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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 0-22879
BIORELIANCE CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 52-1541583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14920 BROSCHART ROAD
ROCKVILLE, MARYLAND 20850
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(301) 738-1000
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ------
As of July 31, 1999, 7,928,213 shares of registrant's Common Stock, par value
$.01 per share, were outstanding.
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BIORELIANCE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999............................................................. 3
Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 1998 and 1999................................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1999.............................................. 5
Notes to Consolidated Financial Statements................................ 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risks... 20
SIGNATURES........................................................................................... 22
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIORELIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1999
1998 (RESTATED)
(RESTATED) (UNAUDITED)
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 8,847 $ 12,626
Marketable securities.......................................................... 18,250 9,911
Accounts receivable, net....................................................... 21,741 20,897
Other current assets........................................................... 2,506 1,884
------------- ------------
Total current assets.......................................... 51,344 45,318
Property and equipment, net......................................................... 25,371 28,069
Deposits and other assets........................................................... 572 990
------------- ------------
Total assets.................................................. $ 77,287 $ 74,377
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 4,628 $ 4,007
Accounts payable............................................................... 2,685 3,044
Accrued employee compensation and benefits..................................... 1,955 1,998
Other accrued liabilities...................................................... 1,862 1,867
Customer advances.............................................................. 2,632 1,764
Deferred income taxes.......................................................... 1,551 0
------------- ------------
Total current liabilities..................................... 15,313 12,680
Deferred taxes...................................................................... 25 1,790
Long-term debt...................................................................... 7,914 7,891
------------- ------------
Total liabilities............................................. 23,252 22,361
------------- ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value: 6,900,000 shares
authorized; no shares issued and outstanding................................ --- ---
Common stock, $.01 par value: 15,000,000 shares authorized;
7,821,344 and 7,911,469 shares issued and outstanding........................ 78 79
Additional paid-in capital................................................... 52,586 52,736
Retained earnings.............................................................. 1,661 187
Accumulated other comprehensive income......................................... (290) (986)
------------- ------------
Total stockholders' equity.................................... 54,035 52,016
------------- ------------
Total liabilities and stockholders' equity..................... $ 77,287 $ 74,377
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------------
1998 1999 1998 1999
(RESTATED) (RESTATED)
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................... $ 12,731 $ 11,816 $ 24,820 $ 22,132
---------- ----------- ----------- ------------
Expenses:
Cost of sales................................. 6,611 7,585 13,757 15,175
Selling, general and administrative........... 3,810 4,336 6,704 8,421
Research and development...................... 347 310 733 665
---------- ----------- ----------- ------------
10,768 12,231 21,194 24,261
---------- ----------- ----------- ------------
Income (loss) from operations......................... 1,963 (415) 3,626 (2,129)
---------- ----------- ----------- ------------
Other (income) expense:
Interest income............................... (434) (325) (920) (786)
Interest expense.............................. 73 191 232 384
Other (income) expense........................ 139 196 271 243
---------- ----------- ----------- ------------
(222) 62 (417) (159)
---------- ----------- ----------- ------------
Income (loss) before income taxes..................... 2,185 (477) 4,043 (1,970)
Income tax provision (benefit)........................ 834 (130) 1,613 (496)
---------- ----------- ----------- ------------
Net income (loss)..................................... $ 1,351 $ (347) $ 2,430 $ (1,474)
---------- ----------- ----------- ------------
Net income (loss) per share:
Basic......................................... $ 0.17 $ (0.04) $ 0.31 $ (0.19)
========== =========== =========== ============
Diluted....................................... $ 0.16 $ (0.04) $ 0.29 $ (0.19)
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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BIORELIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998
(RESTATED) 1999
Cash flows from operating activities: ---------- --------
<S> <C> <C>
Net income (loss)..................................................................... $ 2,430 $ (1,474)
------------ ------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation...................................................................... 1,546 2,160
Amortization expense.............................................................. 118 127
Amortization of bond premiums and discounts....................................... (96) (290)
Loss on disposal.................................................................. 20 2
Deferred income taxes, net........................................................ --- 214
Changes in current assets and liabilities:
Accounts receivable, net...................................................... (4,041) 1,013
Other current assets.......................................................... (438) 551
Accounts payable.............................................................. (679) 468
Accrued employee compensation and benefits.................................... (788) 49
Other accrued liabilities..................................................... 776 (129)
Customer advances............................................................. 438 (785)
Increase in deposits and other assets............................................. (96) (616)
------------ ------------
Net cash provided by (used in) operating activities...................... (810) 1,290
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities.................................................. (21,997) (5,871)
Proceeds from the maturities of marketable securities............................... 23,150 14,500
Purchases of property and equipment................................................. (1,492) (4,824)
------------ ------------
Net cash provided by (used in) investing activities...................... (339) 3,805
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options............................................ 249 151
Payments on debt................................................................... (400) (329)
Payments on capital lease obligations.............................................. (341) (474)
Repurchase and cancellation of treasury stock...................................... (139) ---
------------ ------------
Net cash used in financing activities.................................... (631) (652)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents............................ 51 (664)
------------ ------------
Net increase (decrease) in cash and cash equivalents.................................... (1,729) 3,779
Cash and cash equivalents, beginning of period.......................................... 6,227 8,847
------------ ------------
Cash and cash equivalents, end of period................................................ $ 4,498 $ 12,626
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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BIORELIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF THE BUSINESS
BioReliance Corporation (the "Corporation") is a contract service
organization providing nonclinical testing and contract manufacturing services
for biologics to biotechnology and pharmaceutical companies worldwide.
