<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 0-22879
BIORELIANCE CORPORATION
(Exact name of the registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code:
(301) 738-1000
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of October 31, 2000, 8,189,467 shares of registrant's Common Stock, par value
$.01 per share, were outstanding.
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BIORELIANCE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 2000 (Unaudited)............................................ 3
Consolidated (Unaudited) Statements of Operations for the Three
Months and Nine Months Ended September 30, 1999 and 2000.................. 4
Consolidated (Unaudited) Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 2000.................................. 5
Notes to Consolidated (Unaudited) Financial Statements.................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risks... 21
PART II OTHER INFORMATION............................................................ 22
SIGNATURES................................................................................ 23
</TABLE>
2
<PAGE> 3
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 2000
1999 (UNAUDITED)
---------------------- ----------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 12,273 $ 11,255
Marketable securities ................................................ 6,491 6,460
Accounts receivable, net ............................................. 19,762 20,000
Other current assets ................................................. 2,062 2,546
Deferred income taxes ................................................ 12 ---
---------------- ----------------
Total current assets .................................... 40,600 40,261
Property and equipment, net ................................................ 37,085 39,479
Deposits and other assets .................................................. 294 250
Deferred income taxes ...................................................... 962 480
---------------- ----------------
Total assets ............................................ $ 78,941 $ 80,470
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................... $ 1,484 $ 1,181
Accounts payable ..................................................... 2,673 2,216
Accrued employee compensation and benefits ........................... 3,001 2,808
Other accrued liabilities ............................................ 1,619 2,943
Customer advances .................................................... 1,874 2,945
Deferred income taxes................................................. 3,208 3,371
---------------- ----------------
Total current liabilities ............................... 13,859 15,464
Long-term debt ............................................................. 12,546 11,819
---------------- ----------------
Total liabilities ....................................... 26,405 27,283
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
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;
7,929,002 and 8,186,114 shares issued and outstanding .............. 79 81
Additional paid-in capital ........................................... 52,764 53,143
Retained earnings .................................................... 671 1,497
Accumulated other comprehensive income ............................... (978) (1,534)
---------------- ----------------
Total stockholders' equity .............................. 52,536 53,187
---------------- ----------------
Total liabilities and stockholders' equity .............. $ 78,941 $ 80,470
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ----------------------------------
1999 2000 1999 2000
--------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue ..................................... $ 12,424 $ 14,349 $ 34,556 $ 41,601
--------------- -------------- -------------- ------------
Expenses:
Cost of sales ......................... 7,705 9,679 22,880 27,475
Selling, general and administrative ... 3,919 3,527 12,340 11,485
Research and development .............. 330 341 995 1,049
--------------- -------------- -------------- ------------
11,954 13,547 36,215 40,009
--------------- -------------- -------------- ------------
Income (loss) from operations ............... 470 802 (1,659) 1,592
--------------- -------------- -------------- ------------
Other (income) expense:
Interest income ....................... (193) (292) (979) (878)
Interest expense ...................... 227 252 611 664
Other expense ......................... 22 201 265 378
--------------- -------------- -------------- ------------
56 161 (103) 164
--------------- -------------- -------------- ------------
Income (loss) before income taxes ........... 414 641 (1,556) 1,428
Income tax provision (benefit) .............. 188 271 (308) 602
--------------- -------------- -------------- ------------
Net income (loss) ........................... $ 226 $ 370 $ (1,248) $ 826
--------------- -------------- -------------- ------------
Net income (loss) per share:
Basic ................................. $ 0.03 $ 0.05 $ (0.16) $ 0.10
=============== ============== ============== ============
Diluted ............................... $ 0.03 $ 0.04 $ (0.16) $ 0.10
=============== ============== ============== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 2000
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ (1,248) $ 826
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation .................................................... 3,314 3,091
Amortization expense ............................................ 196 54
Amortization of bond discounts .................................. (390) (261)
Loss on disposal ................................................ 6 212
Deferred income taxes, net ...................................... 214 657
Changes in current assets and liabilities:
Accounts receivable, net .................................... 2,539 (165)
Other current assets ........................................ 743 (519)
