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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 19961997, 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 000-21615 .
BOSTON BIOMEDICA, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2652826
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
375 WEST STREET,
WEST BRIDGEWATER, MASSACHUSETTS 0237902379-1040
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(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code (508) 580-1900
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OFTHE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated be reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X][ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at February 28, 1997March 17, 1998 was $30,074,188.$27,754,339. The aggregate market
value was computed by reference to the closing price as of that date. (For
purposes of calculating this amount only, all directors, executive officers and
greater than 10% shareholders of the Registrant are treated as affiliates.)date on
NASDAQ.
The number of shares outstanding of the Registrant's only class of
common stock as of February 28, 1997March 17, 1998 was 4,378,157.4,643,172.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's definitive Proxy Statement for its 1997
annual meeting, are incorporated by reference into Part III of this Report, and
portions of the RegistrantsRegistrant's Registration Statement on Form S-1 (Registration
No. 333-10759) are incorporated by reference into Part IV of this Report.
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PART I
ITEM 1. BUSINESS
The Company is a worldwide provider of proprietary quality control
products for use with in vitro diagnostic test kits ("test kits") for the
detection, analysis and monitoring of infectious diseases, including AIDS,
Hepatitis and Lyme Disease. These products are used to develop test kits, to
permit the monitoring of laboratory equipment and personnel, and to help ensure
the accuracy of test results. The Company's products are derived from human
plasma and serum using proprietary manufacturing processes. The Company
believes its Quality Control Panel products are viewed as the current industry
standard for the independent assessment of the performance of HIV and Hepatitis
test kits. The Company also manufactures diagnostic test kit components,
laboratory instruments, and provides specialty laboratory services, including
clinical trials. It also provides contract instrument development and related
repairs at its service center in Garden Grove, CA. The Company's customers
include test kit manufacturers, regulatory agencies and end-users of test kits
such as blood banks, hospital laboratories and clinical reference laboratories.
Currently the Company's products are used in connection with the detection of
more than 15 infectious diseases, and its specialty laboratory services are
used in connection with the detection of over 100 such diseases.
The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (i) capitalize on
the emerging end-user market, (ii) develop new products and services, (iii)
enhance technical leadership, (iv) capitalize on complementary business
operations, and (v) pursue strategic acquisitions and alliances.
INDUSTRY OVERVIEWIndustry Overview
Infectious Disease Test Kits and Testing Methods. Test kits contain in
one compact package all of the materials necessary to run a test for an
infectious disease. These include the disposable diagnostic components,
instructions, and reaction mixing vessels (generally 96-well plates or test
tubes) which are coated with the relevant infectious disease antigens,
antibodies or other materials. To perform the test, either a technician or a
specially designed instrument typically mixes the solutions from the test kit
with human blood specimens in a specific sequence according to the test kit
instructions. The mixture must then "incubate" for up to 18 hours, during which
time a series of biochemical reactions trigger signals (including color, light
and radioactive count) which indicate the presence or absence and amount of
specific markers of the particular disease in the specimen.
Test kits generally employ one of three methods for infectious disease
testing: microbiology, immunology or molecular biology. Traditional
microbiology tests use a growth medium that enables an organism, if present, to
replicate and be detected visually. Immunology tests detect the antigen or
antibody, which is an indicator (marker) of the pathogen (e.g., virus,
bacterium, fungus or parasite). Molecular diagnostic methods, such as the
polymerase chain reaction ("PCR"), test for the presence of nucleic acids (DNA
or RNA) which are specific to a particular pathogen.
Most infectious disease tests currently use microbiological or
immunological methods. However, molecular diagnostic methods are increasingly
being used in research and clinical laboratories worldwide and the Company believes that soon
they will be accepted for routine use in the clinical laboratory setting.worldwide. The Company
believes that the advent of molecular diagnostic methods will complement rather
than diminish the need to test by microbiological and immunological procedures,
because different test methods reveal different information about a disease
state. The Company anticipates that as new test methods become more widespread,
they will account for a larger portion of the Company's business.
Quality Control for In Vitro Diagnostic Test Kits. Customers employ
quality control products in order to develop and use test kits (both infectious
and non-infectious). Quality control products help ensure that test kits detect
the correct analyte (specificity), detect it the same way every time
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(reproducibility or precision), and detect it at the appropriate levels
(sensitivity). The major element of this quality control process is the
continuous evaluation of test kits by the testing of carefully characterized
samples that resemble the donor or patient samples routinely used with the
test. Quality control is used in both the infectious and non-infectious disease
markets, although currently it is not as prevalent among end-users of
infectious disease test kits.
