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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 June 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 August 1, 2000, 8,121,903 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> <C>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
June 30, 2000.......................................................................... 3
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 1999 and 2000................................................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 2000........................................................... 5
Notes to Consolidated 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....................... 20
PART II OTHER INFORMATION............................................................................ 21
SIGNATURES................................................................................................. 23
</TABLE>
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BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 12,273 $ 11,424
Marketable securities ................................................................. 6,491 6,458
Accounts receivable, net .............................................................. 19,762 19,980
Other current assets .................................................................. 2,062 2,147
Deferred income taxes ................................................................. 12 ---
-------- --------
Total current assets ................................................... 40,600 40,009
Property and equipment, net .................................................................. 37,085 39,650
Deposits and other assets .................................................................... 294 253
Deferred income taxes ........................................................................ 962 480
-------- --------
Total assets ........................................................... $ 78,941 $ 80,392
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................................... $ 1,484 $ 1,307
Accounts payable ...................................................................... 2,673 2,307
Accrued employee compensation and benefits ............................................ 3,001 3,063
Other accrued liabilities ............................................................. 1,619 2,363
Customer advances ..................................................................... 1,874 3,147
Deferred income taxes ................................................................. 3,208 3,208
-------- --------
Total current liabilities .............................................. 13,859 15,395
Long-term debt ............................................................................... 12,546 12,006
-------- --------
Total liabilities ...................................................... 26,405 27,401
-------- --------
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 8,116,709 shares issued and outstanding ............................... 79 81
Additional paid-in capital ............................................................ 52,764 53,128
Retained earnings ..................................................................... 671 1,127
Accumulated other comprehensive income ................................................ (978) (1,345)
-------- --------
Total stockholders' equity ............................................. 52,536 52,991
-------- --------
Total liabilities and stockholders' equity ............................. $ 78,941 $ 80,392
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue .......................................... $ 11,816 $ 13,973 $ 22,132 $ 27,252
-------- -------- -------- --------
Expenses:
Cost of sales ........................... 7,585 9,038 15,175 17,796
Selling, general and administrative ..... 4,336 4,136 8,421 7,958
Research and development ................ 310 341 665 708
-------- -------- -------- --------
12,231 13,515 24,261 26,462
-------- -------- -------- --------
Income (loss) from operations .................... (415) 458 (2,129) 790
-------- -------- -------- --------
Other (income) expense:
Interest income ......................... (325) (305) (786) (586)
Interest expense ........................ 191 279 384 412
Other expense ........................... 196 27 243 177
-------- -------- -------- --------
62 1 (159) 3
-------- -------- -------- --------
Income (loss) before income taxes ................ (477) 457 (1,970) 787
Income tax provision (benefit) ................... (130) 192 (496) 331
-------- -------- -------- --------
Net income (loss) ................................ $ (347) $ 265 $ (1,474) $ 456
-------- -------- -------- --------
Net income (loss) per share:
Basic ................................... $ (0.04) $ 0.03 $ (0.19) $ 0.06
======== ======== ======== ========
Diluted ................................. $ (0.04) $ 0.03 $ (0.19) $ 0.06
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................. $ (1,474) $ 456
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation ................................................... 2,160 1,973
Amortization expense ........................................... 127 46
Amortization of bond premiums and discounts .................... (290) (155)
Loss on disposal ............................................... 2 135
Deferred income taxes, net ..................................... 214 494
Changes in current assets and liabilities:
Accounts receivable, net ................................... 1,013 (215)
Other current assets ....................................... 551 (104)
Accounts payable ........................................... 468 (338)
Accrued employee compensation and benefits ................. 49 69
Other accrued liabilities .................................. (129) 766
Customer advances .......................................... (785) 1,379
Increase in deposits and other assets .......................... (616) (48)
-------- --------
Net cash provided by operating activities .............. 1,290 4,458
-------- --------
Cash flows from investing activities:
Purchases of marketable securities ............................. (5,871) (12,812)