Accounts payable ............................................ 63 (418)
Accrued employee compensation and benefits .................. 131 (181)
Other accrued liabilities ................................... 613 1,366
Customer advances ........................................... (631) 1,238
Increase in deposits and other assets ........................... (643) (111)
-------------- -------------
Net cash provided by operating activities .............. 4,907 5,789
-------------- -------------
Cash flows from investing activities:
Purchases of marketable securities ................................ (10,288) (19,208)
Proceeds from the maturities of marketable securities ............. 21,000 19,500
Purchases of property and equipment ............................... (11,586) (5,740)
-------------- -------------
Net cash provided by (used in) investing activities .... (874) (5,448)
-------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options .......................... 178 381
Proceeds from loan ............................................... 3,000 ---
Payments on debt and capital lease obligations ................... (1,210) (1,110)
-------------- -------------
Net cash provided by(used in) financing activities ..... 1,968 (729)
-------------- -------------
Effect of exchange rate changes on cash and cash equivalents .......... (429) (630)
-------------- -------------
Net increase(decrease) in cash and cash equivalents ................... 5,572 (1,018)
Cash and cash equivalents, beginning of period ........................ 8,847 12,273
-------------- -------------
Cash and cash equivalents, end of period .............................. $ 14,419 $ 11,255
============== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract service
organization that provides testing, development and manufacturing services for
biologics and other biomedical products to biotechnology and pharmaceutical
companies worldwide.
(2) INTERIM FINANCIAL STATEMENTS PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by the Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") regarding interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements, and therefore these consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and related
notes thereto, included in the Corporation's Annual Report on Form 10-K. In the
opinion of management, the unaudited consolidated financial statements for the
three-month and nine-month period ended September 30, 1999 and 2000 include all
normal and recurring adjustments that are necessary for a fair presentation of
the results of the interim period. The results of operations for the three-month
and nine-month period ended September 30, 1999 and 2000 are not necessarily
indicative of the results for the entire year ending December 31, 2000.
(3) NET INCOME (LOSS) PER SHARE
The Corporation calculates earnings per share ("EPS") on both a basic and
diluted basis. Dilutive securities are excluded from the computation in periods
which they have an anti-dilutive effect. Net income (loss) available to common
stockholders and common equivalent stockholders is equal to net income (loss)
for all periods presented.
The following table represents reconciliations between the weighted
average common stock outstanding used in basic EPS and the weighted average
common and common equivalent shares outstanding used in diluted EPS for each of
the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
--------- --------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common stock outstanding........ 7,926 8,124 7,873 8,033
Stock options, as if converted.................. 228 247 --- 190
------- ------- ------- -------
Weighted average common and common equivalent
shares outstanding............................... 8,154 8,371 7,873 8,223
======= ======= ======= =======
</TABLE>
6
<PAGE> 7
(4) SEGMENT INFORMATION
Summarized financial information concerning the Corporation's reportable
segments, for the three months and nine months ended September 30, is shown in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 2000 1999 2000
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Testing and Development $11,227 $13,297 $31,378 $37,403
Manufacturing 1,197 1,052 3,178 4,198
------- ------- ------- -------
Total $12,424 $14,349 $34,556 $41,601
======= ======= ======= =======
Gross Profit:
Testing and Development $ 4,728 $ 5,651 $12,412 $15,346
Manufacturing (9) (981) (736) (1,220)
------- ------- ------- -------
Total $ 4,719 $ 4,670 $11,676 $14,126
======= ======= ======= =======
</TABLE>
Summarized financial information concerning the Corporation's revenues
and gross profit by geographic region for the three months and nine months ended
September 30, is shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 2000 1999 2000
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
United States $10,973 $12,255 $29,517 $35,561
Europe 1,451 2,094 5,039 6,040
------- ------- ------- -------
Total $12,424 $14,349 $34,556 $41,601
======= ======= ======= =======
Gross Profit:
United States $ 4,340 $ 3,817 $10,284 $11,728
Europe 379 853 1,392 2,398
------- ------- ------- -------
Total $ 4,719 $ 4,670 $11,676 $14,126
======= ======= ======= =======
</TABLE>
(5) RESTRUCTURING
During the second quarter 2000, the Corporation announced a plan for the
consolidation of German testing and development services into its Stirling,
Scotland operations. In connection with the plan, the Corporation recorded a
pre-tax restructuring charge of $263,000 in the second quarter. Of the total
restructuring charge, $85,000 related to personnel costs, $78,000 related to
property and equipment write-downs, and $100,000 related to lease termination
and other administrative facility closing costs. During the third quarter 2000,
the Corporation reduced the restructuring provision by $100,000 to account for
reduced losses related to lease termination costs. These restructuring costs are
included in selling, general and administrative expenses.
