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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22879
BIORELIANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal office) (zip code)
(Registrant's Telephone Number, Including Area Code): (301) 738-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
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The aggregate market value of the voting stock held by nonaffiliates
of the registrant (based on the closing price of such stock as reported on March
1, 2000 on the Nasdaq Stock Market) was approximately $26,767,144. There were
7,961,548 shares of common stock, $0.01 par value per share, outstanding as of
March 1, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission within 120 days
after the end of the registrant's fiscal year, are incorporated by reference
into Part III, Items 10, 11, 12 and 13 of this Report.
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TABLE OF CONTENTS
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ITEM PAGE
PART I
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Item 1. Business.......................................................................................... 4
Item 2. Properties........................................................................................ 11
Item 3. Legal Proceedings................................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............................................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................................................ 13
Item 6. Selected Financial Data........................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 15
Risk Factors...................................................................................... 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................ 30
Item 8. Financial Statements and Supplementary Data....................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 32
Item 11. Executive Compensation............................................................................ 32
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 32
Item 13. Certain Relationships and Related Transactions.................................................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 33
Index to Consolidated Financial Statements and Financial Schedules................................ F-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
BioReliance Corporation ("BioReliance" or the "Corporation") is a
leading contract service organization ("CSO") that provides testing, development
and manufacturing services for biologics and other biomedical products to
biotechnology and pharmaceutical companies worldwide. Through its testing and
development business, the Corporation evaluates products to ensure that they are
free of disease-causing agents or do not cause adverse effects, characterizes
products' chemical structures, develops formulations for long-term stability,
and validates purification processes under regulatory guidelines. In its
manufacturing business, BioReliance develops unique production processes and
manufactures biologics on behalf of clients both for use in clinical trials and
for the worldwide commercial market.
The Corporation was founded in 1947 as Microbiological Associates,
Inc. It reincorporated in Delaware and changed its name to BioReliance in
connection with the initial public offering of its stock in 1997.
CSO INDUSTRY OVERVIEW
The CSO industry provides outsourced product development and
licensed product support services on a contract basis to pharmaceutical and
biotechnology companies. The CSO industry has evolved from providing primarily
preclinical services in the 1970s to a full service industry today consisting of
many small, limited-service providers and a handful of larger companies in four
broad service sectors: (i) nonclinical laboratory testing focused on product
characterization and identification of potential contaminants; (ii) in vitro
("test tube") and in vivo (animal-based) toxicology studies; (iii) contract
manufacturing for clinical trials and commercial purposes; and (iv) human
clinical trials management. BioReliance provides services in the first three of
these categories, primarily for biologics and other biomedical products.
BIOLOGICS DEVELOPMENT PROCESS
Under the regulatory system of the United States, the product cycle
for new pharmaceuticals can be divided into three distinct stages: preclinical
development, clinical development and licensed product. The preclinical
development stage involves the discovery, characterization, product formulation
and biological trials necessary to prepare an Investigational New Drug ("IND")
exemption application for submission to the FDA. The IND must be acceptable to
the FDA before either a biologic or chemical drug can be tested in humans. The
second, or clinical stage, of development follows a successful IND submission
and involves the activities necessary to demonstrate the safety, tolerability,
efficacy and dosage of the active substance in humans, as well as the ability to
manufacture the substance in accordance with the FDA's Good Manufacturing
Practices ("GMP") regulations. For biologics, data from these activities are
compiled in a Product License Application or, if a specified biologic, in a
Biologic License Application, and submitted to the Center for Biologics
Evaluation and Research ("CBER") of the FDA requesting approval to market the
product. The third stage, or licensed product (approved product or commercial
product) stage, follows FDA approval of the Product License Application or
Biologics License Application, and involves the manufacture, distribution and
clinical monitoring of the product. The licensed product stage, during which the
biologic can be marketed as a product, also involves the
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development and regulatory approval of product modifications and line extensions
of the original product.
SERVICES
BioReliance provides two broad types of contract services, testing
and development services and manufacturing services, each of which spans the
product cycle from early preclinical development through licensed production.
The only significant CSO services not provided by BioReliance are chronic
toxicology studies and human clinical trials management.
Compared to CSOs specializing in human clinical trials management,
BioReliance's involvement with clients begins at a much earlier stage of product
development, most often well before any clinical trials are initiated. In the
Corporation's experience, preclinical services lead to increased business for
later stage services, including manufacturing, by providing an entry at the
earliest stage of product development. The Corporation provides these services
to clients at every stage of product development and manufacture, including
in-process and final testing of licensed biologics.
TESTING AND DEVELOPMENT SERVICES
BioReliance provides a broad range of testing and development
services. Testing services represent the more mature parts of its business,
while development services are a more recent outgrowth of the core testing
business.
Testing Services. The Corporation's testing services include assessments of cell
banks used to manufacture biologics, validation of purification processes for
clearance of adventitious agents such as viruses, and testing of in-process and
final products. The Corporation pioneered biologics testing during the
development of the first biologic products, including Genentech's Activase(R)
and Ortho Pharmaceutical's Orthoclone OKT(R)3, in the early 1980s. The
Corporation believes that it has a major share of the current outsourced
international market for these services and intends to increase its market share
in this rapidly expanding field.
Cell Bank Characterization. The starting point for manufacture of a biologic is
a cell bank, consisting of a large number of vials of cryopreserved cells. Each
bank must be free of any detectable biologic contaminants. BioReliance performs
all the FDA-required tests to characterize cell banks with respect to the
presence of biologic agents such as viruses, mycoplasma and bacteria. The
Corporation also confirms the species and identity of cell lines. A biologic may
not proceed to human clinical trials without these tests.
In-Process and Final Product Testing. The Corporation tests the biologic during
intermediate states of manufacture (i.e., before purification) and as a final
purified product. Each production lot must be tested for the presence of
specified biological agents both before and after the purification process. In
addition, the Corporation tests the final purified (and vialed) product on a
lot-by-lot basis to detect the presence of microbial and other agents. This
FDA-required testing currently must be compliant with Good Laboratory Practices
("GLPs"). The Corporation, however, as a leader in ensuring the quality of
biologics, holds itself to the more stringent GMP requirements in its lot
release testing, which are the same requirements that must be met in
manufacturing processes. Tests are performed on each lot of a manufactured
product throughout its clinical development and commercial marketing.
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For over twenty years, BioReliance has provided both in vitro and in
vivo testing services to assess the genetic safety of pharmaceutical and
chemical products. With the advent of biotechnology, BioReliance has developed
specialized assays to assess the safety of a variety of biologic products, from
genetically engineered proteins to DNA plasmids used in gene therapy clinical
trials. The Corporation believes that the greatest future growth in in vivo
services will come from the application of molecular biological techniques.
In Vitro Studies. BioReliance conducts a wide array of preclinical biological
trials employing primarily in vitro ("test tube") approaches to assess
toxicological effects of biologics and other substances. These studies include
genetic safety assays for the detection of gene mutations, chromosome damage,
primary DNA damage and cell transformation. The Corporation is well positioned
to provide these services with its experienced scientific staff and
state-of-the-art laboratory facilities. BioReliance custom designs its testing
batteries and GLP compliant protocols to comply with international guidelines.
An additional in vitro service provided by the Corporation is the detection of
infectious agents, primarily viral, in laboratory animals used for research
purposes by clients worldwide.
In Vivo and Molecular Studies. BioReliance currently offers several types of
short-term in vivo (animal-based) studies, primarily designed to refine dose
levels during the preclinical stage of product development. Many of these
studies are designed to provide mechanistic data enabling earlier prediction of
the carcinogenic potential of a drug or chemical.
BioReliance is engaged in a contract sponsored by the National
Institute of Environmental Health Sciences (NIEHS) to determine whether tumor
formation can be induced by known carcinogens in certain strains of transgenic
mice. The advantage of such an approach would be to shorten the "in life"
portion of long-term carcinogenicity studies from two years to six months.
Employing its molecular biology expertise from the emerging gene
therapy sector, the Corporation has developed a unique assay system in which
specialized small animal models are coupled with advanced polymerase chain
reaction (PCR) techniques to detect the presence of therapeutic DNA distributed
in tissues and organs throughout the body. This specialized biodistribution
study is important for gene therapy and other DNA-based products because the
"active ingredient" is a genetic element that may have serious side effects if
delivered to sites outside the target area within the body. For developers of
DNA-based products, these studies now are required by the FDA prior to the first
administration to humans in clinical trials.
Development Services. In 1995, the Corporation expanded its capabilities to
better characterize biologics in anticipation of new FDA regulations and
guidelines. These regulations, published in 1996, permit the development and
manufacturing processes for well-characterized biologics to be streamlined. This
expansion into development services was an outgrowth of the Corporation's
testing business and includes the analytical services and validation services
described below.
Product Characterization and Methods Validation. These services focus on protein
characterization to show that a molecule's structure meets predefined criteria
for identity, purity, concentration and molecular weight. The Corporation
routinely uses methods based on SDS PAGE, isoelectric focusing, N-terminal
sequencing, high performance liquid chromatography (HPLC), peptide mapping,
amino acid analysis, LC-electrospray mass spectrometry (LC-MS), and matrix
assisted laser desorption/ionization time-of-flight (MALDI-TOF) mass
spectrometry for clients in a GMP environment.
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Each biologic product presents a unique set of analytical
challenges. The size, shape and internal structure of the molecule determine the
methods employed to fully characterize it in a manner suitable for regulatory
submission. Generally, several different methods are required to fully
characterize a biologic molecule. For a product license submission, it also is
necessary to develop and rigorously validate each analytical method.
Formulation Development, Product Stability and Consistency Testing. The
Corporation's development services include the full spectrum of formulation
development, stability testing and consistency testing services. Biologics are
extremely sensitive to their immediate environment, and a suitable, stable
formulation must be developed so that the product can be administered in active
form to patients. The structural uniqueness of each product demands its own
formulation -- a poor formulation can reduce therapeutic effect during clinical
trials. The formulation also plays a key role in the stability of the product.
Typically, several candidate formulations are developed and the relative product
stability is compared for each formulation over an extended period of time
(usually months to years) under a variety of conditions (temperature, humidity,
etc.). The product's stability is measured by the same validated analytical
techniques that are used to assess the product's structural integrity on a
lot-by-lot basis. The goal is a formulation in which the product remains active
through final packaging, inventory storage, distribution to clinical sites and
administration to patients. One of the major impacts of a successful formulation
will be to extend the shelf-life of a biologic -- an extended shelf-life can
have a significantly positive economic impact for the client. Finally, the FDA
requires that the product maintain its structural identity and activity from
lot-to-lot throughout the product's commercial lifetime.
Purification Process Validation. BioReliance validates client purification
processes to determine the capability of the process for clearance (removal or
inactivation) of certain biological agents such as viruses, mycoplasma and DNA.
The client typically conducts a small-scale version of its purification process
at the Corporation's facilities. A biologic product will not be licensed if
these studies are not performed. BioReliance has the capacity to perform large
studies (for example, studies involving multiple purification steps and
simultaneous testing with multiple biological agents), and the Corporation has
dedicated laboratory suites for the performance of these studies in the United
States, United Kingdom and Germany.
Cell Banking and Biorepository. A cell bank is a collection of cryopreserved
vials, usually several hundred in number, which is held in a frozen state (at
liquid nitrogen temperatures). Each vial contains genetically altered cells that
are used for production of the biologic product. Typically, each biologic
product will have both a Master Cell Bank ("MCB") and a Working Cell Bank
("WCB"). As the name implies, the WCB is the bank from which frozen vials are
withdrawn, the cryopreserved cells are thawed, and the live cells are used to
seed a bioreactor vessel for culture and production of the biologic product. The
MCB is the bank from which additional WCBs are manufactured, if needed. The MCB
and WCB must be created in compliance with GMPs. BioReliance offers this
capability in both the United States and Europe. The long-term storage of such
vials is called a biorepository, which also must be maintained under strict GMP
guidelines.
MANUFACTURING SERVICES
BioReliance's manufacturing services currently include both viral
production and microbial fermentation. The Corporation has been providing
services in viral production since 1993 when it formed its Phase I/II
manufacturing department in the United States. The rapid progress of gene
therapy products into Phase I/II human clinical trials and the emergence of
viral cancer therapies have fueled the growth of manufacturing revenue for the
Corporation from viral production services from 1993 to present. The
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Corporation began manufacturing microbial products in 1996 with its acquisition
of BIOMEVA GmbH ("BIOMEVA"), a contract manufacturer of microbial products
located in Heidelberg, Germany.
Production and Production Development. Generally, biologics are manufactured
either by genetically altered mammalian cells (if the molecular structure is
complex) or genetically altered microbial cells (if the molecular structure is
relatively less complex). BioReliance offers mammalian cell culture services to
developers of viral-based products, particularly viral vaccines, gene therapies
and cancer oncolytics. In 1988, the Corporation began pioneering assays to
support the development of gene therapy products. Building on this early testing
capability, in 1993 the Corporation established an independent contract
manufacturing service for companies and research institutes developing gene
therapies, which it believes was the first of its kind. This expanded
manufacturing service drew upon the Corporation's many years of experience in
viral testing and small scale manufacturing. BioReliance now has GMP-compliant
viral manufacturing laboratories in Rockville, Maryland and Stirling, Scotland
(U.K.). Combined, these facilities have manufactured more than 120 lots of human
clinical trial material for gene therapy clinical trials in the United States,
Europe and Japan. The Corporation has specific experience in manufacturing
retroviruses, adenoviruses, adeno-associated viruses and cells as tumor
vaccines. The early-stage nature of these therapies demands that specific
production techniques are developed for each product, much the same as with
other biologic products. BioReliance offers these production development
services as part of its manufacturing "package" to clients.
Currently, the most advanced of the Corporation's manufacturing
clients are engaged in Phase II clinical trials. However, the Corporation's
manufacturing capacities are at the 100 liter per lot size -- more than
sufficient for many Phase III viral therapy trials. As more gene therapy and
other viral products reach Phase III and the market, and their manufacturing
require scales beyond 100 liters, the Corporation plans to construct appropriate
facilities according to market demand.
In 1996, the Corporation expanded its manufacturing capabilities by
acquiring BIOMEVA, an established contract manufacturing company located in
Heidelberg, Germany. This operation has been serving clients since 1989 and
offers GMP-compliant contract fermentation services for recombinant and natural
microorganisms, with bioreactor working volumes up to 1,000 liters. These
microbial fermentation capabilities allow BioReliance to provide manufacturing
services not only to viral product companies, but also to companies that are
employing "naked" DNA or plasmid DNA as a vector (rather than viruses). Besides
manufacturing, the Corporation's German facility offers scale-up and development
for production processes and provides analytical testing of proteins and other
biologics.
Purification and Purification Development. Both U.S. and German operations
provide purification services for production clients. Similar to production
services, purification techniques must be developed on a product-by-product
basis. BioReliance has developed GMP-compliant chromatographic-based techniques
for the large-scale purification of viruses that will be necessary as emerging
gene therapy and other viral products progress to Phase III clinical trials.
Final Formulation and Filling. BioReliance offers aseptic final formulation and
filling services for its viral production clients and others. Filling involves
dispensing the final purified product into individual containers suitable for
shipment to the client for further processing or into formulated, individual
dosage forms suitable for administration to individual patients in a human
clinical trial. For its microbial-based production clients, the Corporation does
not currently offer final filling services.
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BACKLOG
The Corporation does not have a significant backlog, and does not
believe that backlog is a meaningful indicator of its future results.
GOVERNMENT REGULATION
During 1996, the FDA introduced new approaches to the regulation of
biologics that benefit BioReliance and many of its clients. The FDA has
published a list of "specified" biologic products that are eligible for new
guidelines reducing the complexity of the licensing process. The list of
specified products includes most of the biologics now under development by
pharmaceutical and biotechnology companies; namely, therapeutic monoclonal
antibodies, therapeutic recombinant DNA (protein) products, synthetic
therapeutic peptides of less than 40 amino acids, and synthetic plasmid nucleic
acid therapeutics. The FDA recognizes that reliable bioanalytical techniques now
are available that enable accurate characterization of these structurally
complex products. Specified biologics for which bioanalytical techniques have
been developed, validated and accepted by the FDA are often termed
"well-characterized" products.
The FDA allows other important benefits and exemptions for
well-characterized products. Biologics developers now have more flexibility in
engaging independent contract suppliers for each portion of the manufacturing
process, so long as they ensure that each contract manufacturer employed meets
manufacturing compliance requirements. In addition, the FDA no longer requires
an "Establishment License" for a facility designated for the production of a
specified product. Under prior regulations, the large-scale facility necessary
for licensed production was needed prior to product approval. The current
approach enables the use of a smaller, pilot-scale facility owned by the
developer or a contract manufacturer for the production of clinical trials
materials, including those for pivotal Phase III trials and for licensed
products. BioReliance believes that developers of biologics will pursue CSOs
that understand these new guidelines and can provide the full range of services
to support the proper characterization and documentation for biologics.
The services performed by BioReliance are subject to various
regulatory requirements designed to ensure the quality and integrity of
pharmaceutical products, primarily under the Federal Food, Drug and Cosmetic Act
and associated GLP and GMP regulations which are administered by the FDA in
accordance with current industry standards. These regulations apply to all
phases of drug manufacture, testing and record keeping, including personnel,
facilities, equipment, control of materials, processes and laboratories,
packaging, labeling and distribution. Noncompliance with GLPs or GMPs by the
Corporation in a project could result in disqualification of data collected by
the Corporation in the project. Material violation of GLP or GMP requirements
could result in additional regulatory sanctions, and in severe cases could
result in a mandated closing of the Corporation's facilities, which would have a
material adverse effect on the Corporation's business and results of operations.
To help assure compliance with applicable regulations, BioReliance
has established quality assurance units at its facilities that monitor ongoing
compliance by auditing test data and regularly inspecting facilities, procedures
and other GLP and GMP compliance parameters. In addition, FDA regulations and
guidelines serve as a basis for the Corporation's standard operating procedures.
Certain of the Corporation's development and testing activities are subject to
the Controlled Substances Act, administered by the Drug Enforcement Agency
("DEA"), which regulates strictly all narcotic and habit-forming substances. The
Corporation maintains restricted-access facilities and heightened control
procedures for projects involving such substances due to the level of security
and other controls required
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by the DEA. In addition to FDA regulations, the Corporation is subject to other
federal and state regulations concerning such matters as occupational safety and
health and protection of the environment. See "Risk Factors -- Hazardous
Materials."
COMPETITION
The service industry is highly fragmented, with many providers
ranging in size from one person consulting firms to full-service global drug
development corporations. The Corporation primarily competes with in-house
research and development departments of biotechnology and pharmaceutical
companies, universities and medical centers, and other CSOs, some of which may
possess substantially greater capital, technical and other resources than the
Corporation. The Corporation's primary service competitors are different in
each of its service areas. For testing and development services, its primary
competitors are Applied Analytical Industries, Inc., Charles River
Laboratories, Inc., ClinTrials Research Inc., Covance Inc., Inveresk Research
International Ltd., Q-One Biotech Ltd., and SRI International; and for
manufacturing services, Bio-Intermediair Europe b.v., Molecular Medicine, Inc.
and Q-One Biotech Ltd.
As a result of competitive pressures, the industry has begun to
consolidate. This trend is likely to produce increased competition among the
larger competitors for both clients and acquisition candidates. In addition, the
service industry has attracted the attention of the investment community, which
could lead to heightened competition by increasing the availability of financial
resources for competitors. Increased competition may lead to price and other
forms of competition that may affect the Corporation's margins. The Corporation
believes the principal competitive factors in its business are scientific and
technological expertise, reputation, regulatory experience, the ability to offer
a full range of biologics development services, international presence and
price.
INFORMATION SYSTEMS
Digital information systems are an important component of the
Corporation's technological leadership. The Corporation believes that superior
information systems are essential to expanding its operations and to providing
innovative services to clients, for timely, accurate reporting and to enable
clients to monitor their projects better.
BioReliance has made significant investments in its information
systems and personnel, in both the United States and Europe, to maximize its
relationships with its clients. Those investments have included state-of-the-art
hardware and software that maximize compatibility and integration internally and
with the Corporation's clients, and an ORACLE enterprise application suite of
modules as the software foundation for its business.
The FDA has become increasingly sophisticated with respect to
information systems and the integrity of all forms of data incorporated into
regulatory submissions. Correspondingly, BioReliance strives to be at the
forefront of nonclinical testing laboratories in validation of hardware and
software systems.
INSURANCE
BioReliance maintains product liability and professional errors and
omissions liability insurance, providing $13 million in coverage on a
claims-made basis. In addition, in certain circumstances the Corporation seeks
to manage its liability risk through contractual provisions with clients
requiring the Corporation to be indemnified by the client or covered by clients'
product liability insurance. In addition,
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in certain types of engagements, the Corporation seeks to limit contractual
liability to its clients to the amount of fees received by the Corporation. The
contractual arrangements are subject to negotiation with clients and the terms
and scope of such indemnification, liability limitation and insurance coverage
vary from client to client and from project to project. Although many of the
Corporation's clients are large, well-capitalized companies, the financial
performance of their indemnities is not secured. Therefore, BioReliance bears
the risk that the indemnifying party may not have the financial ability to
fulfill its indemnification obligations or that liability would exceed the
amount of applicable insurance. In addition, the Corporation could be held
liable for errors and omissions in connection with the services it performs. See
"Risk Factors -- Potential Liability."
EMPLOYEES
At December 31, 1999 the Corporation had 427 full-time equivalent
employees, of whom 237 were employed directly in testing and development
services and 47 were employed directly in manufacturing services, with the
remainder employed in support roles. The Corporation believes that its relations
with its employees are good. None of the Corporation's employees is represented
by a collective bargaining agreement.