Proceeds from the maturities of marketable securities .......... 14,500 13,000
Purchases of property and equipment ............................ (4,824) (4,686)
-------- --------
Net cash provided by (used in) investing activities .... 3,805 (4,498)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options ........................ 151 366
Payments on debt and capital lease obligations ................. (803) (784)
-------- --------
Net cash used in financing activities .................. (652) (418)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ......... (664) (391)
-------- --------
Net increase in cash and cash equivalents ............................ 3,779 (849)
Cash and cash equivalents, beginning of period ....................... 8,847 12,273
-------- --------
Cash and cash equivalents, end of period ............................. $ 12,626 $ 11,424
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract service
organization 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 six-month period ended June 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
six-month period ended June 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 2000 1999 2000
----- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common stock outstanding ............... 7,858 8,032 7,846 7,987
Stock options, as if converted ......................... --- 152 --- 213
----- ----- ----- -----
Weighted average common and common equivalent shares
outstanding ............................................. 7,858 8,184 7,846 8,200
===== ===== ===== =====
</TABLE>
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(4) SEGMENT INFORMATION
Summarized financial information concerning the Corporation's reportable
segments, for the three months and six months ended June 30, is shown in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 2000 1999 2000
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Testing and Development $ 11,213 $ 12,538 $ 20,151 $ 24,106
Manufacturing 603 1,435 1,981 3,146
-------- -------- -------- --------
Total $ 11,816 $ 13,973 $ 22,132 $ 27,252
======== ======== ======== ========
Gross Profit:
Testing and Development $ 4,896 $ 5,259 $ 7,684 $ 9,695
Manufacturing (665) (324) (727) (239)
-------- -------- -------- --------
Total $ 4,231 $ 4,935 $ 6,957 $ 9,456
======== ======== ======== ========
</TABLE>
Summarized financial information concerning the Corporation's revenues
and gross profit by geographic region for the three months and six months ended
June 30, is shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 2000 1999 2000
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
United States $10,026 $12,138 $18,544 $23,306
Europe 1,790 1,835 3,588 3,946
------- ------- ------- -------
Total $11,816 $13,973 $22,132 $27,252
======= ======= ======= =======
Gross Profit:
United States $ 3,573 $ 4,275 $ 5,944 $ 7,911
Europe 658 660 1,013 1,545
------- ------- ------- -------
Total $ 4,231 $ 4,935 $ 6,957 $ 9,456
======= ======= ======= =======
</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. These restructuring costs are
included in selling, general and administrative expenses.
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(6) RELATED PARTIES
Beginning in April 2000, the Corporation retained the consulting services
of two members of its Board of Directors. During the second quarter of 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 Corporation
believes that the effect of adoption of SFAS 133 will not be material.
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 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
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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 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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements made in this Report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
similar words or phrases. Forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by BioReliance with the Securities and Exchange
Commission, including in its Forms 10-K and 10-Q, and include, among others, the
following: general economic and market conditions; the size and growth of the
overall markets for biopharmaceuticals, including the amounts spent on research
and development by biotechnology and pharmaceutical companies; changes in
government regulations; the size, timing and mix of contracts for the
Corporation's products and services; the ability of BioReliance to attract and
retain qualified technical and management personnel; seasonal demand for the
Corporation's products and services; fluctuations and difficulty in forecasting
operating results; the ability of BioReliance to sustain, manage or forecast its
growth and utilize its facilities; the loss of significant contracts or
customers; business disruptions and other factors referenced in the above
reports. New risk factors emerge from time to time and it is not possible for
management to predict all such risk factors, nor can it assess the impact of all
such risk factors on the Corporation's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
While BioReliance does, from time to time, communicate with securities
analysts, it is against BioReliance's policy to disclose to them any material
non-public information or other confidential information. Accordingly,
shareholders should not assume that BioReliance agrees with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, BioReliance has a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of BioReliance.
The following discussion and analysis of the Corporation's financial
condition and results of operations should be read in conjunction with the
Corporation's consolidated financial statements and related notes thereto
included elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Revenue was $14.0 million for the three months ended June 30, 2000, an
increase of 18.6% over revenue of $11.8 million for the three months ended June
30, 1999. The increase
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was attributable to increases in revenue generated from testing and development
services and manufacturing services, resulting from continued improvement in the
rate of new orders.