The market for quality control products consists of three main customer
segments: (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the manufacture and use of test kits and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.
COMPANY PRODUCTS AND SERVICES
OVERVIEWCompany Products and Services
Overview
The Company offers threetwo broad product groupsclasses used in infectious disease
diagnostics:in vitro
diagnostics ("IVD"): "Diagnostic Products" consisting of Quality Control
Panels, Accurun(TM)Accurun( Run Controls and Diagnostic Components. These productsComponents, all used in connection
with infectious disease testing, and new for 1997, "Laboratory Instruments".
Diagnostic Products are used throughout the entire test kit life cycle, from
initial research and development, through the regulatory approval process and
test kit production, to training, troubleshooting and routine use by end-users.
The Company's Quality Control Panels, which combine human blood specimens with
comprehensive quantitative data useful for comparative analysis, help ensure
that test kits detect the correct analyte (specificity), detect it the same way
every time (reproducibility), and detect it at the appropriate levels
(sensitivity). The Company's Accurun(TM)Accurun( Run Controls enable end-users of test
kits to confirm the validity of results by monitoring test performance, thereby
minimizing false negative test results and improving error detection. In
addition, the Company provides Diagnostic Components, which are custom
processed human plasma and serum products, to test kit manufacturers.
Through its wholly owned subsidiary, BBI Source Scientific, Inc., the
Company designs, manufactures and markets Laboratory Instruments used in
hospitals, clinics, and research, environmental and food testing laboratories.
Utilizing a common hardware technology platform, these instruments are used in
connection with the performance of an IVD test, including reading the test
result.
The Company's specialty clinical laboratory services include both
routine and sophisticated infectious disease testing in microbiology,
immunology and molecular biology. The Company seeks to focus its specialty
laboratory services in advanced areas of infectious disease testing, and
provides contract research and clinical trials for the United States government
and for domestic and foreign test kit manufacturers.
PRODUCTSDiagnostic Products
The Company manufactures its productsDiagnostic Products from human plasma and
serum which are obtained from nonprofit and commercial blood centers, primarily
in the United States. The Company has acquired and developed an inventory of
approximately 50,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
QUALITY CONTROL PANELSWithin the Diagnostic Products class are two groups: Quality Control Products
(Panels and Accurun( Run Controls) and Diagnostic Components.
Quality Control Panels
Quality Control Panels consist of blood products characterized by the
presence or absence of specific disease markers and a Data Sheet containing
comprehensive quantitative data useful for comparative analysis. These Quality
Control ProductsPanels are designed for measuring overall test kit
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performance and laboratory proficiency, as well as for training laboratory
professionals. The Company's Data Sheets, containing comprehensive
quantitative data useful for comparative analysis, are an integral part of its
Quality Control Products.Panels. These Data Sheets are created as the result of
extensive testing of proposed panel components in both the Company's
laboratories and at major testing laboratories on behalf of the Company in the
United States and Europe, including national public health laboratories,
research and clinical laboratories and regulatory agencies. These laboratories
are selected based on their expertise in performing the appropriate tests on a
large scale in an actual clinical setting; this testing process provides the
Company's customers with the benefit that the Quality Control Panels they
purchase from the Company have undergone rigorous testing in actual clinical
settings. In addition, the Company provides information on its Data Sheets on
the reactivity of panel components in all FDA licensed test -3-
kits and all
leading European test kits for the target pathogen, as well as for all other
appropriate markers of this pathogen. For example, the Company's HIV panel Data
Sheets include anti-HIV by IFA, ELISA and western blot; HIV antigen by ELISA;
and HIV RNA by several molecular diagnostic procedures. The Company's Data
Sheets require significant time and scientific expertise to prepare. The
following table describes the types of Quality Control Panel products currently
offered by the Company.