ITEM 2. PROPERTIES
BioReliance's corporate headquarters are located in Rockville,
Maryland. In addition to the headquarters building, the Corporation leases four
other facilities in Rockville, Maryland, providing approximately 152,000 square
feet of operational and administrative space. BioReliance uses its headquarters
facility and three of its other facilities for both testing and development and
administrative space. The other facility is used for both testing and
development and manufacturing. The Corporation also leases laboratory,
manufacturing and administrative facilities of approximately 28,000 square feet
in Stirling, Scotland (U.K.), and approximately 14,000 square feet in
Heidelberg, Germany. BioReliance maintains sales offices in Boston,
Massachusetts; San Francisco, California; Seattle, Washington; and European
sales offices in Stirling, Scotland (U.K.), Heidelberg, Germany, and Marseilles,
France. See Notes 5 and 10 of Notes to Consolidated Financial Statements for
information concerning lease obligations.
BioReliance expects its new U.S.-based Phase III and Commercial
Manufacturing Services facility with approximately 58,000 square feet to be
operational in the second quarter of 2000. BioReliance also expanded its testing
facility in Stirling, Scotland (U.K.) by approximately 18,000 square feet in the
second quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS
The Corporation from time to time may be involved in various claims
and legal proceedings arising in the ordinary course of business. The
Corporation does not believe that any such claims or proceedings, individually
or in the aggregate, would have a material adverse effect on the Corporation's
financial condition or results of operations.
The Corporation was identified by the U.S. Environmental Protection
Agency ("EPA") as one of several hundred potentially responsible parties
("PRPs") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to the Ramp Industries, Inc., site in
Denver, Colorado. We have recently signed a consent decree with the EPA, which
we expect will allow BioReliance to resolve its liability for clean-up costs at
this site for approximately $3,600. The consent
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Corporation during the quarter ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE
The Corporation's common stock, is traded on the Nasdaq Stock Market
under the symbol "BREL". The following table presents, for the periods
indicated, the high and low sale prices per share of common stock as reported by
the Nasdaq Stock Market.
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QUARTER ENDED HIGH LOW
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December 31, 1999 $8.50 $4.50
September 30, 1999 $8.00 $6.25
June 30, 1999 $7.44 $5.88
March 31, 1999 $9.00 $5.75
December 31, 1998 $10.50 $7.00
September 30, 1998 $13.06 $7.75
June 30, 1998 $16.38 $10.75
March 31, 1998 $25.00 $16.00
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NUMBER OF STOCKHOLDERS
As of March 16, 2000, there were approximately 291 holders of record
of the Corporation's common stock. Based on a review of its nominee account
listings, the Corporation estimates that there are approximately 1,200
beneficial owners of the Corporation's common stock.
DIVIDENDS
The Corporation has never declared or paid any cash dividends on its
common stock, and the Corporation's existing credit facility prohibits the
payment of dividends without the prior consent of the lender. The Corporation
does not anticipate paying any cash dividends in the foreseeable future and
intends to retain future earnings for the development and expansion of its
business.
USE OF PROCEEDS - INITIAL PUBLIC OFFERING
During 1997, the Corporation received $32.2 million net proceeds
from the initial public offering. The common stock sold in the initial public
offering was registered on registration statement no. 333-25071, which became
effective on July 28, 1997. As of December 31, 1999, the Corporation had used
approximately $18.7 million of the net proceeds from the Corporation's initial
public offering toward
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debt repayment, purchases of laboratory equipment and information systems
hardware and software, and planning and initial construction for manufacturing
expansion.
At December 31, 1999, $6.5 million of the net proceeds from the
initial public offering was invested in short-term United States government
securities, and the balance, $7.0 million, was invested in money market funds.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the
five years ended December 31, 1999 has been derived from the Corporation's
consolidated financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. The selected consolidated financial data set forth
below should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Corporation's audited consolidated financial statements and
related notes appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996(1) 1997 1998 1999
---- ------- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue .................................... $ 30,078 $ 37,789 $ 47,949 $ 50,017 $ 47,192
-------- -------- -------- -------- --------
Cost of sales .............................. 20,570 24,860 29,452 29,738 31,056
Selling, general and administrative
Expenses ................................ 7,071 7,852 10,093 13,627 16,126
Research and development expenses .......... 1,012 1,110 1,393 1,438 1,306
Nonrecurring charge ........................ --- 696(2) --- --- ---
-------- -------- -------- -------- --------
Total expenses .................... 28,653 34,518 40,938 44,803 48,488
-------- -------- -------- -------- --------
Income (loss) from operations .............. 1,425(3) 3,271 7,011 5,214 (1,296)
Interest and other (income) expenses, net... 524 816 (67) (842) (161)
-------- -------- -------- -------- --------
Income (loss) before income taxes .......... 901 2,455 7,078 6,056 (1,135)
Provision for (benefit from) income taxes.. 243 887 2,974 2,354 (145)
-------- -------- -------- -------- --------
Net income (loss) .......................... $ 658 $ 1,568 $ 4,104 $ 3,702 $ (990)
======== ======== ======== ======== ========
Net income (loss) per share (4):
Basic .................................. $ 1.80 $ 4.62 $ 1.19 $ 0.48 $ (0.13)
======== ======== ======== ======== ========
Diluted ................................ $ 0.11 $ 0.28 $ 0.60 $ 0.45 $ (0.13)
======== ======== ======== ======== ========
Weighted-average common stock outstanding... 289 309 3,458 7,791 7,886
======== ======== ======== ======== ========
Weighted-average common and common
Equivalent shares outstanding (5) ....... 4,619 5,679 6,833 8,233 7,886
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
Marketable securities .. $ 693 $ 2,965 $33,781 $27,097 $18,764
Working capital ........... 4,963 5,481 38,213 36,031 26,741
Total assets .............. 24,938 35,934 68,819 77,287 78,941
Long-term debt ............ 6,189 8,982 5,434 7,914 12,546
Stockholders' equity ...... 12,121 14,157 49,899 54,035 52,536
</TABLE>
- ----------
(1) In July 1996, the Corporation acquired all of the shares of common stock
of BIOMEVA GmbH. The acquisition has been accounted for by the purchase
method and, accordingly, BIOMEVA's results of operations have been
included in the consolidated financial statements since the date of
acquisition.
(2) Nonrecurring charge represents a charge of $0.7 million ($0.4 million
after income taxes) in connection with the settlement of a dispute with a
landlord relating to the termination of a lease.
(3) Income from operations includes the effect of $1.3 million of first-year
expenses for testing and development services.
(4) In certain years, net income has been reduced to reflect the assumed
dividend paid to preferred stockholders. See Note 9 of Notes to
Consolidated Financial Statements.
(5) The weighted average common stock outstanding has been reduced by the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the Corporation. See Note 9 of Notes to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements made in this Report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
similar words or phrases. Forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by BioReliance with the Securities and Exchange
Commission, including in its Prospectus, dated July 28, 1997, and its Forms 10-K
and 10-Q, and include, among others, the following: general economic and market
conditions; the size and growth of the overall markets for biopharmaceuticals,
including the 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;
15
<PAGE> 16
the ability of BioReliance to attract and retain qualified technical and
management personnel; seasonal demand for the Corporation's products and
services; fluctuations and difficulty in forecasting operating results; the
ability of BioReliance to sustain, manage or forecast its growth and utilize its
facilities; the loss of significant contracts or customers; business disruptions
and other factors referenced in the above reports or in this Form 10-K. New risk
factors emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Corporation's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
While BioReliance does, from time to time, communicate with
securities analysts, it is against BioReliance's policy to disclose to them any
material non-public information or other confidential information. Accordingly,
shareholders should not assume that BioReliance agrees with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, BioReliance has a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of BioReliance.
The following discussion and analysis of the Corporation's financial
condition and results of operations should be read in conjunction with the
Corporation's consolidated financial statements and related notes thereto
included elsewhere in this Report.
OVERVIEW
The Corporation is a leading contract service organization ("CSO")
that provides testing, development and manufacturing services for biologics and
other biomedical products to biotechnology and pharmaceutical companies
worldwide.
During 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an
Enterprise and Related Information," which changes the way the Corporation
reports information about its operating segments. The adoption of SFAS 131 did
not affect the Corporation's results of operations or financial position but did
affect the disclosure of segment information. The presentation of the
Corporation's financial results for 1998 and 1997 has been restated in order to
conform to the 1999 presentation. See Note 11 of the Notes to Consolidated
Financial Statements.
Under SFAS 131, the Corporation reports the results of two operating
segments: testing and development services and manufacturing services. The
Corporation evaluates the performance of these operating segments based on
revenues and gross profit. In 1999, the Corporation realigned its biorepository
services from the manufacturing segment to the testing and development segment.
The segment information for 1998 and 1997 has been restated from the prior year
in order to reflect this realignment. The Corporation also reports the results
of its U.S. operations and European operations.
The Corporation derived 89.2%, 91.8% and 92.1% of its revenue from
commercial contracts in 1999, 1998 and 1997, respectively, of which 91.2%, 89.0%
and 88.6% were testing and development contracts and 8.8%, 11.0% and 11.4% were
manufacturing contracts, respectively. Commercial contracts are either fixed
price or fixed rate, and their terms range from under a week to three or more
years. Testing and development services contracts are accounted for using the
percentage-of-completion over
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<PAGE> 17
time method, except services that are completed within approximately three days,
which are accounted for using the completed-contract method. Manufacturing
services that provide for the delivery of products are accounted for using the
completed-contract method while all other manufacturing services are accounted
for using the percentage-of-completion over time method. No commercial client
accounted for more than 10% of the Corporation's revenue in 1999.
The Corporation derived 10.8%, 8.2% and 7.9% of its revenue from
government contracts in 1999, 1998 and 1997, respectively. Government contracts
generally are cost-plus-fixed-fee and have terms of three to five years. Revenue
from government contracts is recognized in an amount equal to reimbursable costs
plus a pro rata portion of the earned fee.
BioReliance enters into several different types of contractual
relationships with its clients. Contracts in the testing and development
business can be quotations, based upon established price lists for individual
services, or work proposals, most often for larger studies composed of a variety
of services. A majority of testing and development contracts range in length
from a few weeks to several months; however, certain stability testing and lot
release testing contracts may be one to three years in length. Manufacturing
contracts tend to be relatively long because of the length of time required to
create and characterize cell banks, perform pilot production runs, and produce
and test the products. These contracts require a formal statement of work and
range in length from six months to over two years. Government contracts, usually
multi-year, are consistent with the requirements of the particular granting
agency.
Clients generally are invoiced either as work is completed or, for
contracts in excess of $70,000, with a payment at the commencement of the
services and progress payments based on defined milestones. Contracts may be
terminated for a variety of reasons, including the client's decision to forego a
particular study or to cancel or delay particular product development program,
the failure of a clinical trial or unexpected or undesired results of product
testing, or by the government for convenience. Generally, service contracts may
be canceled by the client upon notice, with a partial charge commensurate with
the percentage of work completed at the time of cancellation.
For both testing and development services and manufacturing
services, the major components of cost of sales are labor and related fringe
benefits; facilities, primarily rent or depreciation, utilities and maintenance;
direct materials; overhead costs, such as travel, office expenses and
employee-related expenses; consulting costs and subcontracted costs. Cost of
sales includes these expenses for laboratories directly providing the services
and for supporting services departments, principally regulatory affairs, quality
assurance and quality control. In relative proportion to the total cost of
sales, labor and materials costs are greater and facilities costs are less for
testing and development services than for manufacturing services.
Selling, general and administrative expense consists primarily of
labor and related fringe benefits, indirect materials, travel, legal,
consulting, costs related to managing investor relations, and bad debt expense.
In addition, a portion of facilities and information systems costs are allocated
to general and administrative departments. Research and development expense
consists primarily of labor and related fringe benefits, materials, travel, and
a portion of facilities cost.
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<PAGE> 18
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenue was $47.2 million in 1999, a decrease of 5.6% from revenue
of $50.0 million in 1998. Testing and development services generated revenue of
$43.3 million in 1999, a decrease of 2.5% from revenue of $44.4 million in 1998.
Manufacturing services generated revenue of $3.9 million in 1999, a decrease of
30.4% from revenue of $5.6 million in 1998. The overall decrease in revenues was
due to a decrease in orders. The decrease in testing and development revenue can
be attributed to decreases in revenues generated in both the U.S. and Europe.
The decrease in testing and development revenue in the U.S. can be primarily
attributed to a decrease in testing services revenue partially offset by an
increase in development services revenue. Development services were positively
impacted by an increase in biorepository revenue and revenue from analytical
services. The decrease in European testing and development revenue is primarily
the result of a decrease in U.K. testing services which was partially offset by
an increase in revenue generated from German testing and development services.
U.K. testing and development revenue was adversely affected by client delays and
a decrease in new orders. In manufacturing services, the Corporation's results
reflect a decrease in both U.S. and European manufacturing revenue. The decrease
in U.S. manufacturing revenue is the result of the Company's focus in the first
half of the year on developing new client relationships and operational
improvements and a delay in manufacturing projects at the end of the year. The
decrease in revenue generated by European manufacturing operations is
attributable to a decrease in German manufacturing revenues which were adversely
impacted by client delays and delays in obtaining new contracts. The decrease is
partially offset by an increase in manufacturing revenues generated in the U.K.
Testing and development services and manufacturing services accounted for 91.7%
and 8.3%, respectively, of the Corporation's revenue in 1999, and 88.8% and
11.2% respectively, of the Corporation's revenue in 1998. Revenue generated in
Europe decreased from $7.7 million in 1998 to $6.4 million in 1999, a decrease
of 16.9%, accounting for 13.6% and 15.4% of the Corporation's revenue in 1999
and 1998, respectively.
Cost of sales was $31.1 million in 1999, an increase of 4.7% over
cost of sales of $29.7 million in 1998. As a percentage of total revenue, cost
of sales increased to 65.9% in 1999 from 59.4% in 1998, and gross profit
decreased to 34.1% in 1999 from 40.6% in 1998. Cost of sales increased due to
increases in labor costs, direct materials and depreciation. This increase in
cost of sales as a percentage of total revenue and the corresponding decrease in
gross profit was attributable to increases in cost of sales for both the testing
and development segment and the manufacturing segment. Gross profit for testing
and development services was $17.4 million in 1999, a 14.3% decrease over gross
profit of $20.3 million in 1998. Gross profit (loss) for manufacturing services
reflected a loss of $1.3 million in 1999. Manufacturing services did not
generate a gross profit in 1998. These decreases in both testing and development
and manufacturing can be attributed to increases in expenses such as direct
materials, labor and fringe benefits and depreciation. Gross profit for Europe
was $1.6 million in 1999, a decrease of 38.5% from $2.6 million in 1998.
Selling, general and administrative expense was $16.1 million in
1999, an increase of 18.4% over expense of $13.6 million in 1998. As a
percentage of revenue, selling, general and administrative expense increased to
34.1% in 1999 from 27.2% in 1998. These increases were a result of greater
facilities costs related to the Corporation's occupancy of its new combined
headquarters and laboratory facility in the latter half of 1998, as well as
increased depreciation and other expenses related to the Corporation's
investment in an enterprise information system, and an increase in the bad debt
allowance. The increase in the bad debt allowance was primarily the result of
ongoing reviews of customer projects and trade receivables.
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<PAGE> 19
Research and development expense was $1.3 million in 1999, a
decrease of 7.1% from $1.4 million in 1998. These expenses represent the
investment of internal resources to develop new methods and tests to support the
Corporation's services.
The Corporation reported a loss from operations of $1.3 million in
1999, as compared to income from operations of $5.2 million in 1998. The change
can be attributed to a decrease in revenue and an increase in operating
expenses.
Net interest and other income was $0.2 million in 1999, compared to
$0.8 million in 1998. The decrease resulted primarily from a decrease in
interest income. Interest income decreased from $1.9 million in 1998 to $1.1
million in 1999, due to a decrease in cash, cash equivalents and marketable
securities. Interest expense remained constant at $0.6 million in 1999 and 1998.
The benefit from income taxes was $0.1 million in 1999, compared to
a provision for income taxes of $2.4 million in 1998. The benefit is the result
of the Corporation's loss before income taxes for the year ended December 31,
1999. The Corporation's effective tax rate was 12.8% in 1999, compared to 39.0%
in 1998. The decrease in the effective rate is the result of increases in the
valuation allowance and the impact of certain prior year deductions that were
reversed in 1999.
The Corporation reported a net loss of $1.0 million in 1999,
compared to net income of $3.7 million in 1998. The change can be attributed to
decreased revenue, decreased interest income and increased operating expenses,
which were partially offset by an income tax benefit in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenue was $50.0 million in 1998, an increase of 4.4% over revenue
of $47.9 million in 1997. Testing and development services generated revenue of
$44.4 million in 1998, an increase of 4.5% over revenue of $42.5 million in
1997. Manufacturing services generated revenue of $5.6 million in 1998, an
increase of 3.7% from revenue of $5.4 million in 1997. Although testing and
development revenue grew modestly, the growth was slower than expected because
the number of new development contracts did not increase as rapidly as
anticipated. The increase in 1998 manufacturing revenue is primarily
attributable to an increase in manufacturing contracts in both the U.S. and
Europe. Testing and development services and manufacturing services accounted
for 88.8% and 11.2%, respectively, of the Corporation's revenue in 1998, and
88.7% and 11.3% respectively, of the Corporation's revenue in 1997. Revenue
generated in Europe remained constant at $7.7 million, accounting for 15.4% and
16.1% of the Corporation's revenue in 1998 and 1997, respectively.
Cost of sales was $29.7 million in 1998, relatively constant with
cost of sales of $29.5 million in 1997. As a percentage of total revenue, cost
of sales decreased to 59.4% in 1998 from 61.6% in 1997, and gross profit
improved to 40.6% in 1998 from 38.4% in 1997. This decrease in cost of sales as
a percentage of total revenue and the corresponding improvement in gross profit
was primarily attributable to volume mix variances in favor of higher margin
testing and development business such as viral clearance, in vitro assays for
viral contamination, and lot release testing. Gross profit for testing and
development services was $20.3 million in 1998, a 12.8% increase over gross
profit of $18.0 million in 1997. The Corporation generated $0 gross profit from
manufacturing services in 1998, compared to a gross profit of $0.5 million in
1997. This decrease can be attributed to personnel changes and technical issues
which necessitated repeating work. Gross profit for Europe remained constant at
$2.6 million for 1998 and 1997.
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<PAGE> 20
Selling, general and administrative expense was $13.6 million in
1998, an increase of 34.7% over expense of $10.1 million in 1997. As a
percentage of revenue, selling, general and administrative expense increased to
27.3% in 1998 from 21.1% in 1997. These increases were due to administrative
expense associated with the Corporation's newly public status, consulting fees,
depreciation and expensed items for information systems, and facilities costs,
including completion of a new U.S. headquarters facility, expansion of the
Corporation's German testing facility and U.K. manufacturing operations and
increased bad debt allowance. The Corporation's accounts receivable aging
increased in 1998, due in part to personnel changes and billing delays
encountered in transitioning to a new ORACLE system. Management increased the
allowance for bad debts in response to the increase in aged accounts
receivables.
Research and development expense was $1.4 million in 1998,
consistent with $1.4 million in 1997. These expenses represent the investment of
internal resources to develop new methods and tests to support the Corporation's
services.
Operating income was $5.2 million in 1998, a decrease of 25.7% from
operating income of $7.0 million in 1997. This decrease was due to increased
selling, general and administrative expenses, slightly offset by an improvement
in gross margin.
Net interest and other income was $0.8 million in 1998, compared to
$0.1 million in 1997. The increase resulted primarily from an increase in
interest income and a decrease in interest expense, offset by an increase in
other expense. Interest income increased from $0.8 million in 1997 to $1.9
million in 1998, due to the investment of the proceeds from the Corporation's
initial public offering. Additionally, interest expense decreased to $0.6
million in 1998, from $0.7 million in 1997. The decrease can be attributed to
the renegotiation of the interest rate on the Corporation's bank debt during
1998.
The provision for income taxes was $2.4 million in 1998, compared to
a provision of $3.0 million in 1997. The Corporation's effective tax rate was
39.0% in 1998, compared to 42.0% in 1997. The decrease resulted primarily from
the use of existing tax credits in the United States and the successful
implementation of tax planning strategies in Europe.
Net income was $3.7 million in 1998, a decrease of 9.8% from net
income of $4.1 million in 1997. This decrease was due to decreased operating
income and decreased income before income taxes, offset by a decrease in the
provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has funded its business through existing cash, cash
flows from operations, long-term bank loans and capital leases. At December 31,
1999, the Corporation had cash, cash equivalents and marketable securities of
$18.8 million, compared to cash, cash equivalents and marketable securities of
$27.1 million and $33.8 million at December 31, 1998 and 1997, respectively.
In 1997, the Corporation received net proceeds of $32.2 million from
the initial public offering of its common stock. A majority of the proceeds were
invested in government and government agency securities with original maturities
of more than 90 days at the time of purchase. These marketable securities
totaled $6.5 million at December 31, 1999.
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In 1999, the Corporation generated positive net cash flow from
operating activities of $5.8 million. In 1998, the Corporation did not generate
positive net cash flow from operating activities. In 1997, the Corporation
generated positive net cash flows from operations of $6.3 million. Net income,
as adjusted for depreciation and amortization, deferred income taxes and other
non-cash adjustments, provided cash of $3.1 million, $8.3 million and $9.1
million in the years ended December 31, 1999, 1998 and 1997, respectively.
Changes in other assets and liabilities provided cash of $2.7 million in 1999,
primarily due to a decrease in accounts receivable and an increase in accrued
employee compensation and benefits, partially offset by decreases in customer
advances, other accrued liabilities and an increase in deposits and other
assets. In 1998 changes in other assets and liabilities used cash of $8.3
million, primarily due to an increase in accounts receivable and a decrease in
customer advances and accrued employee compensation and benefits.