Testing and development services generated revenue of $12.5 million for
the three months ended June 30, 2000, an increase of 11.6% from revenue of $11.2
million for the three months ended June 30, 1999. This increase was primarily
due to increased revenue from development projects in both the U.S. and Europe,
particularly in the viral clearance area. U.S. revenue was also positively
impacted by an increase in revenue generated from the toxicology departments.
During the second quarter, the Corporation consolidated German testing and
development services into its operations in Stirling, Scotland, resulting in
decreased testing and development revenue generated in Germany.
Manufacturing services generated revenue of $1.5 million for the three
months ended June 30, 2000, an increase of 150.0% from revenue of $0.6 million
for the three months ended June 30, 1999. 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, including a contract for the Corporation to supply
up to several million doses of a vaccine, currently under development, and
initiation of other Phase III production programs.
Testing and development services and manufacturing services accounted for
89.3% and 10.7%, respectively, of the Corporation's revenue for the three months
ended June 30, 2000, and 94.8% and 5.2%, respectively, of the Corporation's
revenue for the three months ended June 30, 1999.
Revenue generated in Europe remained constant at $1.8 million for the
three months ended June 30, 2000 and 1999.
Cost of sales was $9.0 million for the three months ended June 30, 2000,
an increase of 18.4% over cost of sales of $7.6 million for the three months
ended June 30, 1999. As a percentage of total revenue, cost of sales remained
relatively constant as a percentage of revenue, decreasing to 64.3% for the
three months ended June 30, 2000 from 64.4% for the three months ended June 30,
1999. Cost of sales increased due to an increase in direct labor and fringe
benefits, direct materials and depreciation.
Gross profit for testing and development services was $5.3 million for
the three months ended June 30, 2000, an increase from a gross profit of $4.9
million for the three months ended June 30, 1999. Manufacturing services
generated a loss of $0.3 million for the three months ended June 30, 2000,
compared to a loss of $0.7 million for the three months ended June 30, 1999. The
increase in gross profit from testing and development services and the decrease
in the loss from manufacturing services can be attributed to revenue growth,
partially offset by increases in direct labor and fringe benefits, direct
materials and depreciation. The increase in depreciation can be attributed to
the opening of the Corporation's new manufacturing facility placed in service in
the second quarter. Revenue growth has exceeded the rate at which costs have
increased as a result of more efficient use of capacity.
Gross profit for Europe remained constant at $0.7 million for the three
months ended June 30, 2000 and 1999.
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Selling, general and administrative expense was $4.1 million for the
three months ended June 30, 2000, a decrease of 4.6% from selling, general and
administrative expense of $4.3 million for the three months ended June 30, 1999.
As a percentage of revenue, selling, general and administrative expenses
decreased to 29.3% for the three months ended June 30, 2000 from 36.6% for the
three months ended June 30, 1999. The decrease is due primarily to decreases in
labor and fringe costs and a decrease in the provision for bad debt expense. The
decrease in bad debt expense relates to an improvement in the Corporation's
accounts receivable aging. The decrease is partially offset by the accrual of
restructuring expenses related to German testing and development and the accrual
of consulting fees to two members of the Corporation's Board of Directors.
Research and development expense remained constant at $0.3 million for
the three months ended June 30, 2000 and June 30, 1999. These expenses represent
the investment of internal resources to develop new methods and tests to support
the Corporation's services.
Income from operations was $0.5 million for the three months ended June
30, 2000 compared to a loss from operations of $0.4 million for the three months
ended June 30, 1999. The change can be attributed to an increase in revenue and
a decrease in selling, general and administrative expenses, partially offset by
an increase in cost of sales.
Net interest and other expense was $1,000 for the three months ended June
30, 2000, compared to net interest and other income of $62,000 for the three
months ended June 30, 1999. Interest income remained constant at $0.3 million
for the three months ended June 30, 2000 and the three months ended June 30,
1999. Interest expense increased to $0.3 million for the three months ended
June 30, 2000 compared to $0.2 million for the three months ended June 30, 1999.