(2) INTERIM FINANCIAL STATEMENTS PRESENTATION
The accompanying interim financial statements are unaudited and have
been prepared by the Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") regarding interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements, and therefore these consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and the notes
thereto, included in the Corporation's Annual Report on Form 10-K. In the
opinion of management, the unaudited consolidated financial statements for the
three-month and six-month periods ended June 30, 1998 and 1999 include all
normal and recurring adjustments which are necessary for a fair presentation of
the results of the interim period. The results of operations for the three-month
and six-month periods ended June 30, 1998 and 1999 may not necessarily be
indicative of the results for the entire year ending December 31, 1999.
(3) PRIOR PERIOD ADJUSTMENTS
During the fourth quarter of 1999, the Corporation identified
approximately $342,000 in various credits in the accounts receivable subsidiary
ledgers that should have been recorded as revenue over the three-year period
1996-1998. The financial statements and related notes reflect all such
restatements. A summary of the impact of the restatements for the three months
and six months ended June 30, 1998 and 1999 follows (in thousands except per
share amounts):
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<TABLE>
<CAPTION>
Results of Operations
---------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................... $12,677 $12,731 $24,648 $24,820
Income from operations............ 1,909 1,963 3,454 3,626
Income before income taxes........ 2,131 2,185 3,871 4,043
Income tax provision.............. 813 834 1,547 1,613
Net income........................ 1,318 1,351 2,324 2,430
Net income per share:
Basic.......................... $0.17 $0.17 $0.30 $0.31
Diluted........................ 0.16 0.16 0.28 0.29
</TABLE>
The restatements did not impact the results of operations for the three months
and six months ended June 30, 1999.
<TABLE>
<CAPTION>
Financial Position
------------------
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accounts receivable, net......... $21,399 $21,741 $20,555 $20,897
Total current assets............. 51,002 51,344 44,976 45,318
Total assets..................... 76,945 77,287 74,035 74,377
Other accrued liabilities........ 1,732 1,862 1,737 1,867
Total current liabilities........ 15,183 15,313 12,550 12,680
Total liabilities................ 23,122 23,252 22,231 22,361
Retained earnings (deficit)...... 1,449 1,661 (25) 187
Total stockholders' equity....... 53,823 54,035 51,804 52,016
</TABLE>
(4) NET INCOME (LOSS) PER SHARE
The Corporation calculates earnings per share ("EPS") on both a basic
and diluted basis. Dilutive securities are excluded from the computation in
periods which they have an anti-dilutive effect. Net income (loss) available to
common stockholders and common equivalent stockholders is equal to net income
(loss) for all periods presented.