Working capital decreased to $26.7 million at December 31, 1999,
from $36.0 million at December 31, 1998. This decrease was due to a decrease in
current assets partially offset by a decrease in current liabilities. The
decrease in current assets resulted from a decrease in cash and cash equivalents
and marketable securities and decreases in accounts receivable and other current
assets. The decrease in current liabilities is the result of decreases in
customer advances and other accrued liabilities, partially offset by an increase
in accrued employee compensation and benefits. Additionally, the current portion
of long-term debt decreased as of December 31, 1999 as the Corporation's loans
with Bank of America were amended in December 1999 that resulted in extensions
of the loans' maturities dates.
A new corporate headquarters and laboratory facility in Rockville,
Maryland, constructed under a build-to-lease agreement with a developer, was
completed in August 1998. This new headquarters facility consolidated existing
research and development other laboratory 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 $11.2 million over the remaining 13 years
of the lease.
The Corporation's new manufacturing facility in Rockville, Maryland
is scheduled to be 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 providing for the construction of
the exterior shell of a new manufacturing facility in Rockville, Maryland. These
arrangements require the Corporation to make net noncancelable lease payments
totaling approximately $12.3 million over the remaining nineteen years and to
guarantee indebtedness of approximately $4.4 million incurred by the developer
to construct the facility.
The arrangements with Montgomery County and the developer require
the Corporation to account for the leases and subleases of the manufacturing
facility as capital leases. The assets underlying the capital leases are
included with the Corporation's owned property and equipment as of December 31,
1999. Property and equipment at December 31, 1999 included approximately $7.3
million related to these capital leases. The related lease obligation is
included in the Corporation's liabilities at December 31, 1999.
During 1999, the Corporation invested approximately $15.3 million in
capital expenditures. These expenditures included building new facilities,
expanding existing facilities and enhancing an enterprise information management
system. Also during 1999, the Corporation acquired an additional $.4 million of
property and equipment under capital lease agreements relating to the new U.S.
manufacturing facility.
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A portion of the Corporation's capital expenditures during 1999
included an investment in an enterprise information system, including
ORACLE-based applications. The Corporation expects to spend $0.8 million on
information systems during 2000. The Corporation believes that its information
systems will maximize compatibility and integration internally and with the
Corporation's clients. The Corporation invested $5.9 million and $4.2 million in
capital expenditures during 1998 and 1997, respectively. The Corporation
acquired additional capital assets under capital lease agreements of $7.1
million in 1998.
At December 31, 1999, the Corporation had commitments to spend
approximately $9.6 million in capital expenditures, including leasehold
improvements, laboratory equipment and information systems. Of the total, the
Corporation expects to spend $5.1 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 possibly strategic acquisitions. The
Corporation expects to fund its growth and its planned capital expenditures from
existing cash, cash flows from operations, bank borrowings and lease or other
financing from third-party sources to the extent that funds are available on
favorable terms and conditions. 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. See Notes 5 and 10 of Notes to the Consolidated
Financial Statements.
Based on its current operating plan, the Corporation believes that
available liquid resources are sufficient to meet its cash needs for at least
the next twelve months.
BORROWINGS AND CREDIT FACILITIES
In 1994, the Corporation obtained a loan of $4,300,000 from Bank of
America with a maturity date of November 30, 1999 (the "Mortgage Loan"). The
Mortgage Loan was amended in December 1999 to extend the maturity date from
November 1999 to November 2009. 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 December 31,
1999, the applicable interest rate on the Mortgage Loan was 8.0% and the LIBOR
Rate Option was 2.15%. Approximately $2.5 million was outstanding on the
Mortgage Loan at December 31, 1999.
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 in 1999, 1998
or 1997.
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
22
<PAGE> 23
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 which ranges from 0.85% to 2.0%
depending on the Corporation achieving certain funded debt to EBITDA ratios.
During 1999, 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 was amended on June 30, 1999 to extend the maturity date from June 30,
1999 to June 30, 2001. The note requires monthly principal payments of $30,000,
and bears interest at the same rate as the Mortgage Loan. At December 31, 1999,
$0.6 million was outstanding on the note, and the interest rate on the note was
8.0%. The amendment requires the Corporation to continue making monthly
principal payments of $30,000 plus interest through June 30, 2001.
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:
- 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. For
the fiscal quarter ended December 31, 1999, this ratio is
based on the preceding three quarter period on an annualized
basis. 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 Bank of America waived the Corporation's non-compliance of the
funded debt to EBITDA covenant which occurred in the fourth quarter of 1999.
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 in connection with its 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% 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 December 31, 1999,
approximately $2.8 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.
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<PAGE> 24
Since the revenues and expenses of the Corporation's international
operations generally are denominated in local currencies, exchange rate
fluctuations between such local currencies and the United States dollar will
subject the Corporation to currency translation risk with respect to the
reported results of its international operations as well as to risks sometimes
associated with international operations. The Corporation derived 13.5%, 15.5%
and 16.1% of its revenue for 1999, 1998 and 1997, respectively, from services
performed outside of the United States. In addition, the Corporation may be
subject to currency risk when the Corporation's service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts.
There can be no assurance that the Corporation will not experience
fluctuations in financial results from the Corporation's operations outside the
United States, and there can be no assurance the Corporation will be able,
contractually or otherwise, to reduce the currency risks associated with its
operations. Although at the present time the Corporation does not use derivative
financial instruments to manage or control foreign currency risk, there can be
no assurance that the Corporation will not use such financial instruments in the
future or that any such use will be successful in managing or controlling
foreign currency risk. See "Item 7A - Market Risk."
The revenue and identifiable assets attributable to the
Corporation's geographic segments are reported in Note 11 of Notes to
Consolidated Financial Statements.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as
their local currency, initially available for currency trading on currency
exchanges and non cash (banking) transactions. The existing local currencies, or
legacy currencies, are planned to remain legal tender through January 1, 2002.
Beginning on January 1, 2002, Euro-denominated bills and coins are planned to be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro are planned to be legal tender. On or before July
1, 2002, the participating countries are planned to withdraw all legacy currency
and use the Euro exclusively.
The introduction of the Euro may have potential implications for the
Corporation's existing operations. Currently, Germany is the only 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 to
incur any costs as a result of the introduction of the Euro that would
materially affect the Corporation's liquidity or capital resources.
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<PAGE> 25
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transaction; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS 133 is
effective for years beginning after June 15, 1999, with earlier adoption
permitted. 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 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. 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.
INFLATION
The Corporation believes the effects of inflation generally do not
have a material impact on its financial condition or results of operations.
YEAR 2000 READINESS
The Corporation is not aware of any year 2000 issues that have
affected its business. In preparation for the year 2000, the Corporation
incurred internal staff costs as well as consulting and other expenses. Year
2000 expenses totaled approximately $200,000. These expenses were not greater
because, during 1997, the Corporation implemented an enterprise information
system that is year 2000 compliant.
It is possible that the Corporation's computerized systems could be
affected in the future by the year 2000 issue. The Corporation has numerous
computerized interfaces with third parties that are possible vulnerable to
failure if those third parties have not adequately addressed their year 2000
issues. System failures resulting for these issues could cause significant
disruption to the Corporation's operations.
RISK FACTORS
The business and future operating results of BioReliance could
differ materially from the descriptions in this Report due to the risks
discussed below and elsewhere in this Report.
DEPENDENCE ON OUTSOURCING FOR DEVELOPMENT OF BIOLOGICS; MARKET ACCEPTANCE OF
BIOLOGICS
The Corporation's revenues are highly dependent on research,
development and manufacturing expenditures by biotechnology and pharmaceutical
companies for the development of biologics. The
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<PAGE> 26
Corporation has benefited to date from the growing tendency of biotechnology and
pharmaceutical companies to outsource product development projects to CSOs. A
decline in the development of biologics, a general decline in research and
development expenditures by these companies, or a delay or reduction in the
outsourcing to CSOs of research and development expenditures due to market
conditions, pharmaceutical industry consolidation or other factors could have a
material adverse effect on the Corporation's business and results of operations.
The Corporation's business strategy is dependent upon market
acceptance of biologics. The market for biologics is still emerging, and most
biologic products are still in the research and development stage. The extent to
which biologics are accepted in commercial markets will affect the Corporation's
business, results of operations and financial condition.
SIGNIFICANT CAPITAL EXPENDITURES
During 1999, the Corporation invested $15.3 million in capital
expenditures primarily related to expansion of its facilities and development of
its information systems, and expects to spend approximately $9.6 million on
capital expenditures during 2000. There is a risk that the return on these
capital expenditures may be less than expected.
RISKS ASSOCIATED WITH THE NATURE OF CONTRACTS
Most of the Corporation's contracts are short-term in duration. As a
result, the Corporation must continually replace its contracts with new
contracts to sustain its revenue. The Corporation's inability to generate new
contracts on a timely basis would have a material adverse effect on the
Corporation's business, financial condition and results of operation. See "--
Revenues Difficult to Predict."
In addition, many of the Corporation's long-term contracts may be
cancelled or delayed by clients upon notice. Contracts may be terminated for a
variety of reasons, including termination of product development, failure of
products to satisfy safety requirements, unexpected or undesired results from
use of the product or the client's decision to forego a particular study. The
failure to obtain new contracts or the cancellation or delay of existing
contracts could have a material adverse effect on the Corporation's business and
results of operations.
GOVERNMENT CONTRACTS MAY BE TERMINATED
During fiscal 1999, approximately 11% of the Corporation's revenues
were from government contracts. A government contract may be modified or
terminated at any time for the convenience of the government, including for
changes in requirements or reductions in budgetary resources. If a contract is
modified, the price of the contract would be adjusted equitably. If a contract
is terminated for convenience, the Corporation would be reimbursed for
reasonable costs plus a reasonable profit on work actually performed. In the
event that the contract would have resulted in a loss, the reimbursed amounts
would be adjusted proportionately to reflect the anticipated loss.
REVENUES DIFFICULT TO PREDICT
The Corporation's revenues are difficult to predict because they are
primarily generated on a contract-by-contract basis. Most of the contracts are
short-term, and the Corporation does not have a significant backlog. As a
result, the Corporation's revenues are not recurring from period to period,
which contributes to the variability of results from period to period.
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<PAGE> 27
VARIATION IN QUARTERLY OPERATING RESULTS; HIGH FIXED COSTS
The Corporation's revenues and operating results have fluctuated,
and could continue to fluctuate, on a quarterly basis. The operating results for
a particular quarter may be lower than expected as a result of a number of
factors, including the timing of contracts; the delay or cancellation of a
contract; the mix of services provided; seasonal slowdowns in Europe during the
summer months; the timing of start-up expenses for new services and facilities;
the timing and integration of acquisitions; and changes in regulations related
to biologics. Because a high percentage of the Corporation's costs are fixed
(such as the cost of maintaining facilities and compensating employees), any one
of these factors could have a significant impact on the Corporation's quarterly
results. In some quarters the Corporation's revenues and operating results may
fall below the expectations of securities analysts and investors due to any of
the factors described above. In such event, the trading price of the
Corporation's common stock would likely decline, even if the decline in revenues
did not reflect any long-term problems with the Corporation's business.
MANAGEMENT OF GROWTH
The Corporation's operations - both domestic and international -
have grown in recent years. This growth has placed a strain on the Corporation's
management, operational, human and financial resources. In order to manage its
growth, the Corporation must continue to improve its operating and
administrative systems, including its financial and accounting systems, and to
attract and retain qualified management and professional, scientific and
technical operating personnel. There can be no assurance that the Corporation
will be able to manage its growth effectively. Any failure to effectively
anticipate, implement and manage the changes required to sustain its growth
could have a material adverse effect on the Corporation's business and results
of operations.
DEVELOPMENT OF MANUFACTURING CAPABILITIES
As part of its business strategy, the Corporation intends to expand
its manufacturing capabilities to allow for large-scale production of biologics.
There can be no assurance that the Corporation will be able to develop these
expanded capabilities on acceptable terms, find clients for any new
manufacturing capacity it may develop or operate any expanded manufacturing
capabilities on a profitable basis.
The establishment of additional manufacturing facilities will
require substantial additional funds and personnel and will require compliance
with extensive regulations applicable to such facilities. There can be no
assurance that such funds and personnel will be available on acceptable terms,
if at all, or that the Corporation will be able to comply with such regulations
at acceptable cost, if at all. In addition, in managing this expansion the
Corporation may encounter unforeseen regulatory, logistical or management
problems or incur unexpected operating costs. Failure or delays in establishing
these facilities, failure of market demand for these services to develop, or the
incurrence of unexpected operating costs could have a material adverse effect on
the Corporation's ability to meet its strategic objective of providing a broad
range of product development services and its business and results of
operations.
COMPETITION; INDUSTRY CONSOLIDATION
The Corporation operates in a highly competitive industry. The CSO
industry is highly fragmented, with many providers ranging in size from one
person consulting firms to full-service global
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<PAGE> 28
drug development corporations. The Corporation primarily competes with in-house
research departments of biotechnology and pharmaceutical companies, universities
and medical centers, and other CSOs.
As a result of competitive pressures, the industry has begun to
consolidate. Mergers and acquisitions have resulted in the emergence of several
large, full-service CSOs that have greater capital, technical and financial
resources than BioReliance. As pharmaceutical and biotechnology companies
increasingly outsource development, they may increasingly turn to larger CSOs
that provide a full range of services. This trend is likely to produce increased
competition among the larger CSOs for both clients and acquisition candidates
and increased competitive pressures on smaller providers. In addition, the CSO
industry has attracted the attention of the investment community, which could
lead to heightened competition by increasing the availability of financial
resources for CSOs. Increased competition may lead to price and other forms of
competition that may have a material adverse effect on the Corporation's
business and results of operations.
DEPENDENCE ON PERSONNEL
The Corporation depends on a number of key executives, including
Capers W. McDonald, its President, Chief Executive Officer and Acting Chief
Financial Officer. The loss of the services of any of the Corporation's key
executives could have a material adverse effect on the Corporation's business.
The Corporation also depends on its ability to attract and retain qualified
scientific and technical employees. There is a significant shortage of, and
intense competition for, qualified scientific and technical employees. There can
be no assurance the Corporation will be able to retain its existing scientific
and technical employees, or to attract and retain additional qualified
employees. The Corporation's inability to attract and retain qualified
scientific and technical employees would have a material adverse effect on the
Corporation's business and results of operations.
POTENTIAL LIABILITY
The Corporation formulates, tests and manufactures products intended
for use by the public. In addition, the Corporation's services include the
manufacture of biologic products to be tested in human clinical trials. Such
activities could expose the Corporation to risk of liability for personal injury
or death to persons using such products, although the Corporation does not
commercially market or sell the products to end users. The Corporation seeks to
reduce its potential liability through measures such as contractual
indemnification provisions with clients (the scope of which may vary from
client-to-client, and the performances of which are not secured) and insurance
maintained by clients. The Corporation could be materially and adversely
affected if it were required to pay damages or incur defense costs in connection
with a claim that is outside the scope of the indemnification agreements, if the
indemnity, although applicable, is not performed in accordance with its terms or
if the Corporation's liability exceeds the amount of applicable insurance or
indemnity. In addition, the Corporation could be held liable for errors and
omissions in connection with the services it performs. The Corporation currently
maintains product liability and errors and omissions insurance with respect to
these risks. There can be no assurance that the Corporation's insurance coverage
will be adequate or that insurance coverage will continue to be available on
terms acceptable to the Corporation. See "Business -- Insurance."
HAZARDOUS MATERIALS
The Corporation's activities involve the controlled use of etiologic
agents, hazardous chemicals and various radioactive materials. The Corporation
is subject to foreign, federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain
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<PAGE> 29
waste products. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of any
contamination or injury from these materials, the Corporation could be held
liable for any damages that result, including joint and several liability under
certain statutes such as CERCLA, and any such liability could exceed the
resources of the Corporation. Furthermore, the failure to comply with current or
future regulations could result in the imposition of substantial fines against
the Corporation, suspension of production, alteration of its manufacturing
processes or cessation of operations. There can be no assurance that the
Corporation will not be required to incur significant costs to comply with any
such laws and regulations in the future, or that such laws or regulations or
liability thereunder will not have a material adverse effect on the
Corporation's business and results of operations.
The Corporation has been identified by the EPA as one of several
hundred PRPs under CERCLA with respect to the Ramp Industries, Inc., site in
Denver, Colorado. See "Legal Proceedings."
DEPENDENCE ON AND EFFECT OF GOVERNMENT REGULATION
The design, development, testing, manufacturing and marketing of
biotechnology and pharmaceutical products are subject to regulation by
governmental authorities, including the FDA and comparable regulatory
authorities in other countries. The Corporation's business depends in part on
strict government regulation of the drug development process, especially in the
United States. Legislation may be introduced and enacted from time to time to
modify regulations administered by the FDA governing the drug approval process.
Any significant reduction in the scope of regulatory requirements or the
introduction of simplified drug approval procedures could have a material
adverse effect on the Corporation's business and results of operations.
All of the Corporation's testing assays are performed in conformity
with either GLP regulations or current GMP regulations. GLPs and GMPs are parts
of the FDA regulations and guidelines governing the development and production
of biologic and pharmaceutical products. Failure by the Corporation to comply
with applicable requirements could result in the disqualification of data for
client submissions to regulatory authorities and could have a material adverse
effect on the Corporation's business and results of operations.
All facilities and manufacturing techniques used for manufacturing
of products for clinical use or for sale in the United States must be operated
in conformity with current GMP regulations. The Corporation's facilities are
subject to scheduled periodic regulatory inspections to ensure compliance with
GMP requirements. A finding that the Corporation had materially violated GMP
requirements could result in regulatory sanctions, the disqualification of data
for client submissions to regulatory authorities and a mandated closing of the
Corporation's facilities. Any such sanctions would have a material adverse
effect on the Corporation's business and results of operations. See "Business --
Government Regulation."
CONTROL BY EXISTING STOCKHOLDERS
As of March 1, 2000, Sidney R. Knafel, Chairman of the Board of
Directors of the Corporation, and related persons beneficially own an aggregate
of approximately 40.1% of the outstanding common stock (excluding shares
issuable upon the exercise of options). The Corporation's executive officers,
directors and related persons (including Sidney R. Knafel) beneficially own an
aggregate of approximately 43.4% of the outstanding common stock (excluding
shares issuable upon the exercise of options). As a result, the Corporation's
directors and executive officers and related persons may exercise
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<PAGE> 30
a controlling influence over the outcome of matters submitted to the
Corporation's stockholders for approval and may have the power to delay, defer
or prevent a change in control of the Corporation.
EXCHANGE RATE FLUCTUATIONS
The accounts of the Corporation's international subsidiaries are
measured using local currency as the functional currency. Assets and liabilities
of these subsidiaries are translated into United States dollars at period-end
exchange rates, and revenue and expense accounts are translated at average
monthly exchange rates. Net exchange gains and losses resulting from such
translations are excluded from net income and are accumulated in a separate
component of stockholders' equity.
Since the revenue and expenses of the Corporation's international
operations generally are denominated in local currencies, exchange rate
fluctuations between such local currencies and the United States dollar will
subject the Corporation to currency translation risk with respect to the
reported results of its foreign operations as well as to risks sometimes
associated with international operations. The Corporation derived 13.5%, 15.5%
and 16.1% of its revenue for 1999, 1998 and 1997, respectively, from services
performed outside of the United States. In addition, the Corporation may be
subject to currency risk when the Corporation's service contracts are
denominated in a currency other than the currency in which the Corporation
incurs expenses related to such contracts. There can be no assurance that the
Corporation will not experience fluctuations in financial results from the
Corporation's operations outside the United States, and there can be no
assurance that the Corporation will be able to contractually or otherwise
favorably reduce the currency risks associated with its operations.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Corporation's common stock has experienced a
high degree of volatility. The market price of the common stock could be subject
to wide fluctuations in response to variations in operating results from quarter
to quarter, changes in earnings estimates by analysts, market conditions in the
industry and general economic conditions. Furthermore, the stock market has
experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. These market fluctuations may have an
adverse effect on the market price of the Corporation's common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MARKET RISK
The Corporation is exposed to market risk from adverse changes in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
The Corporation is exposed to interest rate risk primarily through
its investments in short-term marketable securities and cash equivalents and its
debt agreements. The Corporation's investment policy calls for investment in
short-term, low risk instruments. At December 31, 1999, 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.
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Additionally, the Corporation is exposed to risk from changes in
interest rates as a result of its borrowing activities. At December 31, 1999,
the Corporation had total debt of $14.0 million. The Corporation's debt consists
of a mortgage loan with approximately $2.5 million outstanding; a promissory
note with approximately $0.6 million outstanding; a State of Maryland loan with
approximately $2.8 million outstanding; and capital lease obligations of
approximately $8.1 million outstanding. See Note 5 of Notes to Consolidated
Financial Statements. 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 13.5%, 15.5% and 16.1% of
its revenue for 1999, 1998 and 1997, 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 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 does not hedge
its foreign currency exposure. Management does not believe that the
Corporation's exposure to foreign currency rate fluctuations is material. See
"Risk Factors -- Exchange Rate Fluctuations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Corporation are listed in the Index to Financial Statements and Financial
Statement Schedules appearing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to
the information to be set forth under the caption "Executive Officers of the
Registrant" in the Corporation's definitive proxy statement, which is expected
to be filed with the Securities and Exchange Commission within 120 days after
the close of the Corporation's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to
the information to be set forth under the caption "Executive Compensation" in
the Corporation's definitive proxy statement, which is expected to be filed with
the Securities and Exchange Commission within 120 days after the close of the
Corporation's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to
the information to be set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Corporation's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Corporation's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the information to be set forth under the caption "Certain
Relationships and Related Transactions" in the Corporation's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Corporation's fiscal year.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The financial statements and financial statement schedule required
to be filed as part of this Report are listed in the Index to Consolidated
Financial Statements elsewhere in this Report, which list is incorporated herein
by reference.