The provision for income taxes was $192,000 for the three months ended
June 30, 2000, compared to a benefit from income taxes of $130,000 for the three
months ended June 30, 1999. The Corporation's effective tax rate was 42.0% for
the three months ended June 30, 2000 and 27.2% for the three months ended June
30, 1999. The increase in the effective tax rate is the result of the
Corporation's generation of income before income taxes and a higher proportion
of higher rate U.S. and German sourced income.
Net income was $0.3 million for the three months ended June 30, 2000,
compared to a net loss of $0.3 million for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Revenue was $27.2 million in the six months ended June 30, 2000, an
increase of 23.1% from revenue of $22.1 million in the six months ended June 30,
1999. The increase was attributable to increases in revenue derived from both
testing and development services and manufacturing services, resulting from
continued improvement in the rate of new orders.
Testing and development services generated revenue of $24.1 million for
the six months ended June 30, 2000, an increase of 19.9% from revenue of $20.1
million for the six months
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ended June 30, 1999. The increase in testing and development revenue is
attributable to an increase in revenue derived in both the U.S. and the U.K.
This increase was primarily due to increased revenue from development projects
in both the U.S. and Europe, particularly in the viral clearance and analytical
areas. U.S. revenue was also positively impacted by an increase in revenue
generated from the toxicology departments. During the second quarter, the
Corporation consolidated German testing and development services into its
operations in Stirling, Scotland, resulting in decreased development revenue
generated in Germany.
Manufacturing services generated revenue of $3.1 million for the six
months ended June 30, 2000, an increase of 55.0% from revenue of $2.0 million
for the six months ended June 30, 1999. The increase can be attributed to
increases in revenue generated in the U.S. 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, including a contract for the Corporation to supply
up to several million doses of a vaccine, currently under development, and
initiation of other Phase III production programs.
Testing and development services and manufacturing services accounted for
88.6% and 11.4%, respectively, of the Corporation's revenue for the six months
ended June 30, 2000 and 91.0% and 9.0%, respectively, of the Corporation's
revenue for the six months ended June 30, 1999.
Revenue generated in Europe increased from $3.6 million for the six
months ended June 30, 1999, an increase of 8.3% to revenue of $3.9 million for
the six months ended June 30, 2000.
Cost of sales was $17.8 million for the six months ended June 30, 2000,
an increase of 17.1% over cost of sales of $15.2 million for the six months
ended June 30, 1999. As a percentage of total revenue, cost of sales decreased
to 65.4% for the six months ended June 30, 2000 from 68.5% for the six months
ended June 30, 1999. Cost of sales increased due to an increase in direct labor
and fringe benefits, direct materials and depreciation.
Gross profit for testing and development services was $9.7 million for
the six months ended June 30, 2000, an increase from a gross profit of $7.7
million for the six months ended June 30, 1999. Gross profit for manufacturing
services generated a loss of $0.2 million for the six months ended June 30,
2000, compared to a loss of $0.7 million for the six months ended June 30, 1999.
The increase in gross profit for testing and development services and the
decrease in the loss from manufacturing services can be attributed to revenue
growth, partially offset by increases in direct labor and fringe benefits,
direct materials and depreciation. Revenue growth has exceeded the rate at which
costs have increased as a result of more efficient use of capacity.
Gross profit for Europe increased from $1.0 million for the six months
ended June 30, 1999, an increase of 50.0% to $1.5 million for the six months
ended June 30, 2000. The increase in gross profit is a result of increased
European revenue for both segments.
Selling, general and administrative expense was $8.0 million for the six
months ended June 30, 2000, a decrease of 4.8% from selling, general and
administrative expense of $8.4 million in the six months ended June 30, 1999. As
a percentage of revenue, selling, general and
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administrative expenses decreased to 29.4% for the six months ended June 30,
2000 from 38.0% for the six months ended June 30, 1999. The decrease is a result
of a decrease in labor and fringe benefits and a decrease in the provision for
bad debt expense. The decrease in bad debt expense relates to an improvement in
the Corporation's accounts receivable aging. The decrease is partially offset by
the accrual of restructuring expenses related to German testing and development
and the accrual of consulting fees to two members of the Corporation's Board of
Directors.