The following table represents reconciliations between the weighted
average common stock outstanding used in basic EPS and the weighted average
common and common equivalent shares outstanding used in diluted EPS for each of
the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1999 1998 1999
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common stock outstanding.......... 7,799 7,858 7,766 7,846
Stock options, as if converted.................... 452 --- 570 ---
------ ------ ------ ------
Weighted average common and common
equivalent shares outstanding...................... 8,251 7,858 8,336 7,846
======= ====== ======= ======
</TABLE>
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(5) SEGMENT INFORMATION
Summarized financial information concerning the Corporation's reportable
segments, for the three months and six months ended June 30, is shown in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1999 1998 1999
---- ----
(RESTATED) (RESTATED)
---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Testing and Development $ 11,451 $ 11,213 $ 22,059 $ 20,151
Manufacturing ......... 1,280 603 2,761 1,981
-------- -------- -------- --------
Total ........... $ 12,731 $ 11,816 $ 24,820 $ 22,132
======== ======== ======== ========
Gross Profit:
Testing and Development $ 6,338 $ 4,896 $ 11,167 $ 7,684
Manufacturing ......... (218) (665) (104) (727)
-------- -------- -------- --------
Total .............. $ 6,120 $ 4,231 $ 11,063 $ 6,957
======== ======== ======== ========
</TABLE>
The following table outlines the Corporation's revenues and gross profit
by geographic region for the three months and six months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1999 1998 1999
---- ----
(RESTATED) (RESTATED)
---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
United States $11,126 $10,026 $21,359 $18,544
Europe ...... 1,605 1,790 3,461 3,588
------- ------- ------- -------
Total .... $12,731 $11,816 $24,820 $22,132
======= ======= ======= =======
Gross Profit:
United States $ 5,732 $ 3,573 $ 9,925 $ 5,944
Europe ...... 388 658 1,138 1,013
------- ------- ------- -------
Total .... $ 6,120 $ 4,231 $11,063 $ 6,957
======= ======= ======= =======
</TABLE>
(6) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging
Activities." SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and establishes "special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of forecasted
transactions; and hedges of foreign currency exposures of net investments in
foreign operations. SFAS No. 133 is effective for years beginning after June 15,
1999, with earlier adoption permitted. On July 8, 1999, the FASB issued SFAS No.
137, "Accounting for Derivative
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Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 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 No. 133 will not be material.
(7) CONTINGENCIES
The Corporation is involved in various claims and legal proceedings
arising in the ordinary course of business. The Corporation does not believe
that such claims or proceedings, individually or in the aggregate, will have a
material adverse effect on the Corporation's consolidated financial position or
results of operations.
The Corporation has been identified by the U.S. Environmental Protection
Agency ("EPA") as one of several hundred potentially responsible parties
("PRPs") under CERCLA with respect to the Ramp Industries, Inc., site in Denver,
Colorado. Although the Corporation believes that it sent only a small quantity
of waste to this site, liability under CERCLA can exceed a PRP's pro rata share
of cleanup costs. The EPA has incurred approximately $5 million to date to
remove wastes from this site and expects to incur approximately an additional
$1.3 million to remove the remaining wastes. However, the estimated total
cleanup costs have not been determined. A joint settlement proposal was
developed in October 1997 and submitted to EPA Region VIII representatives, who
have agreed to support the proposal to Senior EPA management and the Department
of Justice. There can be no assurance at this time that the joint settlement
proposal will be accepted by the Department of Justice. The Corporation believes
that the outcome of this matter will not have a material adverse effect on the
Corporation's financial position or results of operations.
(8) SUBSEQUENT EVENTS
On July 1, 1999, the Corporation received the proceeds of a $3,000,000
loan from the Department of Business and Economic Development, a principal
department of the State of Maryland. The Corporation is required to use the
proceeds in connection with the Corporation's 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 nine years. The terms of the
loan contain annual reporting requirements, including the periodic reporting of
employment data.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made in this Report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
similar words or phrases. Forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by BioReliance with the Securities and Exchange
Commission, including in its Prospectus, dated July 28, 1997, and its Forms 10-K
and 10-Q, and include, among others, the following: general economic and market
conditions; the size and growth of the overall markets for biopharmaceuticals,
including the amounts spent on research and development by biotechnology and
pharmaceutical companies; changes in government regulations; the size, timing
and mix of contracts for the Corporation's products and services; the ability of
BioReliance to attract and retain qualified technical and management personnel;
seasonal demand for the Corporation's products and services; fluctuations and
difficulty in forecasting operating results; the ability of BioReliance to
sustain, manage or forecast its growth and utilize its facilities; the loss of
significant contracts or customers; business disruptions and other factors
referenced in the above reports. New risk factors emerge from time to time and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on the Corporation's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
While BioReliance does, from time to time, communicate with securities
analysts, it is against BioReliance's policy to disclose to them any material
non-public information or other confidential information. Accordingly,
shareholders should not assume that BioReliance agrees with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, BioReliance has a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of BioReliance.