EXHIBITS
The documents required to be filed as exhibits to this Report under
Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in
this Report, which list is incorporated herein by reference.
REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER
The Corporation did not file any reports on Form 8-K during the
quarter ended December 31, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Rockville, Maryland, on this 30th day of March, 2000.
BIORELIANCE CORPORATION
(Registrant)
By: s/Capers W. McDonald
--------------------
Name: Capers W. McDonald
Title: President, Chief Executive Officer and Acting Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Capers W. McDonald as his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments to this Report, and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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<PAGE> 35
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
s/Sidney R. Knafel Chairman of the Board March 30, 2000
- -----------------------------------------------
SIDNEY R. KNAFEL
s/Capers W. McDonald President, Chief Executive March 30, 2000
- ----------------------------------------------- Officer, Director and Acting
CAPERS W. MCDONALD Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
s/William J. Gedale Director March 30, 2000
- -----------------------------------------------
WILLIAM J. GEDALE
s/Victoria Hamilton Director March 30, 2000
- -----------------------------------------------
VICTORIA HAMILTON
s/Gordon J. Louttit Director March 30, 2000
- -----------------------------------------------
GORDON J. LOUTTIT
s/Leonard Scherlis Director March 30, 2000
- -----------------------------------------------
DR. LEONARD SCHERLIS
</TABLE>
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<PAGE> 36
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of BioReliance
Corporation. (1)
3.2 Bylaws of BioReliance Corporation. (1)
10.1 Amended and Restated BioReliance Corporation 1997 Incentive Plan. (1)
10.2 Modification Agreement -- Leasehold Deed of Trust and Security
Agreement, dated as of December 1, 1994, by and among NationsBank,
N.A., Kathleen M. Malloy and Microbiological Associates, Inc. (1)
10.3 Security Agreement, dated as of December 17, 1993, by and between
Maryland National Bank, Microbiological Associates, Inc. and
Microbiological Associates Limited. (1)
10.4 Second Modification Agreement -- Leasehold Deed of Trust and Security
Agreement, dated as of October 31, 1997, by and among BioReliance
Corporation, Elizabeth Shore and NationsBank, N.A. (2)
10.5 Leasehold Deed of Trust and Security Agreement, dated December 17,
1993, by and between Microbiological Associates, Inc., Kathleen M.
Malloy, Brent H. Donnell and Maryland National Bank. (1)
10.6 International Swap Dealers Association, Inc. Master Agreement, dated as
of May 10, 1995, by and among NationsBank, N.A., Microbiological
Associates, Inc. and MAGENTA Corporation. (1)
10.7 Note Modification Agreement, dated as of October 31, 1997, by and among
NationsBank, N.A., BioReliance Corporation, MA BioServices, Inc.,
MAGENTA Corporation and MAGENTA Viral Production, Inc. (2)
10.8 Lease Agreement, dated as of December 1, 1983, by and between
Montgomery County, Maryland and Dynasciences Corp. n/k/a BioReliance
Corporation. (1)
10.9 Lease Agreement, dated as of October 31, 1994, as amended December 20,
1994, between Redgate III Limited Partnership, as landlord, and
Microbiological Associates, Inc., as tenant. (1)
10.10 Modification of Loan Agreement, dated as of May 31, 1996, among
NationsBank, N.A., Microbiological Associates, Inc., Microbiological
Associates Limited, MAGENTA Corporation and MAGENTA Services Ltd. (1)
10.11 Deed of Trust Note Modification Agreement, dated as of October 31,
1997, by and among NationsBank, N.A., BioReliance Corporation, MA
BioServices, Inc., MAGENTA Corporation and MAGENTA Viral Production,
Inc. (2)
36
<PAGE> 37
10.12 Amended and Restated Replacement Loan Agreement, dated as of October
31, 1997, among NationsBank, N.A., BioReliance Corporation, MA
BioServices, Inc., MAGENTA Corporation and MAGENTA Viral Production,
Inc. (2)
10.13 Microbiological Associates, Inc. 1995 Non-Qualified Stock Option Plan.
(3)
10.14 MAGENTA Corporation, 1994 Incentive Stock Option Plan. (3)
10.15 Microbiological Associates, Inc., 1988 Incentive Stock Option Plan. (3)
10.16 Lease Agreement, dated as of October 16, 1997, between FP Rockledge,
L.L.C. and MA BioServices, Inc. (2)
10.17 First Amendment to Lease Agreement, dated as of February 12, 1998,
between FP Rockledge, L.L.C. and MA BioServices, Inc. (2)
10.18 Consent of Guarantor, dated as of February 12, 1998, to First Amendment
to Lease Agreement. (2)
10.19 Release and Separation Agreement dated November 26, 1997, by and
between BioReliance Corporation and Carl C. Schwan. (2)
10.20 Replacement Revolving Promissory Note, dated as of October 31, 1997, by
and among BioReliance Corporation, MA BioServices, Inc., MAGENTA
Corporation, MAGENTA Viral Production, Inc. and NationsBank, N.A. (2)
10.21 Lease-Purchase Agreement, dated April 1, 1998, between Montgomery
County, Maryland and BioReliance Corporation. (4)
10.22 Lease, dated April 1, 1998, between BioReliance Corporation and BPG
Industrial Partners II, LLC. (4)
10.23 Project Lease, dated April 1, 1998, between BPG Industrial Partners II,
LLC and MAGENTA Corporation. (4)
10.24 Leasehold Deed of Trust, dated April 1, 1998, by BioReliance
Corporation and MAGENTA Corporation, to Cynthia Flanders and Eileen
Chow (trustees) and NationsBank, N.A. (4)
10.25 Guaranty Agreement, dated April 1, 1998, by BioReliance Corporation in
favor of NationsBank, N.A. (4)
10.26 Loan Agreement, dated April 1, 1998, between BPG Industrial Partners
II, LLC, NationsBank, N.A. and, for certain purposes, BioReliance
Corporation. (4)
10.27 First Amendment to Amended and Restated Replacement Loan Agreement,
dated April 1, 1998, among BioReliance Corporation, MA BioServices,
Inc., MAGENTA Corporation, MAGENTA Viral Production, Inc. and
NationsBank, N.A. (4)
37
<PAGE> 38
10.28 Second Note Modification Agreement, dated April 1, 1998, among
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation,
MAGENTA Viral Production, Inc. and NationsBank, N.A. (4)
10.29 Second Deed of Trust Note Modification, dated April 1, 1998, among
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation,
MAGENTA Viral Production, Inc. and NationsBank, N.A. (4)
10.30 Second Replacement Revolving Promissory, dated April 1, 1998, by
BioReliance Corporation, MA BioServices, Inc., MAGENTA Corporation and
MAGENTA Viral Production, Inc. in favor of NationsBank, N.A. in the
amount of $1 million. (4)
10.31 Third Modification Agreement - Leasehold Deed of Trust and Security
Agreement, dated April 1, 1998, among BioReliance Corporation,
Elizabeth Shore (trustee) and NationsBank, N.A. (4)
10.32 BioReliance Corporation 1997 Incentive Stock Plan (as adopted May 28,
1997 and amended and restated September 24, 1997 and May 21, 1998). (5)
10.33 Employment Agreement, dated October 1, 1998, by and between BioReliance
Corporation and Michael R.N. Thomas. (6)
10.34 Promissory Note, dated May 10, 1999, by James Nelson Harris and
BioReliance Corporation. (7)
10.35 Loan Agreement, dated June 28, 1999, by and between Department of
Business and Economic Development, a principal department of the State
of Maryland and BioReliance Corporation. (7)
10.36 Note Modification Agreement, dated June 11, 1999, by and between
NationsBank, N.A. and BioReliance Corporation, BioReliance Testing and
Development, Inc., BioReliance Manufacturing, Inc. and Magenta Viral
Production, Inc. (7)
10.37 Note Modification Agreement, dated July 27, 1999, by and between
NationsBank, N.A. and BioReliance Corporation, BioReliance Testing and
Development f/k/a MA BioServices, Inc., BioReliance Manufacturing, Inc.
f/k/a Magenta Corporation and Magenta Viral Production, Inc. (7)
10.38 Contractor Agreement, dated June 30, 1999, by and between The
Whiting-Turner Contracting Company and BioReliance Corporation. (8)
10.39 Third Deed of Trust Note Modification Agreement, dated November 30,
1999, by and between Bank of America, N.A. and BioReliance Corporation,
BioReliance Testing and Development, Inc., BioReliance Manufacturing,
Inc. and MAGENTA Viral Production, Inc.
10.40 Second Amendment to Amended and Restated Replacement Loan Agreement,
dated December 30, 1999, by and between Bank of American, N.A. and
BioReliance Corporation, BioReliance Testing and Development, Inc.,
BioReliance Manufacturing, Inc. and MAGENTA Viral Production, Inc.
38
<PAGE> 39
10.41 Fourth Replacement Revolving Promissory Note, dated December 30, 1999,
by and between Bank of American, N.A. and BioReliance Corporation,
BioReliance Testing and Development, Inc., BioReliance Manufacturing,
Inc. and MAGENTA Viral Production, Inc.
10.42 Employment Agreement, dated December 2, 1999, by and between John E.
McEntire, Ph.D. and BioReliance Corporation.
21.1 Subsidiaries of the Registrant.(9)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
- ----------
(1) Indicates an Exhibit to the Corporation's Registration Statement on
Form S-1 (Registration No. 333-25071), which is incorporated herein by
reference.
(2) Indicates an Exhibit to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, which is incorporated
herein by reference.
(3) Indicates an Exhibit to the Corporation's Registration Statement on
Form S-8 (Registration No. 333-34341), which is incorporated herein by
reference.
(4) Indicates as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, which is incorporated herein by
reference.
(5) Indicated as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, which is incorporated herein by
reference.
(6) Indicated as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which is incorporated herein
by reference.
(7) Indicated as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, which is incorporated herein by
reference.
(8) Indicated as Exhibit to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, which is incorporated herein
by reference.
(9) Indicates an Exhibit to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, which is incorporated
herein by reference.
39
<PAGE> 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999........................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998 and 1999..................................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999..................................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1998 and 1999............................................................................... F-6
Notes to Consolidated Financial Statements.......................................................... F-7
Financial Statement Schedule:
For the Three Years Ended December 31, 1999
II - Valuation and Qualifying Accounts...................................................... F-21
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
F-1
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of BioReliance Corporation
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of BioReliance Corporation and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 23, 2000
F-2
<PAGE> 42
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
----------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ..................................................... $ 8,847 $ 12,273
Marketable securities ......................................................... 18,250 6,491
Accounts receivable, net ...................................................... 21,741 19,762
Other current assets .......................................................... 2,506 2,062
Deferred income taxes ......................................................... --- 12
-------- --------
Total current assets ........................................ 51,344 40,600
Property and equipment, net .......................................................... 25,371 37,085
Deposits and other assets ............................................................ 572 294
Deferred income taxes ................................................................ --- 962
-------- --------
Total assets ................................................ $ 77,287 $ 78,941
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................. $ 4,628 $ 1,484
Accounts payable .............................................................. 2,685 2,673
Accrued employee compensation and benefits .................................... 1,955 3,001
Other accrued liabilities ..................................................... 1,862 1,619
Customer advances ............................................................. 2,632 1,874
Deferred income taxes ......................................................... 1,551 3,208
-------- --------
Total current liabilities ................................... 15,313 13,859
Deferred income taxes ................................................................ 25 ---
Long-term debt ....................................................................... 7,914 12,546
-------- --------
Total liabilities ........................................... 23,252 26,405
-------- --------
Commitments and contingencies (Note 10)
Stockholders' equity:
Convertible preferred stock, $.01 par value: 6,900,000 shares
authorized; no shares issued and outstanding ............................... --- ---
Common stock, $.01 par value: 15,000,000 shares authorized;
7,821,344 and 7,929,002 shares issued and outstanding ....................... 78 79
Additional paid-in capital .................................................... 52,586 52,764
Retained earnings ............................................................. 1,661 671
Accumulated other comprehensive income ........................................ (290) (978)
-------- --------
Total stockholders' equity .................................. 54,035 52,536
-------- --------
Total liabilities and stockholders' equity .................. $ 77,287 $ 78,941
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 43
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue ....................................... $ 47,949 $ 50,017 $ 47,192
-------- -------- --------
Expenses:
Cost of sales ....................... 29,452 29,738 31,056
Selling, general and administrative.. 10,093 13,627 16,126
Research and development ............ 1,393 1,438 1,306
-------- -------- --------
40,938 44,803 48,488
-------- -------- --------
Income (loss) from operations ................. 7,011 5,214 (1,296)
-------- -------- --------
Other (income) expense:
Interest income ..................... (817) (1,891) (1,112)
Interest expense .................... 717 551 587
Other expense ....................... 33 498 364
-------- -------- --------
(67) (842) (161)
-------- -------- --------
Income (loss) before income taxes ............. 7,078 6,056 (1,135)
Income tax provision (benefit) ................ 2,974 2,354 (145)
-------- -------- --------
Net income (loss) ............................. $ 4,104 $ 3,702 $ (990)
-------- -------- --------
Net income (loss) per share:
Basic ............................... $ 1.19 $ 0.48 $ (0.13)
======== ======== ========
Diluted ............................. $ 0.60 $ 0.45 $ (0.13)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 44
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ................................................ $ 4,104 $ 3,702 $ (990)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation ................................................. 2,991 3,340 3,684
Amortization expense ......................................... 212 227 215
Amortization of bond premiums and discounts .................. (173) (276) (460)
Loss on disposal ............................................. 190 22 13
Compensation element of options .............................. --- --- 12
Deferred income taxes, net ................................... 1,789 1,282 658
Changes in current assets and liabilities:
Accounts receivable, net ................................. (2,320) (5,937) 2,237
Other current assets ..................................... (678) (640) 374
Accounts payable ......................................... (94) 975 (50)
Accrued employee compensation and benefits ............... 615 (874) 1,049
Other accrued liabilities ................................ 49 (540) (188)
Customer advances ........................................ (320) (1,026) (712)
Increase in deposits and other assets ........................ (89) (259) (27)
-------- -------- --------
Net cash provided by (used in) operating activities.. 6,276 (4) 5,815
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities ............................. (32,381) (41,070) (14,281)
Proceeds from the maturities of marketable securities .......... 5,000 50,650 26,500
Purchases of property and equipment ............................ (4,201) (5,888) (15,301)
-------- -------- --------
Net cash provided by (used in) investing activities.. (31,582) 3,692 (3,082)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering ..................... 32,247 --- ---
Proceeds from exercise of stock options ....................... 223 268 167
Proceeds from loan ............................................ --- --- 3,000
Payments on debt .............................................. (717) (832) (843)
Repayment on note payable to stockholder ...................... (1,900) --- ---
Payments on capital lease obligations ......................... (912) (754) (840)
Repurchase and cancellation of treasury stock ................. (77) (138) ---
-------- -------- --------
Net cash provided by (used in) financing activities.. 28,864 (1,456) 1,484
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ....... (296) 388 (791)
-------- -------- --------
Net increase in cash and cash equivalents .......................... 3,262 2,620 3,426
Cash and cash equivalents, beginning of period ..................... 2,965 6,227 8,847
-------- -------- --------
Cash and cash equivalents, end of period ........................... $ 6,227 $ 8,847 $ 12,273
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 45
BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ......... 6,470,121 $ 65 339,930 $ 3 $ 20,073
Issuance of common stock in
Initial Public Offering ("IPO"),
net of offering costs of $1.5
million ......................... -- -- 2,417,316 24 32,223
Conversion of preferred stock,
concurrent with IPO .............. (6,470,121) (65) 4,778,072 48 17
Exercise of stock options .......... -- -- 155,922 2 221
Stock repurchase and cancellation... -- -- (6,032) -- (77)
Equity adjustment from foreign
currency translation ............. -- -- -- -- --
Net income, restated ............... -- -- -- -- --
---------- --------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 ......... -- -- 7,685,208 77 52,457
Exercise of stock options .......... -- -- 142,245 1 267
Stock repurchase and cancellation... -- -- (6,109) -- (138)
Equity adjustment from foreign
currency translation ............. -- -- -- -- --
Net income, restated ............... -- -- -- -- --
---------- --------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1998 ......... -- -- 7,821,344 78 52,586
Exercise of stock options .......... -- -- 107,658 1 166
Compensation expense for stock
Options .......................... -- -- -- -- 12
Equity adjustment from foreign
currency translation ............. -- -- -- -- --
Net income ......................... -- -- -- -- --
---------- --------- ---------- ---------- -----------
BALANCE AT DECEMBER 31,
1999 ............................... -- $ -- 7,929,002 $ 79 $ 52,764
========== ========= ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS/ OTHER TOTAL
(ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
DEFICIT) INCOME EQUITY
-------- ------ ------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ......... $ (6,145) $ 161 $ 14,157
Issuance of common stock in
Initial Public Offering ("IPO"),
net of offering costs of $1.5
million ......................... -- -- 32,247
Conversion of preferred stock,
concurrent with IPO .............. -- -- --
Exercise of stock options .......... -- -- 223
Stock repurchase and cancellation... -- -- (77)
Equity adjustment from foreign
currency translation ............. -- (755) (755)
Net income, restated ............... 4,104 -- 4,104
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 ......... (2,041) (594) 49,899
Exercise of stock options .......... -- -- 268
Stock repurchase and cancellation... -- -- (138)
Equity adjustment from foreign
currency translation ............. -- 304 304
Net income, restated ............... 3,702 -- 3,702
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 ......... 1,661 (290) 54,035
Exercise of stock options .......... -- -- 167
Compensation expense for stock
Options .......................... -- -- 12
Equity adjustment from foreign
currency translation ............. -- (688) (688)
Net income ......................... (990) -- (990)
----------- ----------- -----------
BALANCE AT DECEMBER 31,
1999 ............................... $ 671 $ (978) $ 52,536
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 46
BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract service
organization providing testing, development and manufacturing services for
biologics and other biomedical products to biotechnology and pharmaceutical
companies worldwide.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual
basis of accounting which is in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires the Corporation to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BioReliance
Corporation and its subsidiaries. All significant intercompany transactions have
been eliminated.
SEGMENT INFORMATION
In 1998, BioReliance Corporation adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supercedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise", replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Corporation's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information (see Note 12).
REVENUE RECOGNITION
Revenue recognized from commercial contracts, which are principally
fixed-price or fixed-rate, is recorded using the percentage-of-completion over
time or the completed-contract method, depending on the nature and duration of
the contract. Testing and development services are accounted for using the
percentage-of-completion over time method, except for services that are
generally completed within three days which are accounted for using the
completed-contract method. Manufacturing services providing for the delivery of
products are accounted for using the completed-contract method, while all other
manufacturing services are accounted for using the percentage-of-completion over
time method. Percentage-of-completion over time is determined using total
project costs as a cost input measure. Revenue recognized from government
contracts, which are principally cost-plus-fixed-fee, is recognized
F-7
<PAGE> 47
in an amount equal to reimbursable costs plus a pro-rata portion of the earned
fee. Losses are provided for at the time at which they become known.
RESEARCH AND DEVELOPMENT
Research and development is expensed in the period in which it is
incurred.
CASH AND CASH EQUIVALENTS
The Corporation classifies as cash equivalents all highly liquid
investments with an original maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities comprise investments in debt securities with
original maturities of more than 90 days at the time of purchase. The
Corporation has classified its entire investment portfolio as held-to-maturity.
Held-to-maturity are those securities which the Corporation has the positive
intent and ability to hold until maturity, and are stated at amortized cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the respective assets.
The building is depreciated over a twenty-year period. Leasehold improvements
are depreciated or amortized over the shorter of the useful life or the lease
term with useful lives up to twenty years. Other fixed assets are depreciated or
amortized over periods ranging from three to ten years. Equipment is depreciated
over five years; and, computer hardware and software is depreciated over three
to five years. Significant additions and betterments are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated, upon a triggering event, for possible
impairment through a review of undiscounted expected future cash flows. If the
sum of the undiscounted expected future cash flows is less than the carrying
amount of the asset or if changes in facts and circumstances indicate, an
impairment loss is recognized.
INCOME TAXES
The Corporation follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method of SFAS 109, deferred income taxes are recognized for the expected future
tax consequences of temporary differences by applying enacted statutory tax
rates, in effect for the year in which the differences are expected to reverse,
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. Valuation allowances are provided if
it is anticipated that some or all of a deferred tax asset may not be realized.
F-8
<PAGE> 48
NET INCOME (LOSS) PER SHARE
Earnings per share ("EPS") are computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This
statement requires dual presentation of basic and diluted EPS on the face of the
income statement. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Dilutive securities are
excluded from the computation in periods in which they have an anti-dilutive
effect, and net income available to common stockholders is adjusted accordingly
for the effect of cumulative dividends on Convertible Preferred Stock. The
Corporation adopted this statement during the fourth quarter of 1997, as
required. Accordingly, all prior period EPS data has been restated.
STOCK-BASED COMPENSATION POLICY
The Corporation accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations. Under APB 25, compensation cost is measured as the excess, if
any, of the market price of the Corporation's stock at the date of the grant
over the exercise price of the option granted. Compensation cost for stock
options, if any, is recognized ratably over the vesting period. The Corporation
provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Transactions for which non-employees are issued equity instruments for
goods or services are recorded by the Corporation based upon the value of the
goods or services received or fair value of the equity instruments issued
whichever is more reliably measured.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's cash and cash equivalents,
marketable securities, accounts receivable, other current assets, deposits and
other assets, accounts payable, accrued expenses, and customer advances
approximate their carrying values due to their short-term nature. Since the
interest rates paid by the Corporation approximate current market rates, the
carrying value of its long-term debt approximates fair value.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries are measured using local currency as
the functional currency. Assets and liabilities of these subsidiaries are
translated into U.S. dollars at period-end exchange rates, and income and
expense accounts are translated at average monthly exchange rates. Net gains and
losses resulting from such translations are excluded from net income (loss) and
are accumulated in a separate component of stockholders' equity.