QUALITY CONTROL PANEL PRODUCTS
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PRODUCT LINE DESCRIPTION USE CUSTOMERS
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Seroconversion Panels Plasma samples collected from a Compare the clinical Test kit
single individual overra specific sensitivity of competing manufacturers and
time period showing conversion manufacturers' test kits, regulators.
from negative to positive for enabling the user to assess the
markers of an infectious sensitivity of a test in
disease.- detecting a developing
antigen/antibody.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Performance Panels A set of 10 to 50 serum and Determine test kit performance Test kit
plasma samples collected from against all expected levels of manufacturers and
many different individuals and reactivities in the evaluation regulators.
characterized for the presence or of new, modified and improved
absence of a particular disease test methods.
marker.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Sensitivity Panels Precise dilutions of human plasma Evaluate the low-end analytical Test kit
or serum human plasma or serum sensitivity of a test kit. manufacturers
containing a known amount of an
infectious disease marker as
calibrated against international
standards.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
Qualification Panels Dilutions of human plasma or Demonstrate the consistent Clinical reference
serum manifesting a full range of lot-to-lot performance of test laboratories, blood
reactivities in test kits for a kits, troubleshoot problems, banks, and hospital
specific marker. evaluate proficiency, and train laboratories
laboratory technicians.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
OEM Panels Custom-designed Qualification Train laboratory personnel on Custom designed
Panels for regulators and test new test kits or equipment. with test kit
kit manufacturers for manufacturers and
distribution to customers or for regulators as an
internal use. end-user product or
for internal use.
- - -------------------------------- ----------------------------------- --------------------------------- ---------------------
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The Company first introduced Quality Control Panels in 1987. The
Company currently offers a broad range of Quality Control Panels that address a
variety of needs of manufacturers and regulators of test kits as well as blood
banks, hospitals, clinical laboratories and other end-users. Prices for the
Company's quality control seroconversion, performance and sensitivity panels
range from $450 to $2,000 each, and its qualification and OEM panels range from
$100 to $200 per panel.
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Seroconversion and Performance Panels are comprised of unique and rare
plasma specimens obtained from individuals during the short period of time when
the markers for a particular disease are converting from negative to positive.
As a result, the quantity of any such panel is limited, so that the Company
must replace these panels as they sell out with another panel comprised of
different specimens equally unique and rare. The Company believes that its
inventory and relationships with blood centers affords it a competitive
advantage in acquiring such plasma for replacement panels and developing new
products to meet market demand. There can be no assurance that the Company will
be able to continue to obtain such specimens.
Quality Control Panels currently span the immunologic markers for AIDS
(i.e., HIV), Hepatitis (A, B and C,C), Lyme Disease and ToRCH (Toxoplasma,
rubella, cytomegalovirus and herpes simplex virus). New introductions this year
include molecular Performance Panels for HBVHIV, EBV and HCV, qualification panelsQualification Panels for HIV,
HBVHTLV, CMV and HCV, and additional Seroconversion Panels for HIV HBV, and HCV.
ACCURUN(TM) RUN CONTROLSIncluded in the Performance Panel category are the first "Worldwide" panels for
HCV and HIV that include specimens from throughout the world reactive for
variants and subtypes of these deadly viruses.
Accurun(r) Run Controls
End-users of test kits utilize Run Controls to confirm the validity of
results by monitoring test performance, thereby minimizing false negative test
results and improving error detection. Run controls consist of one or more
specimens of known reactivity that are tested together with donor or patient
samples in an assay to determine whether the assay is performing within the
manufacturer's specifications. Clinical laboratories generally process their
patient specimens in a batch processing mode, and typically include 25 to 100
specimens to be tested in each batch (a "run"). Large laboratories may perform
several runs per day, while smaller laboratories may perform only a single run
each day, or sometimes only several runs per week. A clinical laboratory using
a Run Control will place the Run Control product in a testing well or
test-tube, normally used for a specimen, and will test it in the same manner
that it tests the donor or patient specimens. It will then compare the results
generated to an acceptable range, determined by the user, to measure whether
the other specimens are being accurately tested. The Run Control result must be
within the acceptable range to be considered valid. This is often tracked
visually using a Levey-Jennings chart. Depending upon a particular laboratory's
quality control practices, it may use several Run Controls on each run or it
may simply use a Run Control in a single run at the beginning and end of the
day.
In 1997, the Company introduced its AccuChartTM tracking and charting
software. Used as part of a laboratory's quality assurance program, AccuChartTM
runs on a PC and is designed to provide the data tracking capability needed to
document laboratory performance.
The Company's Accurun(TM)Accurun(r) family of products is targeted at the emerging
market of end-users of infectious disease test kits. The Company believes that
it offers the most comprehensive line of Run Controls in the industry, and that
its Accurun(TM)Accurun(r) products, in combination with its Quality Control Panel
products, provide an extensive line of products for quality assurance in
infectious disease testing. The Company intends to continue to expand its line
of Accurun(TM)Accurun(r) products, thereby providing its customers with the convenience
and cost effectiveness of a single supplier for independent run controls.