Research and development expense remained constant at $0.7 million for
the six months ended June 30, 2000 and June 30, 1999. These expenses represent
the investment of internal resources to develop new methods and tests to support
the Corporation's services.
The Corporation reported net income from operations of $0.8 million for
the six months ended June 30, 2000, as compared to a loss from operations of
$2.1 million for the six months ended June 30, 1999. The change can be
attributed to an increase in revenue and a decrease in selling, general and
administrative expenses, partially offset by an increase in cost of sales.
The Corporation earned net interest and other income of $3,000 for the
six months ended June 30, 2000 and $0.2 million for the six months ended June
30, 1999. Interest income was $0.6 million for the six months ended June 30,
2000 and $0.8 million for the six months ended June 30, 1999. Interest expense
remained constant at $0.4 million for the six months ended June 30, 2000 and the
six months ended June 30, 1999.
The provision for income taxes was $331,000 for the six months ended June
30, 2000, compared to a benefit of $496,000 for the six months ended June 30,
1999. The effective tax rate was 42.1% for the six months ended June 30, 2000
and 25.1% for the six months ended June 30, 1999. The increase in the effective
tax rate is the result of the Corporation's generation of income before income
taxes and a higher proportion of higher rate U.S. and German sourced income.
The Corporation reported net income of $0.5 million for the six months
ended June 30, 2000, as compared to a net loss of $1.5 million for the six
months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has funded its business through existing cash, cash flows
from operations, long-term bank loans and capital leases. At June 30, 2000, the
Corporation had cash, cash equivalents and marketable securities of $17.9
million, compared to cash, cash equivalents and marketable securities of $18.8
million at December 31, 1999.
The Corporation generated cash flows from operations of $4.5 million for
the six months ended June 30, 2000, compared to $1.3 million for the six months
ended June 30, 1999. Net income (loss), as adjusted for depreciation,
amortization, loss on disposal and deferred income taxes, provided $2.9 million
and $0.7 million for the six months ended June 30, 2000 and 1999, respectively.
This increase in adjusted net income was due primarily to the generation of a
net profit for the six months ended June 30, 2000. Changes in other assets and
liabilities provided cash of $1.5 million for the six months ended June 30,
2000, primarily due to increases in
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<PAGE> 15
customer advances and other accrued liabilities, partially offset by increases
in accounts receivable and other current assets and a decrease in accounts
payable. Changes in other assets and liabilities provided cash of $0.5 million
for the six months ended June 30, 1999, primarily due to decreases in accounts
receivable and other assets and an increase in accounts payable, partially
offset by decreases in customer advances and other accrued liabilities and an
increase in deposits and other assets.
Working capital decreased to $24.6 million at June 30, 2000, from $26.7
million at December 31, 1999. This decrease in working capital was due primarily
to an increase in customer advances resulting from increased payments from
customers and an increase in accrued liabilities. Cash and cash equivalents also
decreased as cash was used for purchases of property and equipment, particularly
related to the completion of its new manufacturing facility and the repayment of
debt.
The Corporation moved into a new corporate headquarters and laboratory
facility in Rockville, Maryland in August 1998. The building was constructed
under a build-to-lease agreement with a developer. This new headquarters
facility consolidated existing research and development and administrative
activities and expanded the Corporation's laboratory and other capacity for
operations. The lease agreement for this facility requires the Corporation to
make noncancelable lease payments totaling approximately $10.2 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 $12.1 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 June 30,
2000. Property and equipment at June 30, 2000 included approximately $7.4
million, net of accumulated depreciation, related to these capital leases. The
related obligation is included in the Corporation's liabilities at June 30,
2000.
During the six months ended June 30, 2000 and 1999, the Corporation
invested $4.7 million and $4.8 million, respectively, for capital expenditures.
Capital expenditures for the six months ended June 30, 2000 were primarily
related to leasehold improvements and equipment for the new manufacturing
facility. Also during the six months ended June 30, 2000, the
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<PAGE> 16
Corporation acquired an additional $0.2 million of property and equipment under
capital lease agreements relating to the new U.S. manufacturing facility.