(2) MARKETABLE SECURITIES
Marketable securities consist of investments in government and
government agency securities as follows at December 31:
F-9
<PAGE> 49
<TABLE>
<CAPTION>
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST (LOSSES) VALUE
-------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1998....................... $18,250 $(4) $18,246
======= ==== =======
1999....................... $ 6,491 $(6) $ 6,485
======= ==== =======
</TABLE>
All securities have maturities of one year or less.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following amounts as of December 31:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
(IN THOUSANDS)
Billed accounts receivable:
<S> <C> <C>
Commercial................................................................. $ 11,997 $ 10,224
Government................................................................. 1,072 1,232
----------- ----------
13,069 11,456
----------- ----------
Unbilled accounts receivable:
Commercial................................................................. 8,422 8,378
Government................................................................. 1,086 1,313
----------- ----------
9,508 9,691
----------- ----------
Less allowances for doubtful accounts and unallowable
contract costs............................................................. (836) (1,385)
----------- ----------
Accounts receivable, net..................................................... $ 21,741 $ 19,762
=========== ===========
</TABLE>
Unbilled commercial receivables represent revenue from commercial
contracts (recorded using the percentage-of-completion method) which are not yet
billable to the client. Generally, these amounts become billable within the next
one to three months upon the attainment of a milestone or the completion of the
contract.
Unbilled government receivables represent amounts which are billed on
government contracts shortly after the end of each month, based on costs
incurred and fees earned during the month, or revenues recognized in excess of
billings on government contracts which generally become billable upon final
determination of allowable costs by the United States government. Government
contract costs for 1999 are subject to final determination of allowable costs by
the United States government. In the opinion of management, these determinations
will have no material effect on the Corporation's consolidated financial
position or results of operations.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following amounts as of December
31:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................... $ 2,704 $ 2,704
Building........................................................... 9,827 10,396
Equipment, furniture, fixtures, and computer hardware and software. 21,408 22,199
Leasehold improvements............................................. 2,463 2,818
Construction in progress and assets not yet placed in service...... 7,358 19,789
-------------- --------------
Property and equipment, at cost.................................... 43,760 57,906
Less accumulated depreciation and amortization..................... (18,389) (20,821)
-------------- --------------
Property and equipment, net........................................ $ 25,371 $ 37,085
============== ==============
</TABLE>
F-10
<PAGE> 50
During the period that capital items are considered to be in progress,
interest costs incurred are capitalized to the cost of the asset in accordance
with Statement of Financial Accounting Standards No. 34, "Capitalization of
Interest Cost" ("SFAS 34"). For the years ended December 31, 1999 and 1998,
$264,593 and $213,413 of interest costs, respectively, were capitalized to the
property and equipment.
(5) DEBT
Debt consisted of the following amounts as of December 31:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage Loan........................... $ 2,867 $ 2,538
Promissory Note......................... 900 600
Capital Lease Obligations............... 8,775 8,106
State of Maryland Loan ................. --- 2,786
------------- -------------
Total debt.............................. 12,542 14,030
Less current portion.................... (4,628) (1,484)
------------- -------------
Long-term portion....................... $ 7,914 $ 12,546
============= =============
</TABLE>
BANK DEBT
In 1994, the Corporation obtained a loan of $4,300,000 from Bank of
America with a maturity date of November 30, 1999 (the "Mortgage Loan"). The
Mortgage Loan was renewed in December 1999 and now expires in November 2009. 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 December 31, 1999, the applicable interest rate on the
Mortgage Loan was 8.0% and the LIBOR Rate Option was 2.15%. Approximately $2.5
million was outstanding on the Mortgage Loan at December 31, 1999.
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 swap agreement was a standard contract with
no imbedded options or other terms involving a higher level of complexity or
risk. The Corporation believes that the effect of the interest rate swap
agreement on interest expense was not material in 1999, 1998 or 1997.
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 which ranges from 0.85% to 2.0% depending on the Corporation
achieving certain funded debt to EBITDA ratios. At December 31, 1999, no amounts
were outstanding under this agreement.
The Corporation financed the acquisition of BioReliance Manufacturing
GmbH (formerly known as "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
F-11
<PAGE> 51
requires monthly principal payments of $30,000, and bears interest at the same
rate as the Mortgage Loan. At December 31, 1999, $0.6 million was outstanding on
the note and the interest rate on the note from June 30, 1999, was 8.0%. The
note was amended on June 30, 1999 to extend the maturity date to June 30, 2001.
The amendment requires the Corporation to continue making monthly principal
payments of $30,000 plus interest through June 30, 2001.
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 meet certain financial and restrictive covenants, including
certain fixed charge coverage and funded debt to EBITDA ratios. The Bank of
America waived the Corporation's non-compliance of the funded debt to EBITDA
covenant which occurred in the fourth quarter of 1999.
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 in
connection with its 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% 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 December 31, 1999, approximately
$2.8 million was outstanding on the loan. The aggregate maturities on long-term
debt are due as follows: 2000-$916,000, 2001-$796,000, 2002-$556,000,
2003-$556,000, 2004-$556,000, and thereafter-$2,544,000.
CAPITAL LEASE OBLIGATIONS
The Corporation leases land and certain equipment under noncancelable
lease agreements accounted for as capital leases. In April 1998, the Corporation
entered into certain third-party leasing and subleasing arrangements relating to
the construction of new manufacturing space in Rockville, MD. These arrangements
require the Corporation to make certain noncancelable lease payments over the
next twenty years and to guarantee indebtedness of approximately $4.5 million.
The terms of the arrangements require that the leases be accounted for as
capital leases. The assets underlying capitalized leases are included with the
Corporation's owned property and equipment, and are summarized as follows as of
December 31:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Land....................................... $ 2,704 $ 2,704
Construction in progress................... 6,160 6,533
Machinery and equipment.................... 4,609 4,319
----------- -----------
Total assets at cost....................... 13,473 13,556
Less accumulated depreciation.............. (3,585) (3,350)
----------- -----------
Net capitalized assets..................... $ 9,888 $ 10,206
=========== ===========
</TABLE>
F-12
<PAGE> 52
The future minimum lease payments under capital lease obligations at
December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
2000...................................................... $ 1,185
2001...................................................... 827
2002...................................................... 740
2003...................................................... 740
2004...................................................... 681
Thereafter................................................ 9,776
-----------
Total minimum lease payments................................ 13,949
Less amount representing interest........................... (5,843)
-----------
Present value of minimum lease payments..................... 8,106
Less current portion........................................ (568)
-----------
Long-term portion........................................... $ 7,538
===========
</TABLE>
(6) STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On August 1, 1997, the Corporation completed its initial public offering
of 2,102,014 shares of its common stock (plus an additional 297,986 shares by a
selling stockholder) at an offering price of $15.00 per share. On August 7,
1997, the underwriters exercised an option to purchase an additional 315,302
shares. The net proceeds to the Corporation from the public offering and the
exercise of the over-allotment option by the underwriters, after deducting the
underwriting discounts and commissions and offering expenses payable by the
Corporation, were approximately $32.2 million. Upon the closing of the offering,
all outstanding shares of the Corporation's convertible preferred stock were
automatically converted into 4,778,072 shares of common stock.
STOCK OPTION PLANS
The Board of Directors of the Corporation adopted the 1997 Incentive
Plan ("the 1997 Plan") in May 1997, and approved amendments to the 1997 Plan in
September 1997, May 1998 and May 1999. The 1997 Plan replaced all of the
Corporation's former stock option plans. Under the terms of the 1997 Plan, the
Corporation may grant or award incentive and nonqualified stock options, stock
appreciation and dividend equivalent rights, restricted stock, performance
units, and performance shares (collectively, "Awards") to employees, officers,
non-employee directors, consultants and advisors. The 1997 Plan also provides
for the initial and annual grant of options to each of its non-employee
directors which must be granted at an exercise price equal to the fair market
value on the date of grant and which generally vest in one-third increments over
three years and have ten-year terms. These Awards are exercisable as determined
by the Corporation's compensation committee and expire no later than ten years
after the date of the grant. The exercise price of incentive stock options must
equal or exceed the fair market value of the stock on the date of grant.
As of December 31, 1999, 1,012,277 and 356,650 shares were authorized
and available for grants under the 1997 Plan, respectively.
F-13
<PAGE> 53
Changes in options outstanding granted under the 1997 Plan and prior
stock option plans were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
-------------- ----------------
<S> <C> <C>
Balance, December 31, 1996................ 871,364 2.43
Granted................................. 34,536 12.84
Exercised............................... (155,922) 1.58
Canceled................................ (40,742) 4.49
--------------
Balance, December 31, 1997................ 709,236 3.34
Granted................................. 418,040 13.00
Exercised............................... (142,245) 1.90
Canceled................................ (92,879) 11.83
---------------
Balance, December 31, 1998................ 892,152 6.71
Granted................................. 425,535 8.43
Exercised............................... (108,198) 1.68
Canceled................................ (84,821) 10.21
---------------
Balance, December 31, 1999................ 1,124,668 7.58
===============
</TABLE>
To determine fair value under SFAS 123, the Corporation used the
Black-Scholes option-pricing model and the following respective weighted-average
assumptions for 1997, 1998 and 1999: a risk-free interest rate of 6.35%, 5.88%
and 5.61%; expected lives of 6 years; expected volatility of 30%, 82% and 55%;
and expected dividends of zero. The weighted average fair value of options
granted during 1997, 1998 and 1999 was $5.44, $9.27 and $3.86, respectively.
For options outstanding and exercisable at December 31, 1999, the
following number of options, range of exercise prices and weighted average
exercise prices were:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF SHARES REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.56 - 2.30 290,023 1.1 $ 1.65 289,000 $ 1.65
$ 2.31 - 4.60 77,495 2.9 $ 3.14 61,853 $ 3.11
$ 4.61 - 6.90 115,506 5.8 $ 6.43 91,506 $ 6.38
$ 6.91 - 9.20 281,607 6.0 $ 7.65 42,049 $ 7.99
$11.51 - 13.80 167,641 8.3 $ 12.01 13,251 $ 12.33
$13.81 - 16.10 182,346 5.8 $ 14.63 39,661 $ 14.63
$20.71 - 23.00 10,050 7.2 $ 22.56 1,044 $ 21.25
------ -------
Total 1,124,668 4.8 $ 7.58 538,364 $ 4.37
========= =======
</TABLE>
As permitted by SFAS 123, the Corporation's has chosen to continue
accounting for stock options at their intrinsic value. Accordingly no
compensation expense has been recognized for its stock option compensation
plans. Had the fair value method of accounting been applied to the Corporation's
stock option plans the impact would be as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) as reported ..................... $ 4,104 $ 3,702 $ (990)
Estimated fair value of the year's option grants... (61) (453) (363)
------- ------- -------
Proforma net income (loss) ........................ 4,043 3,249 (1,353)
Adjusted net income (loss) per share
Basic ......................................... 1.17 0.42 (0.17)
Diluted ....................................... 0.59 0.39 (0.17)
</TABLE>
F-14
<PAGE> 54
(7) INCOME TAXES
INCOME TAX PROVISION
Income (loss) before income taxes consisted of the following amounts for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic ........................... $ 5,899 $ 5,236 $ (854)
Foreign ............................ 1,179 820 (281)
------- ------- -------
Income (loss) before income taxes... $ 7,078 $ 6,056 $(1,135)
======= ======= =======
</TABLE>
The provision (benefit) for income taxes consisted of the following
amounts for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
Current:
<S> <C> <C> <C>
Federal ......................................... $ 488 $ 599 $ (705)
Foreign ......................................... 464 222 --
State ........................................... 233 251 (110)
------- ------- -------
Total current provision (benefit) .......... 1,185 1,072 (815)
------- ------- -------
Deferred:
Federal ......................................... 1,116 1,223 875
Foreign ......................................... 323 (192) (359)
State ........................................... 350 251 154
------- ------- -------
Total deferred provision (benefit) ......... 1,789 1,282 670
------- ------- -------
Total provision (benefit) for income taxes.. $ 2,974 $ 2,354 $ (145)
======= ======= =======
</TABLE>
The provision for income taxes differed from that which would be computed
by applying the U.S. Federal income tax rate to income before income taxes for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate ........ 34.0% 34.0% (34.0)%
State tax, net of federal benefit .... 2.2 2.8 (2.6)
Adjustment for foreign income taxes... (0.1) 0.1 (11.6)
U.K. consolidation ................... -- 5.2 --
Change in valuation allowance ........ 12.2 4.8 40.8
Charitable contribution .............. (7.5) -- --
Tax credits .......................... -- (13.4) --
Nondeductible expenses ............... 0.1 3.6 (5.4)
Other ................................ 1.1 1.9 --
---- ---- ----
Provision for income taxes ........... 42.0% 39.0% (12.8)%
==== ==== ====
</TABLE>
During 1997, the Corporation donated 100% of the outstanding stock of
one of its subsidiaries to a not-for-profit organization which resulted in a
permanent difference between income reported for tax purposes and financial
reporting purposes.
Effective January 1, 1998, BioReliance Holding GmbH ("BRH") and
BioReliance Manufacturing GmbH (formerly known as "BIOMEVA") may consolidate
income for German tax purposes pursuant to an agreement dated November 30, 1998,
which continues for five years. In addition BRH declared a distribution to the
Corporation during 1998 which entitles BRH to a German tax refund.
F-15
<PAGE> 55
Effective December 31, 1998, BioReliance, Ltd. ("BREL, Ltd.") and
BioReliance Manufacturing, Ltd. (formerly MAGENTA Services, Ltd.) were merged
for U.K. tax purposes. In addition to the business strategy benefits of this
merger, it allows for the efficient use of certain tax assets.
DEFERRED INCOME TAXES
Deferred income taxes consisted of the following amounts as of December
31:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards ................. $ 838 $ 1,631
Accrued expenses ................................. 527 685
Tax credit carryforwards ......................... -- 878
Other ............................................ 1,105 882
------- -------
Gross deferred tax assets .......................... 2,470 4,076
Valuation allowance ................................ (1,089) (1,265)
------- -------
Net deferred tax assets .......................... 1,381 2,811
------- -------
Deferred tax liabilities:
Unbilled accounts receivable ..................... (2,337) (4,385)
Depreciation and amortization .................... (620) (672)
------- -------
Deferred tax liabilities ......................... (2,957) (5,057)
------- -------
Deferred taxes, net ................................ $(1,576) $(2,246)
======= =======
Deferred income tax liabilities, current portion ... $(2,337) $(4,385)
Deferred income tax liabilities, long-term portion.. (620) (672)
Deferred income tax assets, current portion ........ 786 1,177
Deferred income tax assets, long-term portion ...... 595 1,634
------- -------
Deferred taxes, net ................................ $(1,576) $(2,246)
======= =======
</TABLE>
The Corporation records a valuation allowance for deferred tax assets when
it is management's judgment that it is more likely than not that all or a
portion of a deferred tax asset will not be realized. During 1999, the valuation
allowance increased primarily due to increases in valuation allowances related
to net operating losses for state jurisdictions and certain tax credits.
TAX CARRYFORWARDS
At December 31, 1999, the Corporation had federal and state net operating
loss ("NOL") carryforwards available to offset future taxable income of
approximately $935,000 and $3.6 million, respectively. The federal NOL expires
in 2019 and the state NOLs expire at varying dates through 2019. At December 31,
1999, the Corporation had foreign net operating loss carryforwards available to
offset future taxable income of approximately $766,000 and $796,000 in the U.K.
and in Germany, respectively, which may be carried forward indefinitely.
At December 31, 1999, the Corporation had research and development,
foreign tax and alternative minimum tax credits totaling $215,000, $563,000 and
$100,000, respectively. The foreign tax and research and development tax credits
expire at varying dates through 2014. The alternative minimum tax credits are
carried forward indefinitely.
(8) RETIREMENT PLAN
The Corporation sponsors a defined-contribution retirement 401(k) plan
covering substantially all of its employees. Contributions made by the
Corporation in 1997, 1998 and 1999 equaled 50% of the voluntary employee
contributions up to a maximum of 6% of a participant's annual compensation. The
F-16
<PAGE> 56
Corporation's retirement plan contributions were $286,000, $282,000 and $257,000
in 1997, 1998 and 1999, respectively.
(9) 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 each of the years presented.
The following represents reconciliations between the weighted average
common stock outstanding denominator used in basic EPS and the weighted average
common and common equivalent shares outstanding denominator used in diluted EPS
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average common stock outstanding........................... 3,458 7,791 7,886
Preferred stock, as if converted.................................... 2,723 --- ---
Stock options, as if converted..................................... 652 442 ---
---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding.............................................. 6,833 8,233 7,886
========== ========== ==========
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Corporation leases certain facilities and equipment under
noncancelable operating leases that expire at various dates through 2017. The
Corporation's corporate headquarters facility in Rockville, MD, constructed
under a build-to-lease agreement was completed in August 1998. The lease
requires the Corporation to make certain noncancelable lease payments over the
next 13 years. The terms of the agreement require that the lease be accounted
for as an operating lease. Future minimum lease payments under operating leases
were as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
2000...................................................... $ 1,796
2001...................................................... 1,797
2002...................................................... 1,808
2003...................................................... 1,834
2004...................................................... 1,885
Thereafter................................................ 11,713
-------------
Total future minimum lease payments.................... $ 20,833
=============
</TABLE>
Total rent expense for all operating leases was $1,650,000, $1,864,000
and $2,112,000 in 1997, 1998 and 1999, respectively.
COMMITMENTS
At December 31, 1999, the Corporation had formulated capital spending
plans of approximately $9.6 million, of which approximately $5.1 million relates
to the new manufacturing facility, relating to building improvements and
equipment.
F-17
<PAGE> 57
LEGAL
The Corporation is involved in various claims and legal proceedings
arising in the ordinary course of business. The Corporation does not believe
that such claims or proceedings, individually or in the aggregate, will have a
material adverse effect on the Corporation's consolidated financial position or
results of operations.
The Corporation has been identified by the U.S. Environmental Protection
Agency ("EPA") as one of several hundred potentially responsible parties
("PRPs") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to the Ramp Industries, Inc. site in
Denver, Colorado. Although the Corporation believes that it sent only a small
quantity of waste to this site, liability under CERCLA can exceed a PRP's pro
rata share of cleanup costs. The EPA has incurred approximately $5 million to
date to remove wastes from this site and expects to incur approximately an
additional $1.3 million to remove the remaining wastes. However, the estimated
total cleanup costs have not been determined. A joint settlement proposal was
developed in October 1997 and submitted to EPA Region VIII representatives, who
have agreed to support the proposal to Senior EPA management and the Department
of Justice. There can be no assurance at this time that the joint settlement
proposal will be accepted by the Department of Justice. The Corporation believes
that the outcome of this matter will not have a material adverse effect on the
Corporation's financial position or results of operations.
(11) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
SEGMENT INFORMATION
During 1998, the Corporation adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information", which changes the way the
Corporation reports information about its operating segments.
The Corporation has two reportable segments: Testing and development
services and manufacturing services each of which spans the product cycle from
early preclinical development through licensed production. BioReliance provides
a broad range of testing and development services. Testing services are the
core, mature parts of its business, while development services represent an
outgrowth of prior biotesting relationships with clients and regulators. Testing
services include assessment of cell banks used to manufacture biologics,
validation of purification processes for clearance of adventitious agents such
as viruses, and testing of in-process and final products. Development services
were expanded in 1995 in response to clients' expressed needs for development of
analytical techniques to characterize biologics better in anticipation of new
FDA regulations and guidelines published during 1996 that permit the development
and manufacturing processes for well-characterized biologics to be streamlined.
Manufacturing services currently include both viral production and microbial
fermentation production methods.
In 1999, the Corporation re-aligned its biorepository services from the
manufacturing segment to the testing and development segment. The information
for 1997 and 1998 has been restated from the prior year's presentation in order
to conform with the 1999 presentation.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies". Segment data includes
intersegment revenues. The Corporation evaluates the performance of its
operating segments based on revenues and gross profit. Asset
F-18
<PAGE> 58
information by reportable segment is not reported, since the Corporation does
not produce such information internally.
Summarized financial information concerning the Corporation's reportable
segments is shown in the following table (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Testing and Development $ 42,534 $ 44,396 $ 43,328
Manufacturing 5,415 5,621 3,864
-------- -------- --------
Total $ 47,949 $ 50,017 $ 47,192
======== ======== ========
Gross Profit:
Testing and Development $ 17,951 $ 20,279 $ 17,398
Manufacturing 546 --- (1,262)
-------- -------- --------
Total $ 18,497 $ 20,279 $ 16,136
======== ======== ========
</TABLE>
The following table outlines the Corporation's revenues, gross profit
and identifiable assets by geographic region as of or for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
United States $40,244 $42,291 $40,818
Europe 7,705 7,726 6,374
------- ------- -------
Total $47,949 $50,017 $47,192
======= ======= =======
Gross Profit:
United States $15,903 $17,650 $14,544
Europe 2,594 2,629 1,592
------- ------- -------
Total $18,497 $20,279 $16,136
======= ======= =======
Identifiable Assets:
United States $12,371 $22,063 $34,342
Europe 3,230 3,308 2,743
------- ------- -------
Total $15,601 $25,371 $37,085
======= ======= =======
</TABLE>
SIGNIFICANT CUSTOMERS
Sales to the U.S. Government represented 8%, 8% and 11% of consolidated
revenue in 1997, 1998 and 1999, respectively.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Income tax payments ............................. $ 475 $1,317 $ 37
Interest payments ............................... $ 713 $ 553 $ 604
Noncash investing and financing activities:
Equipment acquired under capital lease agreements
(Note 5) ..................................... $ --- $ 240 $ ---
Land acquired under capital lease agreement ..... $ --- $ 720 $ ---
Building acquired under capital lease agreement . $ --- $6,160 $ 373
</TABLE>
F-19
<PAGE> 59
(13) 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 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. 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.