<PAGE> 8
(6) RELATED PARTIES
Beginning in April 2000, the Corporation retained the consulting services
of two members of its Board of Directors. For the nine months ended September
30, 2000, the Corporation accrued $125,000 as selling, general and
administrative expenses related to these consulting services.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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. On July 8, 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 defers the effective date of
SFAS No. 133 until fiscal years beginning after June 15, 2000. The adoption of
this standard, as further amended by SFAS 138, is not expected to have a
material effect on the Corporation's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, which summarizes certain of the SEC
staff's view in applying generally accepted accounting principles to revenue
recognition in financial statements. The Staff Accounting Bulletin is effective
for the year beginning January 1, 2000. In March 2000, the SEC issued SAB No.
101A. This guidance defers the effective date of SAB No. 101 until the fiscal
quarter ending June 30, 2000, and permits a change that may result from the
application of this guidance to be reported as a change in accounting principle.
In June 2000, the SEC issued SAB No. 101B. SAB 101B delays the implementation
date of SAB 101 until no later than the fourth fiscal quarter of fiscal quarters
beginning after December 15, 1999. The initial adoption of this guidance is not
anticipated to have a material impact on the Corporation's results of operations
or financial position, however, the guidance may impact the way in which the
Corporation will account for future transactions.
(8) CONTINGENCIES
The Corporation from time to time may be involved in various claims and
legal proceedings arising in the ordinary course of business. The Corporation
does not believe that any such claims or proceedings, individually or in the
aggregate, would have a material adverse effect on the Corporation's financial
condition or results of operations.
The Corporation has been identified by the U.S. Environmental Protection
Agency ("EPA") as one of several hundred potentially responsible parties
("PRPs") under the Comprehensive
8
<PAGE> 9
Environmental Response, Compensation and Liability Act ("CERCLA") with respect
to the Ramp Industries, Inc., site in Denver, Colorado. The Corporation has
recently signed a consent decree with the EPA, which is expected to allow the
Corporation to resolve its liability for clean-up costs at this site for
approximately $3,600. The consent decree was filed with the U.S. District Court
for the District of Colorado on September 27, 2000 and, as is the policy of the
Department of Justice, the decree was published in the Federal Register on
October 6, 2000 to commence a thirty (30) day period for public comment. The
consent decree is not final, and there can be no assurance at this time that the
consent decree 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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made in this Report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
similar words or phrases. Forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by BioReliance with the Securities and Exchange
Commission, including in its 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. In addition to these risks and uncertainties, there can be no assurance
that revenues will continue to increase in BioReliance's testing and development
segment or in its manufacturing segment, that margins will improve, or that its
new vaccine contracts will be successful or profitable. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
While BioReliance does, from time to time, communicate with securities
analysts, it is against BioReliance's policy to disclose to them any material
non-public information or other confidential information. Accordingly,
shareholders should not assume that BioReliance agrees with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, BioReliance has a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of BioReliance.