The following discussion and analysis of the Corporation's financial
condition and results of operations should be read in conjunction with the
Corporation's consolidated financial statements and related notes thereto
included elsewhere in this Form 10-Q.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Revenue was $11.8 million in the three months ended June 30, 1999, a
decrease of 7.1% from revenue of $12.7 million in the three months ended June
30, 1998. The decrease was attributable to a decrease in both the U.S. testing
and development and manufacturing segments. Testing and development services
generated revenue of $11.2 million for the three months ended June 30, 1999, a
decrease of 1.8% from revenue of $11.4 million for the three months ended June
30, 1998. Manufacturing services generated revenue of $0.6 million for the three
months ended June 30, 1999 and $1.3 million for the three months ended June 30,
1998. The decrease in testing and development revenue can be attributed to lower
than expected orders primarily in the U.S. In addition, in the development area,
a number of projects were delayed or diminished in scope by some customers. The
testing and development revenue decrease in the U.S. was partially offset by an
increase in European testing and development revenue, as evidenced by increased
viral clearance revenues in both Germany and the U.K. In the manufacturing
segment, revenue decreased for both the U.S. and Europe. European manufacturing
revenues were adversely affected by client delays for planned projects and
delays in obtaining new manufacturing contracts in Germany in the second
quarter. Testing and development services and manufacturing services accounted
for 94.8% and 5.2%, respectively, of the Corporation's revenue for the three
months ended June 30, 1999 and 90.0% and 10.0%, respectively, of the
Corporation's revenue for the three months ended June 30, 1998. Revenue
generated in Europe increased from $1.6 million for the three months ended June
30, 1998 to $1.8 million for the three months ended June 30, 1999, a 12.5%
increase.
Cost of sales was $7.6 million for the three months ended June 30, 1999,
an increase of 15.1% over cost of sales of $6.6 million in the three months
ended June 30, 1998. As a percentage of total revenue, cost of sales increased
to 64.1% for the three months ended June 30, 1999 from 52.1% for the three
months ended June 30, 1998. The increase was primarily due to increased cost of
sales in the U.S. related to increased direct expenses such as materials and
labor and related fringe benefits. Gross profit for testing and development
services was $4.9 million for the three months ended June 30, 1999, a decrease
from gross profit of $6.3 million for the three months ended June 30, 1998. The
decrease in gross profit can be primarily attributed to a decrease in revenues
for testing and development combined with an increase in cost of sales. Gross
profit for manufacturing reflected a loss of $0.7 million for the three months
ended June 30, 1999, while manufacturing services generated a loss of $0.2
million for the three months ended June 30, 1998. Gross profit for Europe
increased from $0.4 million for the three months ended June 30, 1998 to $0.7
million for the three months ended June 30, 1999, an increase of 75%.
Selling, general and administrative expense was $4.3 million for the
three months ended June 30, 1999, an increase of 13.1% over selling, general and
administrative expense of $3.8 million in the three months ended June 30, 1998.
As a percentage of revenue, selling, general and administrative expenses
increased to 36.6% for the three months ended June 30, 1999 from 30.0% for the
three months ended June 30, 1998. The increase is a result of an increase in
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facilities costs as the Corporation moved to a new headquarters in the latter
half of 1998, as well as increased depreciation and other expenses related to
the Corporation's investment in an enterprise information system, expansion of
the U.K. facility capacity, and an increase in the bad debt allowance. The
increase in the bad debt allowance is primarily the result of ongoing reviews of
all customer projects and trade receivables.
Research and development expense remained constant at $0.3 million for
the three months ended June 30, 1999 and June 30, 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 $0.4 million for the
three months ended June 30, 1999, as compared to income from operations of $2.0
million for the three months ended June 30, 1998. The change can be attributed
to decreases in revenue and an increase in cost of sales and operating expenses.
The Corporation expensed net interest and other income of $62,000 for
the three months ended June 30, 1999, a decrease of 130.0% compared to net
interest and other income of $0.2 million in the three months ended June 30,
1998. Interest income was $0.3 million for the three months ended June 30, 1999
and $0.4 million for the three months ended June 30, 1998. Interest expense was
$0.2 million for the three months ended June 30, 1999 and $0.1 million for the
three months ended June 30, 1998.
The benefit from income taxes was $130,000 for the three months ended
June 30, 1999, compared to a provision for income taxes of $834,000 for the
three months ended June 30, 1998. The effective tax rate was 27.2% for the three
months ended June 30, 1999 and 38.2% for the three months ended June 30, 1998.
The benefit is the result of the loss before income taxes recorded for the three
months ended June 30, 1999.
The Corporation reported a net loss of $0.3 million for the three months
ended June 30, 1999, as compared to net income of $1.4 million for the three
months ended June 30, 1998. The loss can be attributed to decreased revenues and
increased cost of sales and operating expenses, slightly offset by an income tax
benefit, for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenue was $22.1 million in the six months ended June 30, 1999, a
decrease of 10.9% from revenue of $24.8 million in the six months ended June 30,
1998. The decrease was attributable to both U.S. segments, testing and
development and manufacturing. Testing and development services generated
revenue of $20.1 million for the six months ended June 30, 1999, a decrease of
8.6% from revenue of $22.0 million for the six months ended June 30, 1998.
Manufacturing services generated revenue of $2.0 million for the six months
ended June 30, 1999 and $2.8 million for the six months ended June 30, 1998. The
decrease can be attributed to lower than expected orders in the U.S.