The Company introduced its first four Accurun(TM)Accurun(r) Run Control products
in the fourth quarter of 1993 and has since developed and released for sale an
additional 25 Accurun(TM) products. A limited number31 Accurun(r) products, for a total of 35
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Run Controls. The majority of these products are available for diagnostic
purposes; the others currently are limited to research use. Current Accurun(TM)Accurun(r)
Run Control products range in price from $15$5 to $45 per milliliter and are
described in the following table.
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ACCURUN(TM)ACCURUN(r) RUN CONTROLS
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
PRODUCT LINE DESCRIPTION CURRENT NUMBER OF PRIMARY CUSTOMERS
PRODUCTS
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)Accurun(r)1-99 Multi-marker Run Control 46 Blood Banks
for immunological tests
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)Accurun(r)100-199 Single-marker Run Control 1822 Hospitals and clinical
for immunological tests reference laboratories
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)Accurun(r)200-299 Multi-marker Run Control 1 Research and specialty
for molecular tests laboratories
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)Accurun(r)300-399 Single-marker Run Control 3 Research and specialty
for immunological tests laboratories
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
Accurun(TM)Accurun(r)800-899 Negative Run Control for 3 All laboratories
immunological and molecular
tests
- - ------------------------------- -------------------------------- ---------------------- ------------------------------
The Company has received 510(k) clearance from the FDA to market its
Accurun 1(R) line, for diagnostic purposes, and intends to apply for such
clearance for the remainder of its Accurun(TM) products. All of the Company's AccurunAccurun(r) Run Controls will require FDA premarket
clearance or approval(a 510(k)) prior to being marketed for diagnostic use.use, under current
FDA rules. The FDA Modernization Act of 1997 will likely produce new
regulations exempting some of these products from FDA submission requirements,
but the new rules are not yet in place. As of March 1, 1998, a total of nine
products in the Accurun 1(r) line and 14 single analyte Accurun( controls have
received 510(k) clearance from the FDA. An application for clearance for diagnostic
use for one additional Accurun(TM) product hasthree Accurun(r) single
analyte products have been submitted by the Company to
thebut have not yet received FDA and the Company anticipates that applications for approximately 16
additional Accurun(TM) products will be prepared and submitted to the FDA by the
end of 1997. Failure to obtain, or delays in obtaining, such clearance or
approval would adversely affect the Company's strategy of capitalizing on the
end-user market.
DIAGNOSTIC COMPONENTSapproval.
Diagnostic Components
Diagnostic Components are the individual materials supplied to
infectious disease test kit manufacturers and combined (often after further
processing by the manufacturer) with other materials to become the various
fluid components of the manufacturer's test kit. The Company supplies
Diagnostic Components in four product lines: Normal Human Plasma, Normal Human
Serum, Basematrix, and Characterized Disease State Serum and Plasma. Normal
Human Plasma and Serum are both the clear liquid portion of blood which
contains proteins, antibodies, hormones and other substances, except that the
Serum product has had the clotting factors removed. Basematrix, the Company's
proprietary processed serum product that has been chemically converted from
plasma, is designed to be a highly-stable, lower cost substitute for most
Normal Human Serum and Plasma applications. Characterized Disease State Serum
and Plasma are collected from specific blood donors pre-selected because of the
presence or absence of a particular disease marker. The Company often
customizes its Diagnostic Components by further processing the raw material to
meet the specifications of the test kit manufacturer. The Company's Diagnostic
Components range in price from $0.25 to $60 per milliliter, with the majority
selling between $0.50 and $5 per milliliter.
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SERVICESLaboratory Instruments
In 1997, the Company acquired the business and net assets of Source
Scientific, Inc., a laboratory instrument manufacturer in Garden Grove,
California. As a result of this acquisition, the Company through its wholly
owned subsidiary, BBI Source Scientific, Inc. ("BBI Source"), now has expertise
in IVD instruments, adding to its existing capability in IVD quality control
products. This is significant since, in addition to the test kit and a well
trained technician, the third element to an accurate test result is a properly
calibrated instrument to read the test result. See also Note 2 to the Company's
Notes to Consolidated Financial Statements in Item 8 hereunder regarding the
Company's purchase of the business and net assets of Source Scientific, Inc.