The following discussion and analysis of the Corporation's financial
condition and results of operations should be read in conjunction with the
Corporation's consolidated financial statements and related notes thereto
included elsewhere in this Form 10-Q.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following tables show a comparison of revenue by segment for the
three months and nine months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Testing and Development $11,227 $13,297 18% $31,378 $37,403 19%
Manufacturing 1,197 1,052 (12%) 3,178 4,198 32%
-------------------------------------------- -------------------------------------------
Total $12,424 $14,349 15% $34,556 $41,601 20%
============================================ ===========================================
</TABLE>
The increase in testing and development revenue for the three months and
nine months ended September 30, 2000 can be attributed primarily to strong
results in U.S. biosafety, U.S. toxicology and U.K. development services. The
Corporation benefited from the establishment of new client relationships, as
well as the strengthening of existing relationships in these areas.
The decrease in manufacturing revenues for the three months ended
September 30, 2000 is attributable to project delays in the Corporation's U.S.
manufacturing facility, resulting from requirements for additional process
development and client decisions, prior to completion of work. The increase in
manufacturing revenue for the nine months ended September 30, 2000 can be
attributed to an increase in U.S. manufacturing revenue for both Phase I/II and
Phase III services in the first six months of 2000.
During the third quarter of 2000, BioReliance announced its selection as
the principal provider of manufacturing services for a smallpox vaccine for
military purposes and, separately, a teaming agreement to provide large-scale
manufacturing services for a new smallpox vaccine to create a national civil
defense stockpile. The Corporation believes that these activities will allow it
to make an important contribution to the country's biodefense program, and
believes that it is well positioned to meet the growing demand for large-scale
viral manufacturing services.
11
<PAGE> 12
The following tables show a comparison of revenue by geographic region
for the three months and nine months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
United States $10,973 $12,255 12% $29,517 $35,561 20%
Europe 1,451 2,094 44% 5,039 6,040 20%
-------------------------------------------- -------------------------------------------
Total $12,424 $14,349 15% $34,556 $41,601 20%
============================================ ===========================================
</TABLE>
The increase in revenue generated in the United States for the three
months ended September 30, 2000 resulted from an increase in testing and
development revenue, partially offset by a decrease in manufacturing revenue.
U.S. testing and development revenue was positively impacted by increased
revenue in toxicology and biosafety. The decrease in manufacturing revenue is a
result of client project delays as discussed above.
The increase in revenue generated in the United States for the nine
months ended September 30, 2000 resulted from increases in both testing and
development and manufacturing revenue. U.S. testing and development revenue was
positively impacted by increased revenue in toxicology and biosafety. The
increase in manufacturing revenue can be attributed to growth in orders for both
Phase I/II and Phase III services and new contract commitments.
The increase in revenue generated in Europe for the three months ended
September 30, 2000 reflects increases in both the U.K. testing and development
and manufacturing revenue. The increase in revenue generated in Europe for the
nine months ended September 30, 2000, is related to an increase in testing and
development revenue generated in the U.K., partially offset by a decrease in
testing and development revenue in Germany. European manufacturing revenue
remained relatively constant.
The Corporation expects that testing and development revenue will
continue to increase in the foreseeable future, and it expects that
manufacturing revenue in the U.S. will increase with the Corporation's new
vaccine contracts, but there can be no assurance that such expectations will
prove to be correct. These expectations could be adversely affected by factors
noted in the cautionary statements on page 10.
12
<PAGE> 13
The following tables compare gross profit and gross margin by segment for
the three months and nine months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Testing and Development
Gross Profit $4,728 $5,651 20% $12,412 $15,346 24%
Gross Margin 42% 42% 40% 41%
Manufacturing
Gross Profit (9) (981) N.M. (736) (1,220) (66%)
Gross Margin (1%) (93%) (23%) (29%)
Totals
-------------------------------------------- -------------------------------------------
Gross Profit $4,719 $4,670 (1%) $11,676 $14,126 21%
============================================ ===========================================
Gross Margin 38% 33% 34% 34%
============================================ ===========================================
N.M. = not meaningful
</TABLE>
The decrease in gross profit for the three months ended September 30,
2000 can be attributed to increased revenue in the testing and development
segment, partially offset by decreased revenue in the manufacturing segment and
increased cost of sales in both segments. Cost of sales increased approximately
26% due to increases in direct labor, fringe benefits, direct materials, and
non-recurring subcontracting costs related to one development project.