Additionally, in the development area, a number of projects were delayed or the
scope of planned projects was diminished by some customers. In manufacturing
services, increases in revenue generated by Germany and the U.K. partially
offset
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the decrease in the U.S. revenues. The increase in manufacturing in Europe is
primarily attributable to additional revenues from a new contract in 1999.
Testing and development services and manufacturing services accounted for 91.0%
and 9.0%, respectively, of the Corporation's revenue for the six months ended
June 30, 1999 and 88.7% and 11.3%, respectively, of the Corporation's revenue
for the six months ended June 30, 1998. Revenue generated in Europe increased
from $3.5 million for the six months ended June 30, 1998 to $3.6 million for the
six months ended June 30, 1999, a 2.8% increase.
Cost of sales was $15.2 million for the six months ended June 30, 1999,
an increase of 10.1% over cost of sales of $13.8 million for the six months
ended June 30, 1998. As a percentage of total revenue, cost of sales increased
to 68.5% for the six months ended June 30, 1999 from 55.6% for the six months
ended June 30, 1998. The increase in cost of sales, primarily in the testing and
development segment relates to increased direct expenses such as materials and
labor and related fringe benefits. Gross profit for testing and development
services was $7.7 million for the six months ended June 30, 1999, a decrease
from a gross profit of $11.2 million for the six months ended June 30, 1998.
Gross profit for manufacturing services generated a loss of $.7 million for the
six months ended June 30, 1999, while manufacturing services generated a loss of
$0.1 million for the six months ended June 30, 1998. Gross profit for Europe
decreased from $1.1 million for the six months ended June 30, 1998 to $1.0
million for the six months ended June 30, 1999, a decrease of 9.1%. The decrease
in gross profit is a result of the combination of a decrease in revenues and an
increase in cost of sales.
Selling, general and administrative expense was $8.4 million for the six
months ended June 30, 1999, an increase of 25.4% over selling, general and
administrative expense of $6.7 million in the six months ended June 30, 1998. As
a percentage of revenue, selling, general and administrative expenses increased
to 38% for the six months ended June 30, 1999 from 27.1% for the six months
ended June 30, 1998. The increase is a result of an increase in facilities costs
as the Corporation moved to a new headquarters in the latter half of 1998, as
well as increased depreciation and other expenses related to the Corporation's
investment in an enterprise information system, and an increase in bad debt
allowance. The increase in the bad debt allowance is primarily the result of
ongoing reviews of customer projects and trade receivables.
Research and development expense remained constant at $0.7 million for
the six months ended June 30, 1999 and June 30, 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 $2.1 million for the
six months ended June 30, 1999, as compared to income from operations of $3.6
million for the six months ended June 30, 1998. The change can be attributed to
decreases in revenue and increases in operating expenses.
The Corporation earned net interest and other income of $0.2 million for
the six months ended June 30, 1999 and $0.4 million for the six months ended
June 30, 1998. Interest income was $0.8 million for the six months ended June
30, 1999 and $0.9 million for the six months
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<PAGE> 14
ended June 30, 1998. Interest expense was $0.4 million for the six months ended
June 30, 1999 and $0.2 million for the six months ended June 30, 1998.
The benefit from income taxes was $496,000 for the six months ended June
30, 1999, compared to a provision for income taxes of $1,613,000 for the six
months ended June 30, 1998. The effective tax rate was 25.1% for the six months
ended June 30, 1999 and 39.9% for the six months ended June 30, 1998. The
benefit is the result of the loss before income taxes recorded for the six
months ended June 30, 1999.
The Corporation reported a net loss of $1.5 million for the six months
ended June 30, 1999, as compared to net income of $2.4 million for the six
months ended June 30, 1998. The loss can be attributed to decreased revenues and
increased operating expenses, which were slightly offset by an income tax
benefit for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has funded its business through existing cash, cash
flows from operations, long-term bank loans and capital leases. At June 30,
1999, the Corporation had cash, cash equivalents and marketable securities of
$22.5 million, compared to cash, cash equivalents and marketable securities of
$27.1 million at December 31, 1998.
The Corporation generated cash flows from operations of $1.3 million for
the six months ended June 30, 1999, compared to using net cash from operations
of $0.8 million in the six months ended June 30, 1998. Net income (loss), as
adjusted for depreciation and amortization, and deferred income taxes, provided
$0.7 million and $3.9 million of cash for the six months ended June 30, 1999 and
1998, respectively. This decrease in adjusted net income (loss) was due
primarily to the Corporation's net loss for the six months ended June 30, 1999.