BBI Source designs, manufactures and markets Laboratory Instruments
used in hospitals, clinics, and research, environmental and food testing
laboratories. They are generally sold on a private-label or OEM basis for other
companies utilizing a common hardware technology platform. The instruments
manufactured by the Company use advanced optical detection methods
(luminescence, fluorescence, reflectance, photometry), robotics, fluidics, and
unique software, which is desired by customer companies reselling the
state-of-the-art instrumentation systems to clinical distributors and
laboratories worldwide.
The products currently being offered by BBI Source have been
commercialized since 1985. BBI Source expects that its newest products will be
available for production in late 1998. Management believes that products address
important market segments in biomedical and clinical diagnostic testing and
environmental monitoring and food testing research. The BBI Source product line
includes the following:
MicroChem(r) Photometer. A compact, low-cost, photometer designed for
immunoassay and general chemistry applications.
ChemStat(r) Automated Photometer. A high-speed, automated photometer
with a sample capacity of 95 tubes and a read rate of one sample per second.
This product is suited for high-volume processing.
ChemStat(r) Plus Automated Photometer. The ChemStat Plus is a second
generation photometer compatible with the EXEC-WASH Washing System that
features menu-driven software and optional on-board dispensers.
E/LUMINA(r) Luminescence Analyzer. A flexible luminometer for both
"flash" and "glow" luminescence methods, this automated system reads up to 114
samples and reports final results.
E/LUMINA(r) 2E Automated Luminescence Analyzer. This detection system
is designed with the same features as the E/LUMINA Luminescence Analyzer that
can be used to detect faster "flash" luminescence techniques and adapts to
various formats, as well as to liquid phase assays.
EXEC-WASH(r) Washing System. An automated immunoassay washing system
that can be quickly configured by the user to wash different solid-phase assay
formats by a propriety manifold design. The EXEC-WASH is fully compatible with
a variety of other Company products, such as the ChemStat, the ChemStat Plus
and the E/LUMINA Luminescence Analyzer.
PlateMate(r) Reader. The Company expects to have available in 1998 the
PlateMate Reader, a microfluidics well-reading system combining robotics and
fluidics. The current design of the PlateMate Reader performs photometric
assays in the 400 to 700 nm range for 96 samples at a time and prints out
results directly on a built-in printer.
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Protocol Design Software System. A development tool for researchers and
assay manufacturers, the program operates under Microsoft(r) Windows and serves
as the master programing center for EXEC-WASH systems to create fluid handling
protocols.
FOCUS(r). Florescence Polarization System. Fluorescence polarization
("FP") is a technology that has dominated the clinical market for therapeutic
and abuse drug level testing for many years.
FluoroStat(r) Reader. The FluoroStat is a compact fluorometer that is
highly sensitive and provides a broad dynamic range for tube-based fluorometric
assays. The instrument was introduced in September 1995 and is currently
available for OEM manufacture.
Services
The Company seeks to focus its specialty laboratory services in both
the clinical reference laboratory testing and advanced research areas. The
Company concentrates its services in those areas of infectious disease testing
which are complementary to its quality control and diagnostic products
businesses.
Specialty Clinical Laboratory Testing. TheThrough its wholly owned
subsidiary, BBI Clinical Laboratories, Inc. the Company operates an independent
specialty clinical reference laboratory which performs both routine and
sophisticated infectious disease testing in microbiology, immunology and
molecular biology, with special emphasis in AIDS, Viral Hepatitis and Lyme
Disease. The Company's specialty clinical laboratory combines traditional
microbiology, advanced immunology, and current molecular diagnostic techniques,
such as PCR, to detect and identify microorganisms, their antigens and related
antibodies, and their nucleic acids (i.e., DNA and RNA). Customers include
physicians, clinics, hospitals and other clinical/research laboratories.