During the three months and nine months ended September 30, 2000, margins
for the testing and development segment were adversely affected by the increase
in cost of sales discussed above. During the same periods, margins for the
manufacturing segment continued to decrease largely because of increased
capacity costs related to the new U.S. manufacturing facility.
13
<PAGE> 14
The following tables compare gross profit and gross margin by geographic
region for the three months and nine months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
United States
Gross Profit $4,340 $3,817 (12%) $10,284 $11,728 14%
Gross Margin 40% 31% 35% 33%
Europe
Gross Profit 379 853 125% 1,392 2,398 72%
Gross Margin 26% 41% 28% 40%
Totals
-------------------------------------------- -------------------------------------------
Gross Profit $4,719 $4,670 (1%) $11,676 $14,126 21%
============================================ ===========================================
Gross Margin 38% 33% 34% 34%
============================================ ===========================================
</TABLE>
The decrease in the margins for the three and nine months ended September
30, 2000, for the United States resulted from increased cost of sales in both
testing and development and manufacturing which are as discussed above. The
improvement in the margins for Europe for the three months and nine months ended
September 30, 2000 can be primarily attributed to improved U.K. margins in the
testing and development segment resulting from a more favorable revenue mix.
The Corporation expects margins in testing and development, both in the
U.S. and Europe, to remain the same or improve with economies of scale in the
foreseeable future, and expects manufacturing margins in the U.S. to improve as
capacity is utilized. These projected improvements could be adversely affected
by factors noted in the cautionary statements on page 10.
The following tables show a comparison of operating expenses, other than
cost of sales, for the three months and nine months ended September 30, 1999 and
2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Selling, General and Admin $3,919 $3,527 (10%) $12,340 $11,485 (7%)
Research and Development 330 341 3% 995 1,049 5%
-------------------------------------------- -------------------------------------------
Total $4,249 $3,868 (9%) $13,335 $12,534 (6%)
============================================ ===========================================
</TABLE>
The decrease in selling, general and administrative expenses for the
three months and nine months ended September 30, 2000 is due primarily to a
decrease in labor and fringe costs due to fewer administrative employees and a
decrease in the provision for bad debt expense. Bad debt expense decreased
because of an improvement in the accounts receivable aging. The
14
<PAGE> 15
decrease in selling, general and administrative expenses for the nine months
ended September 30, 2000 was partially offset by restructuring expenses related
to testing and development operations in Germany and consulting fees. Selling,
general and administrative expenses are expected to increase as the Corporation
hires additional administrative staff and implements additional applications for
the Corporation's information systems.
Research and development expenses represent the investment of internal
resources to develop new methods and tests to support the Corporation's
services. These expenses have not changed significantly in the periods
presented, but the Corporation expects these expenses to increase with an
accelerated program of new assay development and commercial introductions.
The following table shows a comparison of non-operating expenses for the
three months and nine months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Other (Income) Expense $56 $161 187% $(103) $164 N.M.
------------------------------------------------------------------------------------------
Income Taxes
Provision (Benefit) $188 $271 44% $(308) $602 N.M.
Effective Rate 45% 42% 20% 42%
------------------------------------------------------------------------------------------
N.M. = Not meaningful
</TABLE>
The increase in net interest and other expense for the three months ended
September 30, 2000 reflects increases in interest and other expenses, partially
offset by an increase in interest income. The increased interest expense can be
attributed to the capital lease arrangements related to the new manufacturing
facility.
The decrease in the effective tax rate for the three months ended
September 30, 2000, is the result of a partial reversal of valuation allowances
related to the Corporation's foreign net operating losses. The increase in the
effective tax rate for the nine months ended September 30, 2000, is the result
of the Corporation's generation of income before income taxes and a larger
proportion of higher rate U.S. and German sourced income. The Corporation
expects tax rates to remain at or slightly below current levels in the
foreseeable future, but since the Corporation has international operations, its
effective tax rate may vary from quarter to quarter due to changes in the
distribution of its pre-tax earnings.
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 September 30, 2000,
the Corporation had cash, cash equivalents and marketable securities of $17.7
million, compared to $18.8 million at December 31, 1999.