Changes in other assets and liabilities provided cash of $0.6 million for the
six months ended June 30, 1999 primarily due to decreases in accounts receivable
and other current assets and increases in accounts payable, offset by decreases
in customer advances and increases in deposits and other assets. Changes in
other assets and liabilities used cash of $4.8 million for the six months ended
June 30, 1998 primarily due to an increase in accounts receivable and other
current assets and decreases in accounts payable offset by an increase in
customer advances.
Working capital decreased to $32.6 million at June 30, 1999, compared to
$36.0 million at December 31, 1998. The net decrease in working capital
primarily was due to a decrease in cash and cash equivalents and marketable
securities and decreases in accounts receivable and other current assets. This
decrease in current assets was partially offset by a decrease in current
liabilities, resulting primarily from a decrease in the current portion of the
deferred income tax liability and repayments on debt obligations.
The Corporation spent $4.8 million for capital expenditures for the six
months ended June 30, 1999 and $1.5 million for the six months ended June 30,
1998. Capital expenditures for the six months ended June 30, 1999 were primarily
related to continued investments in facilities and information systems.
14
<PAGE> 15
The Corporation's corporate headquarters facility in Rockville,
Maryland, constructed under a build-to-lease agreement, was completed in August
1998. The headquarters facility consolidated existing research and development,
other laboratory and administrative activities and expanded the Corporation's
laboratory and other capacity for operations. The lease agreement requires the
Corporation to make noncancelable lease payments totaling approximately $11.5
million over the remaining 14 years.
In April 1998, the Corporation entered into third-party leasing and
subleasing arrangements with Montgomery County, Maryland and a developer
providing for the construction of the exterior shell of a new manufacturing
facility in Rockville, Maryland. These arrangements require the Corporation to
make certain net noncancelable lease payments totaling approximately $13.3
million over the next twenty years and to guarantee indebtedness of
approximately $4.5 million incurred by the developer to construct the exterior
shell of the facility.
At June 30, 1999, the Corporation had commitments to spend approximately
$14.0 million in capital expenditures including leasehold improvements and
laboratory equipment during the remainder of 1999 and the first quarter of 2000
related to this new manufacturing facility. The Corporation accounts for the
leases and subleases of the manufacturing facility as capital leases. The assets
underlying the capital leases are included with the Corporation's owned property
and equipment as of June 30, 1999. Property and equipment at June 30, 1999
includes approximately $4.6 million related to these capital leases, of which
$100,000 is capitalized interest. The related obligation is included in the
Corporation's liabilities at June 30, 1999.
A portion of the Corporation's capital expenditures during the first six
months of 1999 included an investment in an enterprise information system. The
Corporation expects to spend an additional $2.1 million on information systems
during the remainder of 1999. The Corporation believes that its information
systems will maximize compatibility and integration internally and with the
Corporation's clients.
In addition, at June 30, 1999, the Corporation had commitments to spend
approximately $326,000 for furniture and building fixtures and approximately
$16,000 for laboratory equipment.
The Corporation expects to continue expanding its operations through
internal growth, geographic expansion and possible strategic acquisitions. The
Corporation expects to fund its growth from existing cash, cash flows from
operations, bank borrowings and lease financing. Although the Corporation has no
agreements or arrangements in place with respect to any future acquisition,
there may be acquisition or other growth opportunities that require additional
external financing, and the Corporation may, from time to time, seek to obtain
funds from public or private issuances of equity or debt securities on a
strategic basis. There can be no assurances that such financing will be
available on terms acceptable to the Corporation.
15
<PAGE> 16
Based on its current operating plan, the Corporation believes that
available liquid resources are sufficient to meet its foreseeable cash needs.
BORROWINGS AND CREDIT FACILITIES
In 1994, the Corporation obtained a loan of $4,300,000 from NationsBank
with a maturity date of November 30, 1999 (the "Mortgage Loan"). The terms of
the Mortgage Loan were amended in October 1997 and April 1998 to modify the
Corporation's financial covenants, release foreign subsidiaries as guarantors
and make other modifications. In addition to a principal payment of $30,000 per
month, the note bears interest at the London Inter-Bank Offering Rate ("LIBOR")
plus the applicable LIBOR Rate Additional Percentage ("LIBOR Rate Option"). The
LIBOR Rate Option ranges from 0.85% to 2.0% depending on the Corporation
achieving certain funded debt to EBITDA ratios. At June 30, 1999 the applicable
interest rate was 7.0% and the LIBOR Rate Option was 2.0%. At June 30, 1999,
approximately $2.7 million was outstanding on the loan.