Contract Research. The Company, through its wholly owned subsidiary,
BBI Biotech Research Laboratories, Inc. ("BBI Biotech"), offers a variety of
contract research services in molecular biology, cell biology and immunology to
governmental agencies, diagnostic test kit manufacturers and biomedical
researchers. Molecular biology services include DNA sequencing, recombinant DNA
support, probe labeling and custom PCR assays. Cell biology and immunology
services include sterility testing, virus infectivity assays, cultivations of
virus or bacteria from clinical specimens, preparation of viral or bacterial
antigens or nucleic acids, and production of antibodies. The Company is
currently providing contract research services forunder several contracts and
grants. These services primarily related to infectious diseases, and include
the following: assessment of the efficiency of candidate HIV vaccines in a
monkey model system under two separate contracts with the National Institutesystem; development of a multiplex RT PCR based test for AllergyHIV-1,
HTLV I/II, HCV, and Infectious Disease ("NIAID"), a partHBV; DNA sequencing of the National Institutes
of Health ("NIH"). Each of these contracts has a two year term which expireshuman genes involved in September 1997.neurological
disorders; plate assays for HIV-1 genotyping; and eliciting neutralizing
antibodies targeting HIV. In addition, since 1983, the Company, through its BTRL
subsidiary,BBI Biotech, has provided
blood processing and repository services for the National Cancer Institute
("NCI"), also a part of the NIH.National Institutes of Health ("NIH"). The
repository stores over 2,000,000 specimens and processes or ships up to several
thousand specimens per week in support of various NIH cancer and virus research
programs. A new one year NCI repository contract was signed in February 1997
which includes four one year renewal options exercisable by NCI. The total
value of the contract in the first year is $916,000, and including all options,
is $4.8 million. ThereThe initial renewal option has been approved by the NCI
although there can be no assurance that any of thesesubsequent options will be
exercised.
Clinical Trials. The Company conducts clinical trials for domestic and
foreign test kit manufacturers. Test kit manufacturers must conduct such trials
to collect data for submission to the United States FDA and other regulatory
agencies. By providing this service, the Company is able to maintain close
contact with test kit manufacturers and regulators, and is able to evaluate new
technologies in various stages of development. The Company believes that the
reputation of its laboratory and scientific staff, its large number of Quality
Control Panels, and its inventory of
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characterized serum and plasma specimens assist the Company in marketing its
clinical trial services to its customers. The Company has performed clinical
trials for a number of United States and foreign test kit manufacturers seeking
to obtain FDA approval for their infectious disease test kits.
Laboratory Instrumentation Services. BBI Source offers design,
development and manufacturing services to companies seeking to market
biomedical products manufactured under government-approved manufacturing
practices. The OEM services range in complexity from contract manufacturing to
full system development and distribution.
BBI Source also provides after-sales-service. Management believes that
after-sales service is a major marketing advantage in many of the Company's
markets, since many of the Company's customers do not maintain their own full
service departments. Servi-Trak(r), a proprietary software program, is a key
element of this after-sales service. The Company's service department is
located at BBI Source's facility in Garden Grove, California. A fully
functional service center located in Giessen, Germany, is contracted by the
Company to provide European service and support.
On March 9, 1998, the Company announced plans to modify a previously
announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent
company, ABX Hematologie, SA (France). Under the contract, the Company provided
technical, customer and field services for instruments sold by ABX in the
United States. Under the modified agreement, individual customer service
contracts will be assigned to ABX and ABX will assume responsibility for its
United States instruments. The Company will provide certain consulting services
through March 1999 to assist ABX in establishing a sales, customer service,
technical support, and field service operation in the United States for its
hematology instrument and reagent business. In addition, the Company has agreed
to allow ABX to occupy space at its California facility during the period of
the agreement. The Company's personnel associated with this contract, included
the nationwide field service organization and hotline technical support, will
be offered employment by ABX.
Drug Screening Program. As a subcontractor for an NIH AIDS grant held
by the University of North Carolina at Chapel Hill, the Company has established
an anti-HIV drug screening program to test a large number of natural products
(largely plant derivatives) to determine whether they inhibit HIV replication
in an in vitro assay system. These in vitro assays are also offered as a
service to researchers and pharmaceutical companies who wish to test various
candidate anti-viral agents for anti-HIV activity.
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RESEARCH AND DEVELOPMENTResearch and Development
The Company's research and development effort is focused on the
development of (i) new and improved Quality Control Products (Panels and
Accurun(r)) for the emerging end-user market, (ii) new products for existing
customers, (iii) Diagnostic Components for use with test kits for both new test
methodologies and new diseases, (iv) new laboratory instruments and (iv)mechanical
and optical detection techniques, and (v) infectious disease testing services
using PCR and other amplification assays for AIDS, Viral Hepatitis, Lyme
Disease and Chlamydia, among others. The Company has approximately 2036 full or
part-time employees dedicated toinvolved in its research and development effort. For 19961997
the Company increased spending on research and development as a percentage of
revenues compared to 19951996 and expects to continue to increase such expenditures
as a percentage of revenues for the next several years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations." The Company's research scientists work closely with
sales, marketing, manufacturing, regulatory and manufacturingfinance personnel to identify
and prioritize the development of new products and services.