The Corporation generated cash flows from operations of $5.8 million for
the nine months ended September 30, 2000, compared to $4.9 million for the nine
months ended
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<PAGE> 16
September 30, 1999. Net income (loss), as adjusted for depreciation,
amortization, loss on disposal and deferred income taxes, provided $4.6 million
and $2.1 million for the nine months ended September 30, 2000 and 1999,
respectively. Adjusted net income increased because the Corporation generated a
net profit for the nine months ended September 30, 2000. Changes in other assets
and liabilities provided cash of $1.2 million for the nine months ended
September 30, 2000, primarily due to increases in customer advances and accrued
liabilities, partially offset by increase in other current assets, deposits and
accounts receivable and by decreases in accounts payable, accrued employee
compensation and benefits and other accrued liabilities. Changes in other assets
and liabilities provided cash of $2.8 million for the nine months ended
September 30, 1999, primarily due to decreases in accounts receivable and other
assets, an increase in other accrued liabilities, partially offset by a decrease
in customer advances and an increase in deposits and other assets.
The Corporation's corporate headquarters facility in Rockville, Maryland
includes research and development, administrative activities and expanded
laboratory and other capacity for operations. The lease agreement for this
facility requires the Corporation to make noncancelable lease payments totaling
approximately $10.7 million through 2013.
The Corporation's new manufacturing facility in Rockville, Maryland
became operational in the second quarter of 2000. In April 1998, the Corporation
entered into third-party leasing and subleasing arrangements with Montgomery
County, Maryland and a developer that provided for the construction of this new
manufacturing facility. These arrangements require the Corporation to make net
noncancelable lease payments totaling approximately $12.4 million over the next
18 years and guarantee indebtedness of approximately $4.6 million incurred by
the developer to construct the facility.
The build-out and validation of the new U.S. manufacturing facility has
demanded and will continue to demand considerable time and resources. The
Corporation is not yet utilizing full capacity in this building. This operation
will likely constrain earnings for the Corporation at least through this year.
Management cannot predict when, if ever, the facility will generate positive
cash flow.
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 September 30,
2000. Property and equipment at September 30, 2000 included approximately $7.3
million, net of accumulated depreciation, related to these capital leases. The
related obligation is included in the Corporation's liabilities at September 30,
2000.
During the nine months ended September 30, 2000 and 1999, the Corporation
invested $5.7 million and $11.6 million, respectively, for capital expenditures.
Capital expenditures for the nine months ended September 30, 2000 were primarily
related to leasehold improvements and equipment for the new manufacturing
facility. Also during the nine months ended September 30, 2000, the Corporation
acquired an additional $0.2 million of property and equipment under capital
lease agreements relating to the new U.S. manufacturing facility.
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<PAGE> 17
At September 30, 2000, the Corporation had commitments to spend
approximately $1.8 million in capital expenditures, including for leasehold
improvements, laboratory equipment and information systems. Of this $1.8
million, the Corporation is committed to spend $1.3 million for leasehold
improvements and laboratory equipment related to the new U.S. manufacturing
facility.
The Corporation expects to continue expanding its operations through
internal growth, geographic expansion and possible strategic acquisitions. The
Corporation expects to fund its growth from existing cash, cash flows from
operations, bank borrowings and lease financing. Although the Corporation has no
agreements or arrangements in place with respect to any future acquisition,
there may be acquisition or other growth opportunities that require additional
external financing, and the Corporation may, from time to time, seek to obtain
funds from public or private issuances of equity or debt securities on a
strategic basis. There can be no assurances that such financing will be
available on terms acceptable to the Corporation.
Based on its current operating plan, the Corporation believes that
available liquid resources are sufficient to meet its foreseeable cash needs.
BORROWINGS AND CREDIT FACILITIES
The Corporation has a mortgage loan of $4,300,000 from Bank of America
with a maturity date of November 30, 2009 (the "Mortgage Loan") that was used to
finance the construction of one of its facilities in Rockville, Maryland. In
addition to a principal payment of $10,576 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 1.0% to 2.15% depending on the Corporation achieving certain funded
debt to EBITDA ratios. At September 30, 2000, the applicable interest rate on
the Mortgage Loan was 8.77% and the LIBOR Rate Option was 2.15%. At September
30, 2000, approximately $2.4 million was outstanding on the Mortgage Loan.