In May 1995, the Corporation entered into an interest rate swap
agreement whereby the variable interest rate of the Mortgage Loan was
effectively converted into debt with a fixed rate of 6.55% per annum. This
agreement expires on November 30, 1999. Amounts to be paid or received under the
interest rate swap agreement are recognized as interest income or expense in the
periods in which they accrue and are recorded in the same category as that
arising from the Mortgage Loan. The swap agreement is a standard contract that
has no imbedded options or other terms involving a higher level of complexity or
risk. The interest rate swap agreement and the LIBOR Rate Option resulted in an
8.55% effective interest rate at June 30, 1999. The effect of the interest rate
swap agreement on interest expense was not material in the quarters ended June
30, 1998 and 1999.
The Corporation has available borrowings up to $1,000,000 under the
terms of a revolving loan agreement with NationsBank. The revolving loan
agreement requires monthly interest payments on the unpaid principal. The unpaid
principal and all unpaid accrued interest is payable in full on May 31, 2001.
Amounts borrowed under the revolving loan agreement bear interest at the same
rate as the Mortgage Loan. At June 30, 1999, no amounts were outstanding under
the facility. This line of credit expires in May 2001.
The Corporation financed the acquisition of BIOMEVA in July 1996 and
obtained additional funds for working capital and expansion of its business
through a promissory note with NationsBank in the amount of $1.8 million with an
original maturity of June 30, 1999. The note requires monthly principal payments
of $30,000, and bears interest at the same rate as the Mortgage Loan. At June
30, 1999, $.7 million was outstanding on the note. The interest rate on the note
was 6.9% at June 30, 1999. 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 NationsBank are cross
collateralized and are secured by a deed of trust on one of the Corporation's
laboratory facilities in Rockville,
16
<PAGE> 17
Maryland. The agreements require the Corporation to meet certain financial and
restrictive covenants, including maintaining profitability, certain tangible net
worth levels and funded debt to EBITDA ratios.
On July 1, 1999, the Corporation received the proceeds of a $3,000,000
loan from the Department of Business and Economic Development, a principal
department of the State of Maryland. The Corporation is required to use the
proceeds in connection with the Corporation's 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 nine years. The terms of the
loan contain annual reporting requirements, including the reporting of
employment data.
FOREIGN CURRENCY
The accounts of the Corporation's international subsidiaries are
measured using local currency as the functional currency. Assets and liabilities
of these subsidiaries are translated into United States dollars at period-end
exchange rates, and revenue and expense accounts are translated at average
monthly exchange rates. Net exchange gains and losses resulting from such
translations are excluded from net income and are accumulated in a separate
component of stockholders' equity.
Since the revenues and expenses of the Corporation's international
operations generally are denominated in local currencies, exchange rate
fluctuations between such local currencies and the United States dollar will
subject the Corporation to currency translation risk with respect to the
reported results of its international operations as well as to risks sometimes
associated with international operations. The Corporation derived 15.2% of its
revenue for the three months ended June 30, 1999 and 12.6% of its revenue for
the three months ended June 30, 1998 from services performed outside of the
United States. The Corporation derived 16.2% of its revenue for the six months
ended June 30, 1999 and 14.1% of its revenue for the six months ended June 30,
1998 from services performed outside of the United States. In addition, the
Corporation may be subject to currency risk when the Corporation's service
contracts are denominated in a currency other than the currency in which the
Corporation incurs expenses related to such contracts.
There can be no assurance that the Corporation will not experience
fluctuations in financial results from the Corporation's operations outside the
United States, and there can be no assurance the Corporation will be able,
contractually or otherwise, to reduce the currency risks associated with its
operations. Although at the present time the Corporation does not use derivative
financial instruments to manage or control foreign currency risk, there can be
no assurance that the Corporation will not use such financial instruments in the
future or that any such use will be successful in managing or controlling
foreign currency risk.
17
<PAGE> 18
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as
their local currency, initially available for currency trading on currency
exchanges and non cash (banking) transactions. The existing local currencies, or
legacy currencies, are planned to remain legal tender through January 1, 2002.
Beginning on January 1, 2002, Euro-denominated bills and coins are planned to be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro are planned to be legal tender. On or before July
1, 2002, the participating countries are planned to withdraw all legacy currency
and use the Euro exclusively.
The introduction of the Euro may have potential implications for the
Corporation's existing operations. Currently, Germany is the only participating
country in the EMU in which the Corporation has operations. While one cannot
predict such events, many authorities expect non-participating European Union
countries, such as Great Britain, to eventually join the EMU. The Corporation
does not currently expect to experience any operational disruptions or to incur
any costs as a result of the introduction of the Euro that would materially
affect the Corporation's liquidity or capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transaction; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS 133 is
effective for years beginning after June 15, 1999, with earlier adoption
permitted. 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 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.
