,066 4,104 3,594 3,702
Net income per share:
Basic ..................... $ 4.41 $ 4.62 $ 1.18 $ 1.19 $ 0.46 $ 0.48
Diluted ................... 0.26 0.28 0.60 0.60 0.44 0.45
</TABLE>
<TABLE>
<CAPTION>
Financial Position
- - - - ------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accounts receivable, net ....... $ 15,923 $ 16,091 $ 21,399 $ 21,741
Total current assets ........... 51,531 51,699 51,002 51,344
Total assets ................... 68,651 68,819 76,945 77,287
Other accrued liabilities ...... 2,302 2,366 1,732 1,862
Total current liabilities ...... 13,422 13,486 15,183 15,313
Total liabilities .............. 18,856 18,920 23,122 23,252
Retained earnings (deficit) .... (2,145) (2,041) 1,449 1,661
Total stockholders' equity ..... 49,795 49,899 53,823 54,035
</TABLE>
(4) 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 .............................. $ 39,272
Net income ........................... $ 1,452
Net income per basic share ........... $ 4.70
Net income per diluted share ......... $ 0.27
</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-11
<PAGE> 29
(5) MARKETABLE SECURITIES
Marketable securities consisted of the following amounts at December 31:
<TABLE>
<CAPTION>
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST (LOSSES) VALUE
---------------- -------------- --------------
<S> <C> <C> <C>
1997 (IN THOUSANDS)
- - - - ----
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.
(6) 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 ................................................................. 8,091 8,422
Government ................................................................. 1,058 1,086
----------- ------------
9,149 9,508
----------- ------------
Less allowances for doubtful accounts and unallowable
contract costs ............................................................. (242) (836)
----------- ------------
Accounts receivable, net ..................................................... $ 16,091 $ 21,741
=========== ============
</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-12
<PAGE> 30
(7) 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>
(8) 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-13
<PAGE> 31
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>
<S> <C>
Years ending December 31:
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-14
<PAGE> 32
(9) 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-15
<PAGE> 33
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 WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- - - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.56 - 1.50 317,205 1.7 $ 1.47 316,205 $ 1.48
$ 2.25 - 4.50 163,870 3.5 $ 2.74 120,918 $ 2.66
$ 7.25 - 11.88 187,479 6.3 $ 9.19 21,532 $ 7.96
$ 13.41 - 19.75 212,448 6.7 $ 14.58 2,551 $13.41
$ 21.25 - 23.00 11,150 7.5 $ 22.48 662 $21.25
------- -------
Total 892,152 4.3 $ 6.71 461,868 $ 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-16
<PAGE> 34
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income as reported ......................................... $ 1,568 $ 4,104 $ 3,702
Estimated fair value of the year's option grants ............... (34) (61) (453)
----------- ----------- ---------
Proforma net income ............................................ 1,534 4,043 3,249
Adjusted net income per share
Basic ...................................................... 4.51 1.17 0.42
Diluted .................................................... 0.25 0.59 0.39
</TABLE>
(10) 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 .............................. $ 1,739 $ 5,899 $5,236
Foreign ............................... 716 1,179 820
----------- -------- --------
Income before income taxes ............ $ 2,455 $ 7,078 $ 6,056
=========== ======== ========
</TABLE>
The provision for income taxes consisted of the following amounts for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
(Restated) (Restated) (Restated)
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal .......................................................... $ 41 $ 488 $ 599
Foreign .......................................................... 323 464 222
State ............................................................ -- 233 251
---------- ---------- ---------
Total current provision ..................................... 364 1,185 1,072
---------- ---------- ---------
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 ............................ $ 887 $ 2,974 $ 2,354
========== ========== =========
</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-17
<PAGE> 35
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.
(11) 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.
F-18
<PAGE> 36
(12) 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.
(13) 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 ......................................................... $ 1,568 $ 4,104 $ 3,702
Assumed dividends paid to preferred stockholders ................... (139) --- ---
---------- ---------- ----------
Net income available to common stockholders ........................ $ 1,429 $ 4,104 $ 3,702
========== ========== ==========
</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 ........................ $ 1,429 $ 4,104 $ 3,702
Assumed dividends paid to preferred stockholders ................... 139 --- ---
--------- -------- ---------
Net income available to common and common
equivalent stockholders ........................................ $ 1,568 $ 4,104 $ 3,702
========= ======== ========
</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>
(14) 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
F-19
<PAGE> 37
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>
<S> <C>
Years ending December 31:
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.