From 1995 to 1999, the Corporation had in place an interest rate swap
agreement whereby the variable interest rate portion of the Mortgage Loan was
effectively converted into debt with a fixed rate of 6.55% per annum. This
agreement expired on November 30, 1999. Amounts paid or received under the
interest rate swap agreement were recognized as interest income or expense in
the periods in which they accrued and were recorded in the same category as that
arising from the Mortgage Loan. The Corporation believes that the effect of the
interest rate swap agreement on interest expense was not material.
The Corporation has available borrowings up to $2,000,000 under the terms
of a revolving loan agreement with Bank of America. 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, 2001, and the line
of credit expires at that time. Amounts borrowed under the revolving loan
agreement bear interest at the LIBOR rate plus the applicable LIBOR Rate option
that ranges from 0.85% to 2.0% depending on the Corporation achieving certain
funded debt to EBITDA ratios. During the first nine months of 2000, no amounts
were borrowed under this revolving loan agreement.
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<PAGE> 18
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 Bank of America in the amount of $1.8 million.
The note matures on June 30, 2001. The note requires monthly principal payments
of $30,000 and bears interest at the same rate as the Mortgage Loan. At
September 30, 2000, $0.4 million was outstanding on the note, and the interest
rate on the note was 8.77%.
All of the Corporation's agreements with Bank of America 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 comply with financial and restrictive covenants, including fixed
charge coverage and funded debt to EBITDA ratios. Specifically, the Corporation
must:
- Maintain a ratio of total funded indebtedness to EBITDA not
greater than 3.50 to 1.00 as of the end of each fiscal quarter,
calculated on the preceding four-quarter period. EBITDA is defined
as earnings before interest, taxes, depreciation and amortization.
- Maintain a fixed charge coverage ratio as of the end of each
quarter of at least 1.25 to 1.00. This ratio is determined by
dividing EBITDA by the sum of interest expense and
current-maturities of long-term debt and capital leases.
The Corporation was in compliance with its debt covenants at September
30, 2000.
On July 1, 1999, the Corporation received the proceeds of a $3,000,000
loan from the Department of Business and Economic Development, a department of
the State of Maryland. The Corporation is required to use the proceeds for
expansion and relocation activities in Rockville, Maryland. The loan requires
quarterly principal payments of $107,143 plus accrued interest and matures on
June 30, 2006. The loan bears interest at rates from 0.0% to 7.5% based on the
Corporation's achieving specific employment levels over the next six years. The
current interest rate is 0.0%. The terms of the loan contain annual reporting
requirements, including the reporting of employment data. At September 30, 2000,
approximately $2.5 million was outstanding on the loan.
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. The Corporation recorded net exchange losses of $0.2
million for the three months ended September 30, 2000 and net exchange gains of
$0.3 million for the three months ended September 30, 1999. The Corporation
recorded net exchange losses of $0.6 million and $0.4 million for the nine
months ended September 30, 2000 and 1999, respectively.
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<PAGE> 19
Since the revenues and expenses of the Corporation's international
operations generally are denominated in local currencies, exchange rate
fluctuations between these local currencies and the United States dollar subject
the Corporation to currency translation risk with respect to the reported
results of its international operations, as well as to other risks associated
with international operations. The Corporation derived 14.6% of its revenue for
the three months ended September 30, 2000 and 11.7% of its revenue for the three
months ended September 30, 1999 from services performed outside of the United
States. The Corporation derived 14.5% of its revenue for the nine months ended
September 30, 2000 and 14.6% of its revenue for the nine months ended September
30, 1999 from services performed outside of the United States. In addition, the
Corporation may be subject to currency risk when its service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts.