The Company's product development activities center on the
identification and characterization of materials for the manufacture of new
Quality Control Products and the replacement of sold-out products. During 1996,1997,
the Company introduced 3032 new Seroconversion, Performance, Sensitivity and
SensitivityQualification Panel products, as well as 256 new Accurun(TM)Accurun(r) Run Controls; in addition, during 1996,
the Company released six Qualification Panel products.Controls, and 34
OEM Panels. The
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Company is developing new Quality Control Products for use with both
immunological and molecular diagnostic tests for subtypes and variants of HIV,
HCV and HBV. Recently the Company expanded its Quality Control Product line
beyond the retrovirusHBV, and Viral Hepatitis diagnostics area to include sexually
transmitted diseases (e.g., Syphilis), tick-borne diseases (e.g., Lyme Disease),
and respiratory and other infections (e.g., Tuberculosis) and is continuing to
develop new Quality Control Productsa variety of controls targeted for these and other diseases.leading instrument
platforms. The Company has increased the number of off-the-shelf Quality
Control Products it offers from approximately 20 products in 1990 to
approximately 191167 in 1997.
The Company's product development activities related to Laboratory
Instruments are centered on additional configurations for its PlateMate(r)
microtiter plate reader and the development of a "reflectance" reader to
produce qualitative results from rapid IVD tests using dry chemistry (strip)
technology. In addition, the Company continues to work on applications for
existing products in 1996.to broaden their utilization.
The Company is also developing new and improved infectious disease
specialty tests which offer potential for Lyme Disease and other tick-borne diseasesabove average profit for use in its specialty
laboratory business. The Company is also pursuing newThis includes emphasis on additional applications of PCR
technologyand other amplification technologies to infectious disease diagnostics, such as amplificationbeyond
its current assays for the pathogens of AIDS, Viral Hepatitis, Lyme Disease and
Chlamydia,Herpes, and for the direct detection of other infectious agents in blood,
tissues and other body fluids.
From time to time in the past, the Company has funded a portion of its
research and development activities from grants provided by various agencies
and departments of the U.S.United States government. See "-- Services.also "-Services-Contract
Research."
STRATEGIC ALLIANCESStrategic Alliances
University of North Carolina at Chapel Hill.Hill ("UNC"). The Company is
directly supporting a drug discovery program at UNC, in which a full-time
research scientist is working to develop synthetic derivatives of anti-HIV
compounds that have been discovered pursuant to the Company's joint
collaboration with UNC. This research scientist is also working to introduce
modifications to these derivatives that would make them more soluble, less
toxic, or otherwise enhance their anti-viral properties. UNC has licensed to
the Company exclusive worldwide rights to three series of patent applications
filed by the Company and UNC with respect to three classes of anti-HIV
compounds. Two such compounds have exhibited therapeutic indices in in vitro
test model systems in excess of those recorded for AZT under comparable test
conditions. The Company is expending approximately $100,000$150,000 per year for
research and development relating to these compounds. In addition, under this
license, the Company will also have the rights to any new anti-HIV compounds or
derivatives developed in the course of this sponsored research, provided the
Company obtains certain regulatory approvals from the FDA. See "-- Services.also
"-Services-Drug Screening program."
-8-
Ajinomoto Co., Inc. The Company entered into an agreement with
Ajinomoto Co., Inc. in October 1995 pursuant to which the Company is performing
research regarding among other things, whether tests for certain amino acids in
plasma can be used to determine a person's immune status, particularly in
chronic fatigue syndrome. This project is funded by Ajinomoto and has a three
year budget of approximately $1,000,000. Discoveries and inventions arising
from the research will be owned by Ajinomoto, but the Company has the right of
first refusal to obtain certain exclusive licenses from Ajinomoto of any
patented technology arising from the research. The Company is entitled to
certain royalties based upon a percentage of sales of products arising out of
the research. This agreement expires in September 1998. The Company does not
know if the contract will be renewed.
BioSeq, Inc. In October 1996, the Company entered into a strategic
alliance with BioSeq, Inc. an early stage biotechnology company that is
developing a technology that may, through the use of pressure, be able to more
precisely control chemical reactions. The Company believes that this technology
may be useful for sample preparation in connection with both molecular and
immunological testing, process purification, sequencing, synthesizing and
characterizing nucleic acids and proteins, which may then allow for the more
precise identification of infectious disease agents. See also Note 45 to the
Company's
-10-
Notes to Consolidated Financial Statements in Item 8 hereunder regarding the
Company's investment in BioSeq, Inc. SALES AND MARKETINGThe Company, in a seperate transaction,
purchased a licensed technology from BioSeq, Inc. on March 20, 1998. See also
Note 14 to the Company's Note to Consolidated Financial Statements and Item 8
hereunder regarding subsequent event.