F-20
<PAGE> 60
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- ------------- --------------------------------- ------------ -----------
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS - BALANCE AT
DESCRIPTION YEAR EXPENSES - DESCRIBE DESCRIBE END OF YEAR
- -------------------------------------- ------------- ---------- ------------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts 240,000 16,000 --- 14,000(1) 242,000
Deferred tax valuation allowance 373,000 398,000 --- --- 771,000
Year Ended December 31, 1998
Allowance for doubtful accounts 242,000 510,000 84,000(2) --- 836,000
Deferred tax valuation allowance 771,000 318,000 --- --- 1,089,000
Year Ended December 31, 1999
Allowance for doubtful accounts 836,000 1,123,000 --- 574,000(1) 1,385,000
Deferred tax valuation allowance 1,089,000 176,000 --- --- 1,265,000
</TABLE>
- ----------------------------
(1) Amounts are write-offs of uncollectible accounts receivable.
(2) Amounts represent a reclassification of excess intercompany work in process
reserves.
F-21
<PAGE> 1
EXHIBIT 10.39
THIRD DEED OF TRUST NOTE MODIFICATION AGREEMENT
THIS THIRD DEED OF TRUST NOTE MODIFICATION AGREEMENT (this "Agreement")
is made this 30th day of November, 1999, by and among BIORELIANCE CORPORATION, a
corporation organized and in good standing under the laws of the State of
Delaware, successor in interest to Microbiological Associates, Inc. (the
"Company"), BIORELIANCE TESTING AND DEVELOPMENT, INC., formerly known as MA
BioServices, Inc., a corporation organized and in good standing under the laws
of the State of Delaware ("MA BioServices"), BIORELIANCE MANUFACTURING, INC.,
formerly known as Magenta Corporation, a corporation organized and in good
standing under the laws of the State of Delaware ("Magenta") and MAGENTA VIRAL
PRODUCTION, INC., a corporation organized and in good standing under the laws of
the State of Delaware ("Magenta Viral"; together with the Company and MA
BioServices, each a "Borrower" and collectively, the "Borrowers") and BANK OF
AMERICA, N.A., successor in interest to Nationsbank, N.A., each a national
banking association, its successors and assigns, (the "Lender").
INTRODUCTORY STATEMENT
A. The Lender has made a loan (the "Loan") in the original principal
amount of Three Million Dollars ($3,000,000) to the Company and Microbiological
Associates International Limited, which changed its name to BioReliance Limited
("MAL") pursuant to the terms of a Deed of Trust Note dated December 17, 1993
from the Borrower and MAL, which Deed of Trust Note was amended by that certain
First Loan Modification Agreement (the "First Loan Modification Agreement")
dated May 31, 1994 by and among the Lender, the Company, MAL, Magenta and
Magenta Services, which among other things added Magenta and Magenta Services as
joint and several co-makers to the Deed of Trust Note, which Deed of Trust Note
was further amended by that certain Second Loan Modification Agreement dated
September 30, 1994 by and among the Company, MAL, Magenta, Magenta Services and
the Lender, which Deed of Trust Note was amended and restated in its entirety
pursuant to the provisions of that certain Third Loan Modification Agreement
dated as of December 1, 1994, by and among the Company, MAL, Magenta, Magenta
Services and the Lender, which among other things, increased the maximum
principal amount of the Loan from Three Million Dollars ($3,000,000) to Four
Million Three Hundred Thousand Dollars ($4,300,000) and which Deed of Trust Note
was further modified pursuant to that certain Deed of Trust Note Modification
Agreement dated as of October 31, 1997 by and among the Borrowers and the Lender
(the Deed of Trust Note as amended and restated from time to time, is
hereinafter called, the "Note"); and
B. The Loan is currently governed by the provisions of that certain
Amended and Restated Replacement Loan Agreement of even date herewith by and
among the Borrowers and the Lender (as the same may be amended from time to
time, the "Restated Loan Agreement").
C. The Loan is secured by, among other things, the Company's leasehold
interest in the property described (the "Property") in that certain Leasehold
Deed of Trust and Security Agreement dated December 17, 1993 from the Company to
the trustees named therein for the benefit of the Lender, which Leasehold Deed
of Trust and Security Agreement was recorded
1
<PAGE> 2
EXHIBIT 10.39
December 20, 1993, among the Land Records for Montgomery County, Maryland in
Liber 12140, at folio 779, and which Leasehold Deed of Trust and Security
Agreement was amended by that certain Modification Agreement-Leasehold Deed of
Trust and Security Agreement dated December 1, 1994 by and among the Company,
the trustees named therein and the Lender (the Leasehold Deed of Trust and
Security Agreement as amended is hereinafter called the "Deed of Trust").
D. The Borrowers have requested and the Lender has agreed to extend the
maturity date of the Loan.
E. On this date the Company continues to be the leasehold owner of the
Property and the Borrowers acknowledge and agree that the Deed of Trust
constitutes a valid and subsisting first lien on the Company's leasehold
interest in the Property for the entire outstanding principal balance of the
Note and interest thereon, all in accordance with the terms, covenants,
conditions and warranties of the Deed of Trust and the Note secured thereby, and
that all of the other provisions of the same are in full force and effect.
F. In order to induce the Lender to extend the maturity date of the
Loan and upon the express condition that the lien of the Deed of Trust remains a
valid and subsisting first lien on the Company's leasehold interest in the
Property and that the execution and delivery of this Agreement shall not impair
the lien thereof, the parties hereto have agreed to execute and deliver this
Agreement to modify the terms of repayment of the Loan as hereinafter more
particularly set forth.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and for the sum of One
Dollar ($1.00) and other good and valuable consideration, the receipt and
sufficiency whereof are hereby acknowledged, the parties hereto, for themselves,
their respective heirs, personal representatives, successors and assigns do
hereby mutually covenant and agree as follows:
1. Incorporation of Recitals. The parties hereto acknowledge and agree
that the recitals hereinabove set forth are true and correct in all respects and
that the same are incorporated herein and made a part hereof.
2. Outstanding Obligations. The parties hereto acknowledge and agree
(a) that the outstanding principal balance of the Note as of the date hereof is
$2,538,194.51 (the "Principal Sum"), (b) that interest on the unpaid principal
balance of the Note has been paid through November 29, 1999, and (c) that the
unpaid principal balance of the Note, together with accrued and unpaid interest
thereon, is due and owing subject to the terms of repayment hereinafter set
forth, without defense or offset.
3. Confirmation of Lien. The Borrowers hereby acknowledge and agree
that the Property is and shall remain in all respects subject to the lien,
charge and encumbrance of the Deed of Trust, and nothing herein contained, and
nothing done pursuant hereto, shall adversely affect or be construed to
adversely affect the lien, charge or encumbrance of, or warranty of title
2
<PAGE> 3
EXHIBIT 10.39
in, or conveyance effected by the Deed of Trust, or the priority thereof over
other liens, charges, encumbrances or conveyances, or to release or adversely
affect the liability of any party or parties whomsoever who may now or hereafter
be liable under or on account of the Loan or any of the Loan Documents (as
hereinafter defined), nor shall anything herein contained or done in pursuance
hereof adversely affect or be construed to adversely affect any other security
or instrument held by the Lender as security for or evidence of the indebtedness
evidenced and secured thereby.
4. Continuation of Loan Terms. Except as otherwise expressly set forth
below, the outstanding principal balance of the Note shall continue to bear
interest and to be repaid on the terms and subject to the conditions set forth
in the Note and the other documents evidencing and securing the Loan (this
Agreement, the Note, the Deed of Trust, the Restated Loan Agreement and all such
other documents, whether currently existing or hereafter executed, and all
modifications thereto, extensions or renewals thereof and substitutions therefor
being hereinafter collectively referred to as the "Loan Documents"). All
capitalized terms used but not defined in this Agreement shall have the meaning
given to such terms in the Loan Documents.
5. Interest. Commencing as of the 1st day of December, 1999, until all
sums due under the Loan shall be repaid in full, the unpaid principal balance of
the Note shall bear interest at a rate which is at all times equal to the
fluctuating at the LIBOR Rate (as hereinafter defined), plus the applicable
LIBOR Rate Additional Percentage (the "LIBOR Rate Option").
(a) For purposes hereof, the "LIBOR Rate Additional
Percentage" shall mean the percentages applicable to the Loan in accordance with
the following:
(i) If the ratio of Funded Debt divided by EBITDA is
equal to or greater than 2.75 to 1.0, the LIBOR Rate Additional
Percentage shall be two and 15/100 percent (2.15%);
(ii) If the ratio of Funded Debt divided by EBITDA is
less than 2.75 to 1.0, but equal to or greater than 2.0 to 1.0, the
LIBOR Rate Additional Percentage shall be one and nine tenths percent
(1.90%);
(iii) If the ratio of Funded Debt divided by EBITDA
is less than 2.0 to 1.0, but equal to or greater than 1.25 to 1.0 the
LIBOR Rate Additional Percentage shall be one and four tenths percent
(1.40%); and
(iv) If the ratio of Funded Debt divided by EBITDA is
less than 1.25 to 1.0, the LIBOR Rate Additional Percentage shall be
one percent (1.0%)
(b) The initial the LIBOR Rate Additional Percentage shall be
two and 15/100 percent (2.15%). Thereafter, the applicable LIBOR Rate Additional
Percentage for all Advances shall be calculated and adjusted quarterly, based on
the quarterly financial statements of the Borrowers required to be submitted to
the Lender pursuant to Section 5.1(c) of the Restated Loan Agreement, commencing
with the statements for the quarter ending September 30, 1999. Such quarterly
changes shall be effective commencing five (5) Banking Days after submission by
the
3
<PAGE> 4
EXHIBIT 10.39
Borrowers of the required financial statements; it being understood, however,
that in the event the quarterly financial statements are not submitted when due,
the LIBOR Rate Additional Percentage shall be two and 15/100 percent (2.15%),
until such financial statements are submitted as required, at which time, the
LIBOR Rate Additional Percentage (for the balance of the quarterly period) shall
be determined as set forth above. For purposes of the Note, "Funded Debt" and
"EBITDA" shall each be determined based on the consolidated quarterly financial
statements of the Borrowers and shall have the meanings set forth in the
Restated Loan Agreement.
(c) For purposes hereof, the "LIBOR Rate" shall mean a
fluctuating rate equal to the daily London Interbank Offered Rate for thirty
(30) day U.S. Dollar deposits as quoted by the Lender as of 11:00 A.M.
(Washington, D.C. time), which rate shall be adjusted for any Federal Reserve
Board reserve requirements imposed upon the Lender from time to time.
(d) The Borrowers shall pay to the Lender, as additional
interest, the following sums, at the time and in the manner hereinafter set
forth:
i) if, due to either: (i) the introduction of or any
change (including, without limitation, any change by way of imposition or
increase of reserve requirements) in or in the interpretation of any law or
regulation or (ii) the compliance by the Lender with any guideline or request
from any central bank or other governmental authority (whether or not having the
force of law), there shall be any increase in the cost to the Lender of agreeing
to make or making, funding or maintaining advances of all or a portion of the
Principal Sum, then the Borrowers shall from time to time, upon demand by the
Lender, pay to the Lender additional amounts to indemnify the Lender against any
such increased costs. A certificate as to the amount of such increased costs
submitted to the Borrowers by the Lender shall be conclusive. It shall be
deemed, for purposes of computing any increased costs pursuant to this Section,
that (i) the making and maintaining of advances of the Principal Sum which
accrue interest based on the LIBOR Rate have been made by the Lender from its
office in London, England and (ii) the funding of each Advance of the Principal
Sum by the Lender which accrues interest based on the LIBOR Rate has been made
through the London Interbank Market. Such additional cost shall be payable
hereunder at the time and in the manner that interest is payable hereunder for
such costs incurred since the last interest payment;
ii) the Borrowers shall also pay to the Lender at the
time and in the manner that interest is payable hereunder for each advance, the
cost since the last interest payment date, as determined in good faith by the
Lender, of complying, in connection with such advance during such interest
period, with any reserve, special deposit or similar requirement (including but
not limited to reserve requirements under Federal Reserve Regulation D) imposed
or deemed applicable against any assets held by or deposits or accounts in or
with or credit extended by the Lender, or the office of the Lender in London,
England, by any United States governmental authority charged with the
administration of such requirements. Each notification as to the amount of such
cost, delivered to the Borrowers by the Lender shall, in the absence of manifest
error, be conclusive as to the amount of such cost. It shall be deemed for
purposes of computing cost pursuant to the above provision that the making and
maintaining of each advance
4
<PAGE> 5
EXHIBIT 10.39
which accrues interest based on the LIBOR Rate has been made by the Lender
through its office in London, England.
(e) In respect to any interest rate election hereunder and any
transactions contemplated hereby, the Borrowers authorize the Lender to accept,
rely upon, act upon and comply with, any verbal or written instructions,
requests, confirmations and orders of Capers W. McDonald, President and CEO or
Patrick J. Spratt, CFO, or their successors in office or on behalf of the
Borrowers. The Borrowers acknowledge and agree that the transmission between the
Borrowers and the Lender of any such instructions, requests, confirmations and
orders involves the possibility of errors, omissions, mistakes and discrepancies
and agrees to adopt such internal measures and operational procedures to protect
its interests. By reason thereof, the Borrowers hereby assume all risk of loss
and responsibility for, releases and discharges the Lender from any and all
responsibility or liability for, and agrees to indemnify, reimburse on demand
and hold the Lender harmless from, any and all claims, actions, damages, losses,
liability and expenses by reason of, arising out of or in any way connected with
or related to, (i) the Lender's acceptance, reliance and actions upon,
compliance with or observation of any such instructions, requests, confirmations
or orders, and (ii) any such errors, omissions, mistakes and discrepancies,
except those caused by the Lender's gross negligence or willful misconduct.
(f) All interest payable under the terms of the Note shall be
calculated on the basis of a 360-day year and the actual number of days elapsed.
6. Payments and Maturity. The unpaid principal balance of the Note,
together with interest thereon at the rate or rates provided above, shall be
payable as follows:
(a) Commencing on the 1st day of January 2000 and continuing
on the same day of each and every month thereafter, to and including November 1,
2009, principal shall be due and payable in equal installments of $10,575.81,
plus all accrued and unpaid interest on the outstanding balance of the Principal
Sum; and
(b) Unless sooner paid, the unpaid principal balance of the
Loan, together with interest accrued and unpaid thereon, shall be due and
payable in full on November 1, 2009.
7. Releases. The Lender, for itself, its successors and assigns hereby
releases each of each of the Released Parties from any and all liability on
account of the Loan, the Note and the Loan Documents. This release shall be
binding upon the Lender and its successors and assigns and shall inure to the
benefit of the Released Parties and their respective present and former
employees, agents, successors and assigns.
8. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF THIS AGREEMENT, THE
LOAN DOCUMENTS, OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING
ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT
APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
5
<PAGE> 6
EXHIBIT 10.39
PROCEDURE FOR ARBITRATION OF COMMERCIAL DISPUTES OF ENDISPUTE, INC., D/B/A
J.A.M.S./ENDISPUTE ("J.A.M.S.") AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE
EVENT OF AN INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO
THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING ANY ACTION, INCLUDING A SUMMARY
OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO
WHICH THIS INSTRUMENT, AGREEMENT OR DOCUMENT RELATES IN ANY COURT HAVING
JURISDICTION OVER SUCH ACTION.
(A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN MONTGOMERY
COUNTY, MARYLAND AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR. IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCING OF SUCH HEARING FOR AN ADDITIONAL SIXTY (60) DAYS.
(B) RESERVATION OF RIGHTS. NOTHING IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT SHALL BE DEEMED TO: (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE
APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS
INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY THE LENDER OF THE
PROTECTION AFFORDED TO IT BY 12 U.S.C. Section 91 OR ANY SUBSTANTIALLY
EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE LENDER: (A) TO EXERCISE
SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE
AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT
PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE
RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE LENDER MAY
EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH
PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY
ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR
DOCUMENT. NEITHER THE EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR
MAINTENANCE OF ANY ACTION FOR FORECLOSURE OR FOR PROVISIONAL OR ANCILLARY
REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE
CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM
OCCASIONING RESORT TO SUCH REMEDIES.
9. Expenses. In consideration of the Lender's agreement to modify the
Loan, the Borrowers covenant and agree to pay all other reasonable fees, costs,
charges and expenses incurred by the Lender in connection with the preparation
of this Agreement and the
6
<PAGE> 7
EXHIBIT 10.39
modification of the Loan, including without limitation, the Lender's reasonable
attorneys fees and all recording costs.
10. Events of Default. The events of default specifically enumerated in
the Note are hereby amended and replaced with the following enumerated events of
default, and the occurrence of any of the following events shall constitute an
event of default and shall entitle the Lender to exercise all rights and
remedies provided in the Note and the Deed of Trust, as well as all other rights
and remedies provided to the Lender under the terms of any of the other Loan
Documents as a result of the occurrence of the same:
(a) The Borrowers shall fail to make any payment of principal
or interest when due on the Note, or on any other promissory note or other
obligation payable by any of the Borrowers to the Lender and such failure
remains uncured for five (5) days after notice thereof;
(b) The Borrowers shall fail to comply with the terms of any
covenant or agreement contained herein and such failure remains uncured for
thirty (30) days after notice thereof; or
(c) An event of default (as described or defined therein)
shall occur under any of the Loan Documents, and such event of default is not
cured within any applicable grace period provided therein.
11. Release of Claims. The Borrowers for themselves and for each of
their respective successors and assigns, hereby release and waive any and all
claims and/or defenses they now may have against the Lender and its successors
and assigns on account of any occurrence relating to the Loan, the Loan
Documents and/or the Property which accrued prior to the date hereof, including,
but not limited to, any claim that the Lender (a) breached any obligation to the
Borrowers in connection with the Loan, (b) was or is in any way involved with
the Borrowers as a partner, joint venturer, or in any other capacity whatsoever
other than as a lender, (c) failed to fund any portion of the Loan or any other
sums as required under any document or agreement in reference thereto, or (d)
failed to timely respond to any offers to cure any defaults under any document
or agreement executed by the Borrowers, or any third party or parties in favor
of the Lender. This release and waiver shall be effective as of the date of this
Agreement and shall be binding upon the Borrowers and each of their respective
successors and assigns, and shall inure to the benefit of the Lender and its
successors and assigns. The term "Lender" as used herein shall include, but
shall not be limited to, its present and former officers, directors, employees,
agents and attorneys.
12. Continuing Agreements; Novation. Except as expressly modified
hereby, the parties hereto ratify and confirm each and every provision of the
Note, the Deed of Trust and each of the other Loan Documents as if the same were
set forth herein. In the event that any of the terms and conditions in the Note
or in any of the other Loan Documents conflict in any way with the terms and
provisions hereof, the terms and provisions of the Restated Loan Agreement shall
prevail. The parties hereto covenant and agree that the execution of this
Agreement is not intended to and shall not cause or result in a novation with
regard to the Note, the Deed of Trust and/or the other Loan Documents and that
the existing indebtedness of the Borrowers to the
7
<PAGE> 8
EXHIBIT 10.39
Lender evidenced by the Note is continuing, without interruption, and has not
been discharged by a new agreement.
13. ENTIRE AGREEMENT. NO STATEMENTS, AGREEMENTS OR REPRESENTATIONS,
ORAL OR WRITTEN, WHICH MAY HAVE BEEN MADE TO ANY OF THE BORROWERS OR TO ANY
EMPLOYEE OR AGENT OF ANY OF THE BORROWERS, EITHER BY THE LENDER OR BY ANY
EMPLOYEE, AGENT OR BROKER ACTING ON THE LENDER'S BEHALF, WITH RESPECT TO THE
MODIFICATION OF THE LOAN, SHALL BE OF ANY FORCE OR EFFECT, EXCEPT TO THE EXTENT
STATED IN THIS AGREEMENT, AND ALL PRIOR AGREEMENTS AND REPRESENTATIONS WITH
RESPECT TO THE MODIFICATION OF THE LOAN ARE MERGED HEREIN.
14. Captions. The captions herein set forth are for convenience only
and shall not be deemed to define, limit or describe the scope or intent of this
Agreement.
15. Governing Law. The provisions of this Agreement shall be construed,
interpreted and enforced in accordance with the laws of the State of Maryland as
the same may be in effect from time to time.
16. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original. It
shall not be necessary that the signature of, or on behalf of, each party, or
that the signatures of the persons required to bind any party, appear on more
than one counterpart.
[SIGNATURES BEGIN ON THE FOLLOWING PAGE]
8
<PAGE> 9
EXHIBIT 10.39
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date first above written.
<TABLE>
<S> <C>
WITNESS/ATTEST: BIORELIANCE CORPORATION
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- --------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS/ATTEST: BIORELIANCE TESTING AND
DEVELOPMENT, INC.
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- --------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS/ATTEST: BIORELIANCE MANUFACTURING, INC.
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- --------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS/ATTEST: MAGENTA VIRAL PRODUCTION, INC.
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- --------------------------- -------------------------------
Name: atrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS: BANK OF AMERICA, N.A.