YEAR 2000 READINESS
The Corporation uses a significant number of information technology
("IT") and non-IT computer systems in its operations. The IT systems include the
Corporation's accounting systems, office and administrative systems,
communications systems and other corporate
18
<PAGE> 19
systems. The non-IT systems include embedded microprocessors that control
laboratory equipment and facilities equipment.
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Corporation's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Corporation has established a task force to address the year 2000
issue. The task force has implemented a three-phase approach. The first phase,
which is substantially complete, consists of an inventory of all IT and non-IT
systems. The second phase, which is also substantially complete, consists of
setting priorities and developing a test plan. The third phase, testing and
remediation, began during the fourth quarter of 1998 and is continuing.
The Corporation depends on various suppliers to continue its operations.
The Corporation is working with its suppliers to determine whether they and
their products are or will be year 2000 compliant. The Corporation has received
compliance certifications from some suppliers, and is following up with the
other suppliers to obtain such certificates. However, the Corporation does not
control its suppliers, and cannot fully audit their year 2000 compliance, and
for some suppliers the Corporation may have no feasible alternative supplier
available. The failure of such suppliers to remediate year 2000 problems in a
timely manner could have a material adverse effect on the Corporation.
The Corporation has not completed its analysis of its most reasonably
likely worst case year 2000 scenarios. The Corporation's task force intends to
investigate these scenarios and, throughout 1999, to develop contingency plans
to reduce or avoid harm to the Corporation's business and operations.
The Corporation's historical costs for remediation are not material and
the Corporation does not anticipate that its future remediation costs will be
material. Starting in 1997, the Corporation began implementation of an
enterprise information system that is year 2000 compliant. The Corporation does
expect to have to replace certain application software to be year 2000
compliant. Estimates of these costs are preliminary, but could be as much as $.5
million, of which approximately $0.2 million has been expended to date. The
Corporation has not delayed any material projects as a result of the year 2000
issue.
The Corporation's plans to complete the year 2000 modifications are
based on management's best estimates, which were derived utilizing assumptions
of future events including the continued availability of certain resources and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Failure by the
Corporation or its suppliers to complete year 2000 remediation in a timely
manner could have a
19
<PAGE> 20
material adverse effect on the Corporation. Specific factors that might cause
such material differences include, but are not limited to, the cooperation of
third party suppliers, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes, and similar
uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Corporation is exposed to market risk from adverse changes in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
The Corporation is exposed to interest rate risk primarily through its
investments in short-term marketable securities and cash equivalents and its
debt agreements. The Corporation's investment policy calls for investment in
short-term, low risk instruments. At June 30, 1999, the Corporation had $9.9
million invested in government and governmental agency securities. A rise in
interest rates would have an adverse impact on the fair market value of fixed
rate securities. If interest rates fall, floating rate securities may generate
less interest income. The Corporation manages its exposure to interest rate
risks through investing in securities with maturities of one year or less.
Additionally, the Corporation is exposed to risk from changes in
interest rates as a result of its borrowing activities. At June 30, 1999, the
Corporation had total debt of $11.9 million. The Corporation's debt consists of
a mortgage loan with approximately $2.7 million outstanding; a promissory note
with approximately $0.7 million outstanding and capital lease obligations of
approximately $8.5 million outstanding. The Corporation's exposure to losses is
partially managed through an interest rate swap agreement related to the
mortgage loan.
FOREIGN CURRENCY EXCHANGE RISK
The Corporation's international operations are subject to foreign
exchange rate fluctuations. The Corporation derived 15.2% and 12.6% of its
revenue for the three months ended June 30, 1999 and 1998, respectively, from
services performed in the United Kingdom and Germany. The Corporation derived
16.2% and 14.1% of its revenue for the six months ended June 30, 1999 and 1998,
respectively, from services performed in the United Kingdom and Germany. Since
the revenue and expenses of the Corporation's international operations generally
are denominated in local currencies, exchange rate fluctuations between such
local currencies and the United States dollar will subject the Corporation to
currency translation risk with respect to the reported results of its foreign
operations as well as to risks sometimes associated with international
operations. In addition, the Corporation may be subject to currency risk when
the Corporation's service contracts are denominated in a currency other than the
20
<PAGE> 21
currency in which the Corporation incurs expenses related to such contracts. The
United Kingdom and Germany have traditionally had relatively stable currencies.
The Corporation currently does not hedge its foreign currency exposure.
Management does not believe that the Corporation's exposure to foreign currency
rate fluctuations is material.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: April 26, 2000
BioReliance Corporation
(Registrant)
By /s/ Capers W. McDonald
-----------------------------
Capers W. McDonald
President, Chief Executive
Officer and Acting Chief
Financial Officer
22
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