At June 30, 2000, the Corporation had commitments to spend approximately
$4.9 million in capital expenditures, including for leasehold improvements,
laboratory equipment and information systems. Of this $4.9 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 June 30, 2000, the applicable interest rate on the
Mortgage Loan was 9.24% and the LIBOR Rate Option was 2.15%. At June 30, 2000,
approximately $2.5 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
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<PAGE> 17
certain funded debt to EBITDA ratios. During the first six months of 2000, no
amounts were borrowed under this revolving loan agreement.
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 June 30,
2000, $0.4 million was outstanding on the note, and the interest rate on the
note was 9.24%.
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 June 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
terms of the loan contain annual reporting requirements, including the reporting
of employment data. At June 30, 2000, approximately $2.6 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 and $0.3 million for the three months ended June 30, 2000 and 1999,
respectively. The Corporation recorded net exchange losses of $0.4 million and
$0.7 million for the six months ended June 30, 2000 and 1999, respectively.
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<PAGE> 18
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 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 12.9% of its revenue for
the three months ended June 30, 2000 and 15.2% of its revenue for the three
months ended June 30, 1999 from services performed outside of the United States.
The Corporation derived 14.3% of its revenue for the six months ended June 30,
2000 and 16.2% of its revenue for the six months ended June 30, 1999 from
services performed outside of the United States. In addition, the Corporation
may be subject to currency risk when the Corporation's service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts.
There can be no assurance that the Corporation will not experience
fluctuations in financial results from the Corporation's operations outside the
United States, and there can be no assurance the Corporation will be able,
contractually or otherwise, to reduce the currency risks associated with its
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. 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 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
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<PAGE> 19
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 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 Corporation believes that
the effect of adoption of SFAS 133 will not be material.
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> 20
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 June 30, 2000, the Corporation had $6.5
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 June 30, 2000, the Corporation
had total debt of $13.3 million. The Corporation's debt consists of a mortgage
loan with approximately $2.5 million outstanding, a promissory note with
approximately $0.4 million outstanding, a State of Maryland loan with
approximately $2.6 million outstanding, and capital lease obligations of
approximately $7.8 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. The Corporation derived 12.9% and 15.2% of its
revenue for the three months ended June 30, 2000 and 1999, respectively, from
services performed in the United Kingdom and Germany. The Corporation derived
14.3% and 16.2% of its revenue for the six months ended June 30, 2000 and 1999,
respectively, from services performed in the United Kingdom and Germany. Since
the revenue and expenses of the Corporation's international operations generally
are denominated in local currencies, exchange rate fluctuations between such
local currencies and the United States dollar will subject the Corporation to
currency translation risk with respect to the reported results of its foreign
operations, as well as to risks sometimes associated with international
operations. In addition, the Corporation may be subject to currency risk when
the Corporation's service contracts are denominated in a currency other than the
currency in which the Corporation incurs expenses related to such contracts. The
United Kingdom and Germany have traditionally had relatively stable currencies.
The Corporation currently does not hedge its foreign currency exposure.
Management does not believe that the Corporation's exposure to foreign currency
rate fluctuations is material.
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<PAGE> 21
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 June 30, 2000, the Corporation had used approximately $18.2
million of the net proceeds from the Corporation's initial public offering
toward debt repayment and purchases of laboratory equipment, information systems
hardware and software, and interior construction and furnishings of the
Corporation's new facility.
At June 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 the balance was invested in money market funds, pending the
purchase of additional United States government securities, or in other
operating accounts of the Corporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 17, 2000, the
following proposals were adopted by the margins indicated:
1. To reelect Mr. Sidney R. Knafel and Mr. Capers W. McDonald as
directors of the Corporation to terms expiring in 2003.
<TABLE>
<CAPTION>
Number of Shares
For Withheld
<S> <C> <C>
Sidney R. Knafel 7,321,753 32,652
Capers W. McDonald 7,318,523 35,882
</TABLE>
2. To ratify the appointment of PricewaterhouseCoopers LLP as the
Corporation's auditors.
<TABLE>
<S> <C>
For 7,353,419
Against 333
Abstain 651
</TABLE>
ITEM 5. OTHER INFORMATION
None
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
22
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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: August 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