(15) 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
F-20
<PAGE> 38
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
(Restated) (Restated) (Restated)
---------- ---------- ----------
Revenues:
<S> <C> <C> <C>
Testing and Development $32,746 $40,659 $42,813
Manufacturing 5,043 7,290 7,204
------- ------- -------
Total $37,789 $47,949 $50,017
======= ======= =======
Gross Profit:
Testing and Development $12,066 $17,517 $19,831
Manufacturing 863 980 448
-------- ------- -------
Total $12,929 $18,497 $20,279
======= ======= =======
</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):
<TABLE>
<CAPTION>
1996 1997 1998
(Restated) (Restated) (Restated)
---------- ---------- ----------
Revenues:
<S> <C> <C> <C>
United States $31,280 $40,244 $42,291
Europe 6,509 7,705 7,726
------- ------- -------
Total $37,789 $47,949 $50,017
======= ======= =======
Gross Profit:
United States $10,742 $15,903 $17,650
Europe 2,187 2,594 2,629
------- ------- -------
Total $12,929 $18,497 $20,279
======= ======= =======
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>
F-21
<PAGE> 39
SIGNIFICANT CUSTOMERS
Sales to the U.S. Government represented 10%, 8% and 8% of consolidated
revenue in 1996, 1997 and 1998, respectively.
(16) 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 8)......................................... $ 903 $ --- $ 240
Land acquired under capital lease agreement ........ $ --- $ --- $ 720
Building acquired.under capital lease agreement .... $ --- $ --- $ 6,160
Details of acquisition (Note 4):
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>
(17) 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; 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.
(18) 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> 40
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B
- - - - -------------------------------------------- ------------------
BALANCE AT
BEGINNING OF
DESCRIPTION YEAR
- - - - -------------------------------------------- ------------------
<S> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts......... $243,000
Deferred tax valuation allowance........ 350,000
Year Ended December 31, 1997
Allowance for doubtful accounts......... 240,000
Deferred tax valuation allowance........ 373,000
Year Ended December 31, 1998
Allowance for doubtful accounts......... 242,000
Deferred tax valuation allowance........ 771,000
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN C
- - - - -----------------------------------------------------------------------------------------
ADDITIONS
---------------------------------------------
CHARGED TO CHARGED TO
COSTS AND OTHER ACCOUNTS
DESCRIPTION EXPENSES - DESCRIBE
- - - - -------------------------------------------- -------- ----------
<S> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts......... $ 32,000 $ ---
Deferred tax valuation allowance........ 23,000 ---
Year Ended December 31, 1997
Allowance for doubtful accounts......... 16,000 ---
Deferred tax valuation allowance........ 398,000 ---
Year Ended December 31, 1998
Allowance for doubtful accounts......... 510,000 84,000 (2)
Deferred tax valuation allowance........ 318,000 ---
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN D COLUMN E
- - - - --------------------------------------------- ---------------- --------------
DEDUCTIONS BALANCE AT
DESCRIPTION - DESCRIBE END OF YEAR
- - - - -------------------------------------------- ---------------- --------------
<S> <C> <C>
Year Ended December 31, 1996
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> 41
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, except for Note 3 which is as of February 23, 2000,
appearing on page F-2 of this annual report on Form 10-K/A. We also consent to
the reference to us under the heading "Selected Financial Data" in such
Registration Statement.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 30, 2000
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 CONSOLIDATED BALANCE SHEETS
AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K/A.
</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> 21,741
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,344
<PP&E> 25,371
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,287
<CURRENT-LIABILITIES> 15,313
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 53,957
<TOTAL-LIABILITY-AND-EQUITY> 77,287
<SALES> 50,017
<TOTAL-REVENUES> 50,017
<CGS> 29,738
<TOTAL-COSTS> 29,738
<OTHER-EXPENSES> 15,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 551
<INCOME-PRETAX> 6,056
<INCOME-TAX> 2,354
<INCOME-CONTINUING> 3,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,702
<EPS-BASIC> .48
<EPS-DILUTED> .45
</TABLE>