By: s/Elizabeth F. Shore (SEAL)
- --------------------------- -------------------------------
Elizabeth F. Shore
Senior Vice President
</TABLE>
9
<PAGE> 1
EXHIBIT 10.40
SECOND AMENDENT TO
AMENDED AND RESTATED REPLACEMENT LOAN AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED REPLACEMENT LOAN
AGREEMENT (the "Agreement") is made this 30th day of December 1999, by and among
BIORELIANCE CORPORATION, a corporation organized and in good standing under the
laws of the State of Delaware, successor in interest to Microbiological
Associates, Inc. (the "Company"), BIORELIANCE TESTING AND DEVELOPMENT, INC.,
formerly known as MA BioServices, Inc., a corporation organized and in good
standing under the laws of the State of Delaware ("MA BioServices"), BIORELIANCE
MANUFACTURING, INC., formerly known as Magenta Corporation, a corporation
organized and in good standing under the laws of the State of Delaware
("Magenta") and MAGENTA VIRAL PRODUCTION, INC., a corporation organized and in
good standing under the laws of the State of Delaware ("Magenta Viral"; together
with the Company, MA BioServices and Magenta, each a "Borrower" and
collectively, the "Borrowers") and BANK OF AMERICA, N.A., successor in interest
to NATIONSBANK, N.A., each a national banking association, its successors and
assigns, (the "Lender").
RECITALS
A. The Lender has made certain loans to the Borrowers, as more fully
described in that certain Amended and Restated Replacement Loan Agreement by and
among the Borrowers and the Lender dated as of October 31, 1997 (as amended from
time to time, the "Restated Loan Agreement").
B. The Borrowers have requested and the Lender has agreed to extend the
maturity of Loan No. 2 and increase the maximum principal amount and extend the
maturity of Loan No. 3 upon the terms and subject to the conditions hereinafter
set forth.
C. All capitalized terms used herein and not otherwise defined herein
shall have the meanings given to such terms in the Restated Loan Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrowers and the Lender
hereby agree as follows:
1. Recitals. The above Recitals are true and correct in all material
respects and that the same are incorporated herein and made a part hereof by
reference.
2. Line of Credit Replacement Note. From and after the effective date
hereof, all references in the Restated Loan Agreement and the Loan Documents to
Loan No. 3 and/or the Line of Credit Replacement Note shall be deemed to refer
to that certain line of credit in the current maximum principal amount of Two
Million Dollars ($2,000,000) as evidenced by that
1
<PAGE> 2
EXHIBIT 10.40
certain Fourth Replacement Revolving Promissory Note of even date herewith in
the maximum principal amount of Two Million Dollars ($2,000,000).
3. Funded Debt to EBIDTA. Section 5.3 of the Restated Loan Agreement is
amended and restated in its entirety as follows:
Section 5.3. Funded Debt to EBITDA. Maintain a ratio of Funded Debt
to EBITDA not greater than 3.5 to 1.0 as of the end of each fiscal
quarter, based on the four (4) quarter period ending on such date. For
purposes hereof, "Funded Debt" shall mean all senior debt, including
any and all capitalized lease obligations and all contingent
liabilities of any Borrower. For purposes hereof, "EBITDA" shall mean
earnings before interest, taxes, depreciation and amortization, all as
determined in accordance with GAAP and all as determined on a
consolidated basis for the twelve (12) month period then ending,
provided, however, for the fiscal quarter ending December 31, 1999,
EBITDA shall be based on the three (3) quarter period then ending on an
annualized basis.
4. Fixed Charge Coverage. From and after the date of this Agreement,
the following Section is added immediately after Section 5.16 of the Restated
Loan Agreement as Section 5.17:
Section 5.17 Fixed Charge Coverage Maintain a Fixed Charge Coverage
Ratio as of the end of each fiscal quarter, based on the consolidated
financial statements of the Company and its Subsidiaries of not less
than 1.25 to 1.0. For purposes hereof, the "Fixed Charge Coverage
Ratio" means at the time of determination thereof, the ratio of (a)
EBITDA, plus capital leases expenses for such period, to (b) the sum of
interest expense, plus current maturities of long term debt and capital
leases for such period. For purposes hereof, "EBITDA" shall mean
earnings before interest, taxes, depreciation and amortization, all as
determined in accordance with GAAP and all as determined on a
consolidated basis for the twelve (12) month period then ending,
provided, however, for the fiscal quarter ending December 31, 1999,
EBITDA shall be based on the three (3) quarter period then ending on an
annualized basis.
5. Loan Fee. In consideration of the Lender's agreement to extend Loan
No. 2, the Borrowers shall pay the Lender at the time of the execution of this
Agreement, a loan fee (the "Loan Fee") in the amount of one quarter of one
percent of the balance of Loan No. 2. The Loan Fee is considered earned when
paid and is not refundable.
6. Restated Note. EXHIBIT B to the Restated Loan Agreement is being
replaced in its entirety with EXHIBIT B attached hereto. The Borrowers shall
execute and deliver to the Lender on the date hereof the Restated Note in
substitution for and not satisfaction of, the issued and outstanding Line of
Credit Replacement Note, and the Restated Note shall be the "Line of Credit
Replacement Note" for all purposes of the Loan Documents. The Note being
substituted pursuant to this Agreement shall be marked "Replaced" and returned
to the Company after the execution and delivery of the Restated Line of Credit
Replacement Note to the Lender.
7. Conditions Precedent. This Agreement shall become effective on the
date the
2
<PAGE> 3
EXHIBIT 10.40
Lender receives the following, each of which shall be satisfactory in form and
substance to the Lender:
(a) A Fourth Replacement Revolving Promissory Note issued and
delivered by the Borrowers in the form of EXHIBIT B attached hereto and
incorporated herein by reference, payable to the order of the Lender in the
maximum principal amount of Two Million and No/100 Dollars ($2,000,000.00)
(which Fourth Replacement Revolving Promissory Note is sometimes referred to
herein as the "Restated Note");
(b) Proof that the Borrowers have paid all costs and expenses
to the Lender and its counsel in connection with this Agreement, including but
not limited to the Lender's reasonable attorneys fees invoiced as of such date;
and
(c) Such other information, instruments, opinions, documents,
certificates and reports as the Lender may in its reasonable discretion deem
necessary.
8. Counterparts. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
9. Loan Documents; Governing Law; Etc. This Agreement is one of the
Loan Documents defined in the Restated Loan Agreement and shall be governed and
construed in accordance with the laws of the State of Maryland. The headings and
captions in this Agreement are for the convenience of the parties only and are
not a part of this Agreement.
10. Acknowledgments. The Borrowers hereby confirm to the Lender the
enforceability and validity of each of the Loan Documents. In addition, the
Borrowers hereby agree to the execution and delivery of this Agreement and the
terms and provisions, covenants or agreements contained in this Agreement shall
not in any manner release, impair, lessen, modify, waive or otherwise limit the
liability and obligations of the Borrowers under the terms of any of the Loan
Documents, except as otherwise specifically set forth in this Agreement. The
Borrowers issue, remake, ratify and confirm the representations, warranties and
covenants contained in the Loan Documents. Nothing in this Agreement shall be
deemed to waive any defaults existing under any of the Loan Documents as of the
date hereof.
11. Notices. All notices, certificates or other communications under
the Loan Documents shall be deemed given when received, if given by hand or
courier, or by certified mail, postage prepaid, return receipt requested,
addressed as follows:
if to the Lender: Bank of America, N.A.
6610 Rockledge Drive
Third Floor
Bethesda, Maryland 20817
Attn: Jeffrey S. Patch
3
<PAGE> 4
EXHIBIT 10.40
With a copy to: Mays & Valentine, L.L.P.,
8201 Greensboro Drive, Suite 801
McLean, Virginia 22102
Attn: Richard M. Pollak, Esq.
if to the Borrowers: BioReliance Corporation
14920 Broschart Road
Rockville, Maryland 20850
Attn: Sherry Rhodes, Esq.
12. Modifications. This Agreement may not be supplemented, changed,
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
[Signatures are on the next page]
4
<PAGE> 5
EXHIBIT 10.40
IN WITNESS WHEREOF, the parties hereto have signed and sealed this
Agreement on the day and year first above written.
<TABLE>
<S> <C>
WITNESS/ATTEST: BIORELIANCE CORPORATION
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- ----------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS/ATTEST: BIORELIANCE TESTING AND
DEVELOPMENT, INC.
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- ----------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS/ATTEST: BIORELIANCE MANUFACTURING, INC.
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- ----------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS/ATTEST: MAGENTA VIRAL PRODUCTION, INC.
s/Sherry R. Rhodes By: s/Patrick J. Spratt (SEAL)
- ----------------------------- -------------------------------
Name: Patrick J. Spratt
Title: Vice President, Finance & CFO
WITNESS: BANK OF AMERICA, N.A..
By: s/Elizabeth F. Shore (SEAL)
- ----------------------------- -------------------------------
Elizabeth F. Shore
Vice President
</TABLE>
5
<PAGE> 1
EXHIBIT 10.41
FOURTH REPLACEMENT REVOLVING
PROMISSORY NOTE
$2,000,000 Rockville, Maryland
December 30, 1999
FOR VALUE RECEIVED, BIORELIANCE CORPORATION, a corporation organized
and in good standing under the laws of the State of Delaware, successor in
interest to Microbiological Associates, Inc. (the "Company"), BIORELIANCE
TESTING AND DEVELOPMENT, INC., formerly known as MA BioServices, Inc., a
corporation organized and in good standing under the laws of the State of
Delaware ("MA BioServices"), BIORELIANCE MANUFACTURING, INC., formerly known as
Magenta Corporation, a corporation organized and in good standing under the laws
of the State of Delaware ("Magenta") and MAGENTA VIRAL PRODUCTION, INC., a
corporation organized and in good standing under the laws of the State of
Delaware ("Magenta Viral"; together with the Company, MA BioServices and
Magenta, each a "Borrower" and collectively, the "Borrowers"), jointly and
severally, promise to pay to the order of BANK OF AMERICA, N.A., successor to
NATIONSBANK, N.A., each a national banking association, its successors and
assigns (the "Lender"), the principal sum of TWO MILLION DOLLARS ($2,000,000)
(the "Principal Sum"), or so much thereof as has been or may be advanced or
readvanced to or for the account of the Borrowers pursuant to the terms and
conditions of the Loan Agreement (as hereinafter defined), together with
interest thereon at the rate or rates hereinafter provided, in accordance with
the following:
1. INTEREST. Commencing as of the date hereof and continuing until
repayment in full of all sums due hereunder, the unpaid Principal Sum shall bear
interest at the LIBOR Rate (as hereinafter defined), plus the applicable LIBOR
Rate Additional Percentage (the "LIBOR Rate Option").
1
<PAGE> 2
EXHIBIT 10.41
(a) For purposes hereof, the "LIBOR Rate Additional
Percentage" shall mean the percentages applicable to this Note in accordance
with the following:
(i) If the ratio of Funded Debt divided by EBITDA is
equal to or greater than 2.75 to 1.0, the LIBOR Rate Additional
Percentage shall be two percent (2.0%);
(ii) If the ratio of Funded Debt divided by EBITDA is
less than 2.75 to 1.0, but equal to or greater than 2.0 to 1.0, the
LIBOR Rate Additional Percentage shall be one and three quarters
percent (1.75%);
(iii) If the ratio of Funded Debt divided by EBITDA
is less than 2.0 to 1.0, but equal to or greater than 1.25 to 1.0 the
LIBOR Rate Additional Percentage shall be one and one quarter percent
(1.25%); and
(iv) If the ratio of Funded Debt divided by EBITDA is
less than 1.25 to 1.0, the LIBOR Rate Additional Percentage shall be
.85/100 percent (.85%)
(b) The initial LIBOR Rate Additional Percentage shall be two
percent (2.0%). Thereafter, the applicable LIBOR Rate Additional Percentage for
all Advances shall be calculated and adjusted quarterly, based on the quarterly
financial statements of the Borrowers required to be submitted to the Lender
pursuant to Section 5.1(c) of the Loan Agreement, commencing with the statements
for the quarter ending September 30, 1999. Such quarterly changes shall be
effective commencing five (5) Banking Days after submission by the Borrowers of
the required financial statements; it being understood, however, that, subject
to the provisions of the immediately following sentence, in the event the
quarterly financial statements are not submitted when due, the LIBOR Rate
Additional Percentage shall be two percent (2.00%), until such financial
statements are submitted as required, at which time, the LIBOR Rate Additional
2
<PAGE> 3
EXHIBIT 10.41
Percentage (for the balance of the quarterly period) shall be determined as set
forth above. If such financial statements are not submitted when due, but are
received within thirty (30) days of when due, the Lender will return to the
Borrower any additional interest collected in excess of the amount that should
have otherwise been due hereunder based on the financial statements. For
purposes of this Note, "Funded Debt" and "EBITDA" shall each be determined based
on the consolidated quarterly financial statements of the Borrowers and shall
have the meanings set forth in the Loan Agreement.
(c) For purposes hereof, the "LIBOR Rate" shall mean a
fluctuating rate of interest equal to the one month rate of interest (rounded
upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate Page
3750 (or any successor page) as the one month London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time) on the second
preceding business day as adjusted from time to time in Lender's sole discretion
for then applicable reserve requirements, deposit insurance assessment rates and
other regulatory costs. If for any reason such rate is not available, the term
"LIBOR Rate" shall mean the fluctuating rate of interest equal to the one month
rate of interest (rounded upwards, if necessary to the nearest 1/100 of 1%)
appearing on Reuters Screen LIBO Page as the one month London interbank offered
rate for deposits in Dollars at approximately 11:00 a.m. (London time) on the
second preceding business day, as adjusted from time to time in Lender's sole
discretion for then applicable reserve requirements, deposit insurance
assessment rates and other regulatory costs; provided, however, if more than one
rate is specified on Reuters Screen LIBO page, the applicable rate shall be the
arithmetic mean of all such rates. "Telerate Page 3750" means the British
Bankers Association Libor Rates (determined as of 11:00 a.m. London time) that
are published by Dow Jones Telerate, Inc.
3
<PAGE> 4
EXHIBIT 10.41
(d) The Borrowers shall pay to the Lender, as additional
interest, the following sums, at the time and in the manner hereinafter set
forth:
(A) if, due to either: (i) the introduction of or any
change (including, without limitation, any change by way of imposition or
increase of reserve requirements) in or in the interpretation of any law or
regulation or (ii) the compliance by the Lender with any guideline or request
from any central bank or other governmental authority (whether or not having the
force of law), there shall be any increase in the cost to the Lender of agreeing
to make or making, funding or maintaining advances of all or a portion of the
Principal Sum, then the Borrowers shall from time to time, upon demand by the
Lender, pay to the Lender additional amounts to indemnify the Lender against any
such increased costs. A certificate as to the amount of such increased costs
submitted to the Borrowers by the Lender shall in the absence of manifest error
be conclusive. It shall be deemed, for purposes of computing any increased costs
pursuant to this Section, that (i) the making and maintaining of advances of the
Principal Sum which accrue interest based on the LIBOR Rate have been made by
the Lender from its office in London, England and (ii) the funding of each
Advance of the Principal Sum by the Lender which accrues interest based on the
LIBOR Rate has been made through the London Interbank Market. Such additional
cost shall be payable hereunder at the time and in the manner that interest is
payable hereunder for such costs incurred since the last interest payment;
(B) the Borrowers shall also pay to the Lender at the
time and in the manner that interest is payable hereunder for each advance, the
cost since the last interest payment date, as determined in good faith by the
Lender, of complying, in connection with such advance during such interest
period, with any reserve, special deposit or similar requirement (including but
not limited to reserve requirements under Federal Reserve Regulation D) imposed
4
<PAGE> 5
EXHIBIT 10.41
or deemed applicable against any assets held by or deposits or accounts in or
with or credit extended by the Lender, or the office of the Lender in London,
England, by any United States governmental authority charged with the
administration of such requirements. Each notification as to the amount of such
cost, delivered to the Borrowers by the Lender shall, in the absence of manifest
error, be conclusive as to the amount of such cost. It shall be deemed for
purposes of computing cost pursuant to the above provision that the making and
maintaining of each advance which accrues interest based on the LIBOR Rate has
been made by the Lender through its office in London, England.
(e) In respect to any interest rate election hereunder and any
transactions contemplated hereby, the Borrowers authorize the Lender to accept,
rely upon, act upon and comply with, any verbal or written instructions,
requests, confirmations and orders of Capers W. McDonald, President and CEO, or
Patrick J. Spratt, CFO, or their successors in office, on behalf of the
Borrowers. The Borrowers acknowledge and agree that the transmission between the
Borrowers and the Lender of any such instructions, requests, confirmations and
orders involves the possibility of errors, omissions, mistakes and discrepancies
and agrees to adopt such internal measures and operational procedures to protect
its interests. By reason thereof, the Borrowers hereby assume all risk of loss
and responsibility for, releases and discharges the Lender from any and all
responsibility or liability for, and agrees to indemnify, reimburse on demand
and hold the Lender harmless from, any and all claims, actions, damages, losses,
liability and expenses by reason of, arising out of or in any way connected with
or related to, (i) the Lender's acceptance, reliance and actions upon,
compliance with or observation of any such instructions, requests, confirmations
or orders, and (ii) any such errors, omissions, mistakes and discrepancies,
except those caused by the Lender's gross negligence or willful misconduct.
5
<PAGE> 6
EXHIBIT 10.41
(f) All interest payable under the terms of this Note shall
be calculated on the basis of a 360-day year and the actual number of days
elapsed.
2. PAYMENTS AND MATURITY. The unpaid Principal Sum, together with
interest thereon at the rate or rates provided above, shall be payable as
follows:
(a) Interest only on the unpaid Principal Sum shall be due and
payable monthly, commencing December 31, 1999 and on the last day of each month
thereafter to maturity; and
(b) Unless sooner paid, the unpaid Principal Sum, together
with interest accrued and unpaid thereon, shall be due and payable in full on
May 31, 2001.
The fact that the balance hereunder may be reduced to zero from time to
time pursuant to the Loan Agreement will not affect the continuing validity of
this Note or the Loan Agreement, and the balance may be increased to the
Principal Sum after any such reduction to zero.
3. DEFAULT INTEREST. Upon the occurrence of an Event of Default
(as hereinafter defined), the unpaid Principal Sum shall bear interest
thereafter at a rate five percent (5.0%) per annum in excess of the LIBOR Rate
until such event of Default is cured.
4. LATE CHARGES. If the Borrowers shall fail to make any payment
under the terms of this Note within fifteen (15) days after the date such
payment is due, the Borrowers shall pay to the Lender on demand a late charge
equal to three percent (3%) of such payment.
5. APPLICATION AND PLACE OF PAYMENTS. All payments, made on
account of this Note shall be applied first to the payment of any late charge
then due hereunder, second to the payment of accrued and unpaid interest then
due hereunder, and the remainder, if any, shall be applied to the unpaid
Principal Sum. All payments on account of this Note shall be paid in lawful
money of the United States of America in immediately available funds during
regular business
6
<PAGE> 7
EXHIBIT 10.41
hours of the Lender at its principal office in Rockville, Maryland or at such
other times and places as the Lender may at any time and from time to time
designate in writing to the Borrowers.
6. LOAN AGREEMENT AND OTHER LOAN DOCUMENTS. This Note is the "Restated
Line of Credit Replacement Note" described in that certain Second Amendment to
Amended and Restated Replacement Loan Agreement of even date herewith by and
among the Borrowers and the Lender, which amends that certain Amended and
Restated Replacement Loan Agreement dated October 31, 1997 by and among the
Borrower and the Lender (the Amended and Restated Replacement Loan Agreement, as
thereafter amended from time to time, is hereinafter called the "Loan
Agreement"). This Note increases, amends and restates in its entirety that
certain Third Replacement Revolving Promissory Note dated as of May 31, 1998 in
the maximum principal amount of One Million Dollars ($1,000,000) from the
Borrowers in favor of the Lender (as amended from time to time, the "Replacement
Note"). It is expressly agreed that the indebtedness evidenced by the
Replacement Note has not been extinguished or discharged hereby. The Borrowers
agree that the execution of this Agreement is not intended to and shall not
cause or result in a novation with respect to the Replacement Note. The
indebtedness evidenced by this Note is included within the meaning of the term
"Obligations" as defined in the Loan Agreement. The term "Loan Documents" as
used in this Note shall mean collectively this Note, the Loan Agreement and any
other instrument, agreement, or document previously, simultaneously, or
hereafter executed and delivered by the Borrowers and/or any other person,
singularly or jointly with any other person, evidencing, securing, guaranteeing,
or in connection with the Principal Sum, this Note and/or the Loan Agreement.
All capitalized terms used herein and not otherwise defined shall have the
meanings given to such terms in the Loan Agreement.
7
<PAGE> 8
EXHIBIT 10.41
7. EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an event of default (individually, an "Event
of Default" and collectively, the "Events of Default") under the terms of this
Note:
(a) The failure of the Borrowers to pay to the Lender when due
any and all amounts payable by the Borrowers to the Lender and such failure
remains uncured for five (5) days after written notice thereof; or
(b) The occurrence of an event of default (as defined therein)
under the terms and conditions of any of the other Loan Documents.
8. REMEDIES. Upon the occurrence of an Event of Default, at the option
of the Lender, all amounts payable by the Borrowers to the Lender under the
terms of this Note shall immediately become due and payable by the Borrowers to
the Lender without notice to the Borrowers or any other person, and the Lender
shall have all of the rights, powers, and remedies available under the terms of
this Note, any of the other Loan Documents and all applicable laws. The
Borrowers and all endorsers, guarantors, and other parties who may now or in the
future be primarily or secondarily liable for the payment of the indebtedness
evidenced by this Note hereby severally waive presentment, protest and demand,
notice of protest, notice of demand and of dishonor and non-payment of this Note
and expressly agree that this Note or any payment hereunder may be extended from
time to time without in any way affecting the liability of the Borrowers,
guarantors and endorsers.