There can be no assurance that the Corporation will not experience
fluctuations in financial results from the Corporation's operations outside the
United States, and there can be no assurance the Corporation will be able,
contractually or otherwise, to reduce the currency risks associated with its
foreign 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.
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. 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
country in which the Corporation has operations that is participating in the
Euro. While the United Kingdom is a member of the EMU, it is not participating
in the Euro conversion at this time; however, it may elect to convert to the
Euro at a later date. Consequently, we are unable to forecast with accuracy
whether the conversion to the Euro will have an adverse impact on the
Corporation, but potential risks include the costs of modifying our software and
information systems, as well as changes in the conduct of business and in the
principal European markets for our products and services. Based on the
Corporation's work to date, it does not expect to experience any operational
disruptions or 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"
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<PAGE> 20
("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. On July 8, 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective
date of SFAS 133 until fiscal years beginning after June 15, 2000. The adoption
of this standard, as further amended by SFAS 138, is not expected to have a
material effect on the Corporation's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, which summarizes certain of the SEC
staff's view in applying generally accepted accounting principles to revenue
recognition in financial statements. The Staff Accounting Bulletin is effective
for the year beginning January 1, 2000. In March 2000, the SEC issued SAB No.
101A. This guidance defers the effective date of SAB No. 101 until the fiscal
quarter ending June 30, 2000 and permits a change that may result from the
application of this guidance to be reported as a change in accounting principle.
In June 2000, the SEC issued SAB No. 101B. SAB 101B delays the implementation
date of SAB 101 until no later than the fourth fiscal quarter of fiscal quarters
beginning after December 15, 1999. The initial adoption of this guidance is not
anticipated to have a material impact on the Corporation's results of operations
or financial position, however, the guidance may impact the way in which the
Corporation will account for future transactions.
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<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Corporation is exposed to market risk from adverse changes in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
The Corporation is exposed to interest rate risk primarily through its
investments in short-term marketable securities and cash equivalents and its
debt agreements. The Corporation's investment policy calls for investment in
short-term, low risk instruments. At September 30, 2000, the Corporation had
$6.5 million invested in government and governmental agency securities and
commercial paper. 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. The primary interest rate
exposure results from fluctuation in interest rates on its variable rate
borrowing and leases tied to LIBOR. At September 30, 2000, the Corporation had
total debt of $13.0 million. The Corporation's debt consists of a mortgage loan
with approximately $2.4 million outstanding, a promissory note with
approximately $0.4 million outstanding, a State of Maryland loan with
approximately $2.5 million outstanding, and capital lease obligations of
approximately $7.7 million outstanding. In the past, the Corporation has
partially managed its exposure to losses through an interest rate swap agreement
related to the mortgage loan, but this swap agreement expired on November 30,
1999.
FOREIGN CURRENCY EXCHANGE RISK
The Corporation's international operations are subject to foreign
exchange rate fluctuations. Since the revenue and expenses of the Corporation's
international operations generally are denominated in local currencies, exchange
rate fluctuations between these 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 its service contracts are denominated in a
currency other than the currency in which the Corporation incurs expenses
related to such contracts. The United Kingdom and Germany have traditionally had
relatively stable currencies. The Corporation currently does not hedge its
foreign currency exposure. Management does not believe that the Corporation's
exposure to foreign currency rate fluctuations is material.
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<PAGE> 22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Form 10-K filed March 30, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of September 30, 2000, the Corporation had used approximately $17.9
million of the net proceeds from its initial public offering toward debt
repayment and purchases of laboratory equipment, information systems hardware
and software, and interior construction and furnishings of the Corporation's new
U.S. manufacturing facility.
At September 30, 2000, approximately $6.5 million of the net proceeds of
the initial public offering were invested in short-term United States government
securities and commercial paper, and the balance was invested in money market
funds, pending the purchase of additional United States government securities,
and commercial paper, or in other operating accounts of the Corporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2000
BioReliance Corporation
(Registrant)
By /s/Capers W. McDonald
------------------------------------------------
Capers W. McDonald
President and Chief Executive Officer
By /s/John L. Coker
------------------------------------------------
John L. Coker
Vice President, Finance and Administration, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
23