Until such time as the Lender is not committed to extend further credit
to the Borrowers and all Obligations of the Borrowers to the Lender have been
indefeasibly paid in full in cash, and subject to and not in limitation of the
provisions set forth in the next following paragraph below, no Borrower shall
have any right of subrogation (whether contractual, arising under the
8
<PAGE> 9
EXHIBIT 10.41
Bankruptcy Code or otherwise), reimbursement or contribution from any Borrower
or any guarantor, nor any right of recourse to its security for any of the debts
and obligations of any Borrower which are the subject of this Note. Except as
otherwise expressly permitted by the Loan Agreement, any and all present and
future debts and obligations of any Borrower to any other Borrower are hereby
subordinated to the full payment and performance of all present and future debts
and obligations to the Lender under this Note and the Loan Agreement and the
Loan Documents, provided, however, notwithstanding anything set forth in this
Note to the contrary, prior to the occurrence of a payment Default, the
Borrowers shall be permitted to make payments on account of any of such present
and future debts and obligations from time to time in accordance with the terms
thereof.
Each Borrower further agrees that, if any payment made by any Borrower
or any other person is applied to this Note and is at any time annulled, set
aside, rescinded, invalidated, declared to be fraudulent or preferential or
otherwise required to be refunded or repaid, or the proceeds of any property
hereafter securing this Note is required to be returned by the Lender to any
Borrower, its estate, trustee, receiver or any other party, including, without
limitation, such Borrower, under any bankruptcy law, state or federal law,
common law or equitable cause, then, to the extent of such payment or repayment,
such Borrower's liability hereunder (and any lien, security interest or other
collateral securing such liability) shall be and remain in full force and
effect, as fully as if such payment had never been made, or, if prior thereto
any such lien, security interest or other collateral hereafter securing such
Borrower's liability hereunder shall have been released or terminated by virtue
of such cancellation or surrender, this Note (and such lien, security interest
or other collateral) shall be reinstated in full force and effect, and such
prior cancellation or surrender shall not diminish, release, discharge, impair
or otherwise affect the
9
<PAGE> 10
EXHIBIT 10.41
obligations of such Borrower in respect of the amount of such payment (or any
lien, security interest or other collateral securing such obligation).
The JOINT AND SEVERAL obligations of each Borrower under this Note
shall be absolute, irrevocable and unconditional and shall remain in full force
and effect until the outstanding principal of and interest on this Note and all
other Obligations or amounts due hereunder and under the Loan Agreement and the
Loan Documents shall have been indefeasibly paid in full in cash in accordance
with the terms thereof and this Note shall have been canceled.
9. EXPENSES. The Borrowers, jointly and severally, promise to pay to
the Lender on demand by the Lender all reasonable costs and expenses incurred by
the Lender in connection with the collection and enforcement of this Note,
including, without limitation, reasonable attorneys' fees and expenses and all
court costs.
10. NOTICES. Any notice, request, or demand to or upon the Borrowers or
the Lender shall be deemed to have been properly given or made when delivered in
accordance with Section 9.1 of the Loan Agreement.
11. MISCELLANEOUS. Each right, power, and remedy of the Lender as
provided for in this Note or any of the other Loan Documents, or now or
hereafter existing under any applicable law or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power, or remedy
provided for in this Note or any of the other Loan Documents or now or hereafter
existing under any applicable law, and the exercise or beginning of the exercise
by the Lender of any one or more of such rights, powers, or remedies shall not
preclude the simultaneous or later exercise by the Lender of any or all such
other rights, powers, or remedies. No failure or delay by the Lender to insist
upon the strict performance of any term, condition, covenant, or agreement of
this Note or any of the other Loan Documents, or to exercise any
10
<PAGE> 11
EXHIBIT 10.41
right, power, or remedy consequent upon a breach thereof, shall constitute a
waiver of any such term, condition, covenant, or agreement or of any such
breach, or preclude the Lender from exercising any such right, power, or remedy
at a later time or times. By accepting payment after the due date of any amount
payable under the terms of this Note, the Lender shall not be deemed to waive
the right either to require prompt payment when due of all other amounts payable
under the terms of this Note or to declare an Event of Default for the failure
to effect such prompt payment of any such other amount. No course of dealing or
conduct shall be effective to amend, modify, waive, release, or change any
provisions of this Note.
12. PARTIAL INVALIDITY. In the event any provision of this Note (or any
part of any provision) is held by a court of competent jurisdiction to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision (or remaining part of
the affected provision) of this Note; but this Note shall be construed as if
such invalid, illegal, or unenforceable provision (or part thereof) had not been
contained in this Note, but only to the extent it is invalid, illegal, or
unenforceable.
13. CAPTIONS. The captions herein set forth are for convenience only
and shall not be deemed to define, limit, or describe the scope or intent of
this Note.
14. APPLICABLE LAW. Each of the Borrowers acknowledges and agrees that
this Note shall be governed by the laws of the State of Maryland, even though
for the convenience and at the request of the Borrowers, this Note may be
executed elsewhere.
15. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF THIS NOTE, THE LOAN
DOCUMENTS OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY
CLAIM BASED ON OR ARISING
11
<PAGE> 12
EXHIBIT 10.41
FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE
WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE
LAW), THE RULES OF PRACTICE AND PROCEDURE FOR ARBITRATION OF COMMERCIAL DISPUTES
OF ENDISPUTE, INC., D/B/A J.A.M.S./ENDISPUTE ("J.A.M.S.") AND THE "SPECIAL
RULES" SET FORTH BELOW. IN THE EVENT OF AN INCONSISTENCY, THE SPECIAL RULES
SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THIS NOTE, AGREEMENT OR DOCUMENT MAY BRING ANY
ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF
ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE, AGREEMENT OR DOCUMENT RELATES IN
ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN MONTGOMERY
COUNTY, MARYLAND AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR. IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCING OF SUCH HEARING FOR AN ADDITIONAL SIXTY (60) DAYS.
(B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE, AGREEMENT OR DOCUMENT
SHALL BE DEEMED TO: (I) LIMIT THE APPLICABILITY OF ANY
12
<PAGE> 13
EXHIBIT 10.41
OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED
IN THIS NOTE, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY THE LENDER OF THE
PROTECTION AFFORDED TO IT BY 12 U.S.C. Section 91 OR ANY SUBSTANTIALLY
EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE LENDER: (A) TO EXERCISE
SELF HELP REMEDIES ( BUT NOT INCLUDING SETOFF), OR (B) TO FORECLOSE AGAINST ANY
REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL
OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF
POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE LENDER MAY EXERCISE SUCH SELF
HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR
ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION
PROCEEDING BROUGHT PURSUANT TO THIS NOTE, AGREEMENT OR DOCUMENT. NEITHER THE
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF ANY ACTION
FOR FORECLOSURE OR FOR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH
REMEDIES.
[SIGNATURES BEGIN ON THE FOLLOWING PAGE]
13
<PAGE> 14
EXHIBIT 10.41
IN WITNESS WHEREOF, the Borrowers have caused this Note to be executed
under seal by their duly authorized officers as of the date first written above.
<TABLE>
<S> <C>
WITNESS/ATTEST: BIORELIANCE CORPORATION
By: (SEAL)
- ------------------------------ -----------------------------
Name:
Title:
WITNESS/ATTEST: BIORELIANCE TESTING AND
DEVELOPMENT, INC.
By: (SEAL)
- ------------------------------ -----------------------------
Name:
Title:
WITNESS/ATTEST: BIORELIANCE MANUFACTURING, INC.
By: (SEAL)
- ------------------------------ -----------------------------
Name:
Title:
WITNESS/ATTEST: MAGENTA VIRAL PRODUCTION, INC.
By: (SEAL)
- ------------------------------ -----------------------------
Name:
Title:
</TABLE>
14
<PAGE> 1
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
BETWEEN
BIORELIANCE CORPORATION
AND
JOHN E. McENTIRE, Ph.D.
THIS AGREEMENT, effective the 2nd day of December, 1999, by and between
BioReliance Corporation, a Delaware corporation, with principal offices located
at 14920 Broschart Road, Rockville, MD 20850, and all of its subsidiary
companies and its successors or assigns (the "Corporation") and John E.
McEntire, Ph.D. (the "Executive").
Preliminary Statements
WHEREAS, the Executive is currently employed by the Corporation;
WHEREAS, the parties desire to provide for the continued employment of
the Executive by the Corporation on the terms and conditions set forth in this
Agreement; and
Terms and Conditions of Agreement
NOW THEREFORE, in consideration of the mutual promises and agreements
set forth in this Agreement, the adequacy of which are acknowledged, and with
the intent to be bound hereby, the Corporation and the Executive agree as
follows:
A. POSITION
The Executive will be employed as Vice President, U.S. Testing and
Development of the Corporation commencing with this Agreement. The Executive
shall continue as Vice President, U.S. Testing and Development, or such other
senior management position as may be determined by the Corporation from time to
time, through the remainder of the Term.
B. DUTIES
As Vice President, U.S. Testing and Development, the Executive shall
perform such duties as may be assigned to him from time to time by the President
and Chief Executive Officer of the Corporation (the "CEO"), including, but not
limited to: developing and documenting novel or typical testing or development
programs, procedures, methodologies and the like; engaging clients for the
Corporation's testing and development services; designing major projects;
writing project plans; closing key proposals; directing projects of significant
scale and scope; directing complex technical activities; solving challenging
technical, regulatory
1
<PAGE> 2
EXHIBIT 10.42
and service problems; building client relationships; and anticipating follow-on
client engagements.
C. TERM
The terms and conditions of this Employment Agreement will cover a
period beginning as of the date hereof and ending on January 1, 2000 (the
"Term"), unless otherwise terminated as provided in Section E below. During the
Term of this Agreement, the parties acknowledge that the Executive's employment
is not "at will" employment, and the Corporation's obligation to pay the
Executive the compensation described in Section E of this Agreement shall exist
regardless of any decision by the Corporation to terminate the Executive's
employment for any reason (other than a termination for cause) prior to the
expiration of the Term. At the end of the Term of this Agreement, the
Executive's employment status shall terminate. The terms and conditions
contained in Section E of this Agreement will expire at the end of the Term.
D. EXTENSION OF TERM
The Term of this Agreement may be extended in three (3) month
increments upon mutual, written agreement of both parties.
E. COMPENSATION AND BENEFITS
(i) Base Salary
The Executive's annual base salary will be One Hundred and
Eighty-Five Thousand Dollars ($185,000), payable on the Corporation's
regular bi-weekly payroll basis. The Executive shall receive only that
portion of the base that will become due during the Term, and not the
total annual base salary.
(ii) Bonus
If the Executive remains in the employ of the Corporation
through January 1, 2000, the Executive shall be paid a bonus of Ten
Thousand Dollars ($10,000), less applicable withholdings and deductions
(if any), without appraisal, on January 31, 2000. The Corporation will
be obligated to pay the Executive this bonus as long as the Executive
(a) does not resign from the Corporation before January 1, 2000 and (b)
is not terminated for Cause (as hereinafter defined) on or before
January 1, 2000.
(iii) Incentive Stock Options
As an inducement to remain in the employ of the Corporation
and as an incentive to build the Corporation's value, if the Executive
remains in the employ of the Corporation through January 1, 2000, the
Corporation will fully vest any Incentive Stock Options previously
granted as of January 1, 2000, and the
2
<PAGE> 3
EXHIBIT 10.42
Executive will retain all rights and obligations pertaining thereto in
accordance with the terms of the applicable plan. The Corporation will
be obligated to fully vest any Incentive Stock Options previously
granted as long as the Executive (a) does not resign from the
Corporation before January 1, 2000 and (b) is not terminated for Cause
(as hereinafter defined) on or before January 1, 2000.
(iv) Other Provisions
The Corporation will provide such medical and other insurance
coverage to the Executive as the Corporation makes available to all
employees generally from time to time. Eligibility to extend group
health coverage beyond the Term for the Executive or any dependants may
be exercised by signing the applicable COBRA agreement.
The Executive will receive the Corporation's standard
vacation, sick time and personal holiday benefits during the Term. The
Executive will continue to accrue Paid Personal Leave (PPL) through the
Term of this Agreement, and any unused PPL will be due to the Executive
upon termination of employment.
The Corporation will provide the Executive with appropriate
office space as it deems necessary, and will provide telephone,
computer and email access as required to perform his duties during the
Term of this Agreement.
F. TERMINATION COMPENSATION AND BENEFITS
In the event that during the Term of this Agreement, the Executive's
employment with the Corporation is involuntarily terminated by the Corporation
other than for Cause or because of the Executive's death or substantial
inability to work, the Corporation will pay the Executive a lump sum payment
equal to all amounts that would have otherwise become due hereunder, including
without limitation the Bonus described in Section E (ii) and the Corporation
will vest the incentive stock options in accordance with Section E (iii) hereof.
For a period of six (6) months after such termination, the Corporation
will also continue to make available the same health and dental (but no other)
benefits made available to Corporation employees generally at a cost equal to
the cost the Executive would have paid if he had continued to be an employee of
the Corporation. In the event the Executive becomes employed at any time during
the six (6) month continuance period, all remaining health and dental benefits
shall terminate as of date of hire by the Executive's new employer.
If the Executive terminates his employment prior to the end of the
Term, the Corporation shall have no further obligations under Sections E or F
hereof after the effective date of termination.
3
<PAGE> 4
EXHIBIT 10.42
As used in this Agreement, "Cause" shall mean that the Executive (a)
committed a material act or material acts of personal dishonesty intended to
result in the Executive's personal enrichment at the expense of the Corporation,
and which constitute(s) fraud, grand larceny or any felonious act, (b) failed or
refused to perform the Executive's material duties and obligations as an
employee of the Corporation (other than due to disability or reasons beyond the
Executive's reasonable control) if such failure or approval is not remedied
within a reasonable period of time following the Executive's receipt of notice
thereof.
G. RELEASE
The Executive acknowledges that absent this Agreement, he has no right
or entitlement to any separation payment and benefits, or to a separation
allowance in any particular amount. In consideration of the payment to him of
the monies and other benefits set forth herein, the Executive, on behalf of
himself and his heirs, executors, administrators and assigns, hereby releases
and discharges BioReliance, its agents, employees, successors, assigns,
affiliates, subsidiaries, officers, and directors, and each of them, from any
and all real or pretended claims, demands, rights, liabilities, damages,
injuries or causes of action whatsoever, known or unknown, including but not
limited to, claims and demands relating to salary, compensation, pension or
retirement plans (except as to rights which already may have vested, which
rights are specifically reserved hereunder), bonuses, incentive compensation,
commissions or any other form of compensation or perquisite, personal injury,
bodily injury, defamation, unlawful interference with contract rights or
business advantage, and any claims under the Age Discrimination in Employment
Act of 1967, or under any other federal, state, or local law prohibiting
employment discrimination (including, but not limited to, the Executive's right
to make a claim in his own right or through a suit brought by a third party on
his behalf), and any or all claims which he ever had or now has directly or
indirectly, arising out of his employment relationship with BioReliance or the
ending of that employment relationship with BioReliance, and all said rights,
actions, claims, demands, judgments, and executions are hereby satisfied in
full, terminated and forever discharged.
By granting this Release, the Executive acknowledges that this
Agreement in no way constitutes an admission by BioReliance of any violation of
law, breach of contract or any wrongdoing whatsoever towards him.
Upon termination of the Executive's employment, and as a condition to
the initiation of a Professional Services Agreement, if any, the Executive will
be requested to sign a release covering the period from the date hereof until
January 1, 2000.
H. CONFIDENTIALITY AND NONCOMPETITION
By signing below, the Executive acknowledges his ongoing and continuing
obligation to abide by the Confidentiality, Trade Secrets and Noncompetition
Agreement that he executed on June 23, 1998 ("Trade Secrets Agreement"), and to
keep secret or confidential, and not to utilize in any matter or disclose to
third parties, any proprietary
4
<PAGE> 5
EXHIBIT 10.42
and confidential information of the Corporation, which may have been made
available to him or came into his possession during the period of his employment
with the Corporation, nor will the Executive compete with the Corporation nor
solicit its (i) current or prospective employees for employment elsewhere or
(ii) current or prospective customers. The Corporation and the Executive
acknowledge that the noncompetion provisions of Section 4 (i) of the Trade
Secrets Agreement are not intended to prevent the Executive from seeking or
accepting employment from a customer or client of BioReliance provided that the
customer or client does not provide competing services to third parties. The
provisions of Section 4 (ii) and 4 (iii) of the Trade Secrets Agreement shall
apply in all events.
The Executive also agrees that, during and after the Term, he shall not
make any defamatory or disparaging comments about the Corporation, its agents,
employees, successors, assigns, corporate parent, subsidiaries, affiliates,
officers, or directors to third parties, or to former, present, or prospective
customers, clients, vendors, business associates or anyone else in the industry,
and shall not unlawfully interfere with the business advantage or contracts of
the Corporation, its successors, assigns, corporate parent, subsidiaries, and
affiliates. During and after the Term, the Corporation agrees that the CEO and
the Vice Presidents of the Corporation shall not make any defamatory or
disparaging comments about the Executive.
I. ACKNOWLEDGEMENT
By signing below, the Executive acknowledges that he has read the
foregoing Release; that he has had a right to consult an attorney, and has been
encouraged by BioReliance to review this Agreement with an attorney; that he has
been given a period of not less than twenty-one (21) days in which to consider
this Agreement; that he understands it; and that he accepts and agrees to all of
the provisions contained herein. The Executive understands that this Agreement
sets forth the entire understanding of the parties, and he acknowledges that he
has not relied upon any other representations or promises in entering into this
Agreement.
J. REVOCATION
This Agreement may be revoked by the Executive at any time during the
seven (7) days immediately following his execution of the Agreement, after which
time the Agreement shall be irrevocable and enforceable in any court of
competent jurisdiction. In the event that the Executive exercises his right to
revoke during the seven-day period, any sums previously paid pursuant to the
terms of this Agreement shall be returned to BioReliance.
K. PROFESSIONAL SERVICES
During the twelve (12) month period following the expiration of the
Term hereof, the Executive may provide such professional services to the
Corporation as agreed and set forth in a Professional Services Agreement. These
services will be for the purposes
5
<PAGE> 6
EXHIBIT 10.42
set forth in the Professional Services Agreement as well as for the purpose of
accomplishing a smooth transition of obligations from the Executive to the
Corporation's Vice President, Biosafety Testing Services, and for facilitating
the Corporation's development of its analytical services business.
L. SURVIVAL
Except for the terms and conditions set forth above in Section E, the
terms and conditions of this Agreement, including without limitation the terms
and conditions set forth above in Section H regarding Confidentiality, Trade
Secrets and Noncompetition, will remain in effect after the end of the Term.
M. ASSIGNABILITY
Except by will or by the laws of descent and distribution, neither this
Agreement nor any right or interest hereunder shall be assignable or
transferable by the Executive or by the Executive's beneficiaries or legal
representatives. This Agreement shall inure to the benefit of and be enforceable
by the Executive's legal personal representative.
N. GOVERNING LAW
This agreement shall be construed and governed by the laws of the State
of Maryland without regard to its choice of law provisions.
O. SEVERABILITY
The provisions of this Agreement shall be deemed severable, and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
P. ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement between the Corporation
and the Executive and supersedes all prior agreements, offers, terms or
conditions regarding the Executive's employment, except for the Confidentiality,
Trade Secrets and Noncompetition Agreement, which will survive.
Q. WAIVER
The Executive acknowledges, absent this Agreement, the Executive has no
right or entitlement to any severance payment and benefit, or to a separate
allowance in any particular amount. For the consideration set forth in Section E
(ii) and (iii) and Section F hereof, the adequacy of which is hereby
acknowledged, except for breach of this Agreement by the Corporation, the
Executive hereby remises, releases and forever discharges and quitclaims onto
the Corporation and its officers, directors, shareholders, employees, agents and
representatives of and from any and all debts, actions, causes of
6
<PAGE> 7
EXHIBIT 10.42
action, suits, accounts, covenants, contracts, agreements, damages, and any and
all claims, demands and liabilities whatsoever of every name and nature, both in
Law and in Equity (collectively referred to therein as "Claims"), which the
Executive now has or ever had from the beginning of time.
R. NO CONFLICTS OF INTEREST
By signing this Agreement, the Executive represents that he is not
subject to any restrictions, particularly, but without limitation, in connection
with any previous employment, which prevents the Executive from entering into
and performing his obligations under this Agreement or which materially and
adversely affect (or may in the future, so far as the Executive can reasonably
foresee, materially and adversely affect), the Executive's right to participate
in the affairs of the Corporation.
S. ARBITRATION
Any claim or controversy relating to or arising out of this Agreement
shall be resolved exclusively by arbitration in accordance with the commercial
rules then obtaining of the American Arbitration Association. The arbitration
shall take place in Montgomery County, Maryland.
T. PROOF OF CITIZENSHIP AND ABILITY TO WORK
This Agreement is contingent on the Executive providing the
Corporation, if not previously provided, with proof of U.S. citizenship or alien
work permission, as required by federal law.
BioReliance Corporation
By: s/Capers W. McDonald By: s/John E. McEntire
------------------------------ ---------------------------------
Name: Capers W. McDonald Name: John E. McEntire
Title: President and CEO
Date: December 2, 1999 Date: December 14, 1999
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-3434) of BioReliance Corporation of our report
dated February 23, 2000 appearing on page F-2 of this annual report on Form
10-K. We also consent to the reference to us under the heading "Selected
Financial Data" in such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 27, 2000
<TABLE> <S> <C>
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10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 CONSOLIDATED BALANCE SHEETS
AND CONSOLIDATED SATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
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