Sales and Marketing
The Company's sales and marketing efforts are directed by a Senior Vice
President of Sales and Marketing who supervises 18and includes 25 sales people and four9 other
full-time salesmarketing and marketingcustomer services employees.
The Company's marketing strategy is focused upon addressing the needs
of its customers in the infectious disease testing market throughout the entire
test kit life-cycle, from initial research and development, through the
regulatory approval process and test kit production, to training,
troubleshooting and routine use by end-users such as clinical laboratories,
hospitals and blood banks.
The Company recently has begun to focus its sales and marketing efforts
on the emerging end-user market for quality control products for infectious
disease test kits. To promote this objective, the Company has implemented a
major marketing platform, known as "Total Quality System" ("TQS"). TQS is a
package of Quality Control Products, including the Company's Accurun(TM)Accurun(r) Run
Controls, which is designed to provide test kit end-users with the products
needed in an overall quality assurance program. These products enable
laboratories to evaluate each of the key elements involved in the testing
process: the test kit, laboratory equipmentinstrument and laboratory personnel. The
Company believes that TQS effectively addresses the need for end-users to
ensure the accuracy of their test results. The Company intends to continue to
expand its sales and marketing activities with respect to its Accurun(TM)Accurun(r) line
of Run
Controlrun control products.
The Company's products are currently sold through a combination of
telephone, mail, third party distributors and limited direct sales efforts.
Domestically, productsDiagnostic Products are sold through an in-house tele-sales groupa direct sales force
consisting of sevena sales representatives, two salesdirector, three regional managers and one customer service
representative.nine sales
representatives. Internationally, the Company distributes its productsDiagnostic
Products both directly and through 1821 independent distributors located in
Japan, Australia, South America, Southeast Asia, Israel and Europe. The
Company's international sales manager oversees the Company's foreign
distributors. The Company's Laboratory Instruments are sold through a direct
domestic and international sales force consisting of two sales managers. Export
sales, including sales to distributors, for the years ended December 31, 1994, 1995,
1996, and 19961997 were $2.3$3.4 million, $3.1$4.3 million, and $3.9$5.2 million, respectively.
See also Note 6 to the Consolidated Financial Statements.
The Company's Specialty Clinical Laboratory Testing services are
marketed primarily through a direct domestic sales force consisting of seven
sales representatives managed by a sales director. The sales representatives
are located throughout the eastern and mid-western United States. They are
supported internally by a client services representative.
-9-
The Company emphasizes high quality products and services, technical
knowledge, and responsiveness to customer needs in its marketing activities for
both products and services. The Company educates its distributors, customers
and prospective customers about its products through a series of detailed
marketing brochures, technical bulletins and pamphlets, press releases and
direct mail pieces. These materials are supplemented by advertising campaigns
in major industry publications, technical presentations, and exhibitions at
local, national and international trade shows and expositions.
CUSTOMERS-11-
Customers
The Company's customers for Quality ControlDiagnostic Products and Diagnostic
Components comprise three major
groups: (i) international diagnostics and pharmaceutical manufacturing
companies, such as Abbott Diagnostics, Behring, Boehringer Mannheim, Chiron,
Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson and Johnson), Sanofi
Diagnostics and Sorin Biomedica; (ii) regulatory agencies such as the United
States FDA, the British Public Health Laboratory Service, the French Institut
National de la Transfusion Sanguine, and the German Paul Ehrlich Institute; and
(iii) end-users of diagnostic test kits, such as hospital and independent
clinical laboratories, including LabCorp, Quest and Smith Klein Beecham, public
health laboratories and blood banks, including the American Red Cross, Swiss
Red Cross, United Blood Services and Kaiser Permanente. The Company's customers
for Laboratory Instruments consist of international diagnostic and
pharmaceutical manufacturing companies and are generally sold on an OEM basis,
for use by hospitals, and clinical and research laboratories. In addition,
Laboratory Instruments are sold directly to environmental and food testing
laboratories, and wineries. Customers include Mast Immuno Systems, ABX
Hematology, Hybritech Inc., Vicam, and Toray Fuji Bionics Inc. The Company's
Specialty Clinical Laboratory Testing services are sold to hospital and
clinical laboratories, physicians, blood banks, researchers and other health
care providers. The Company's Contract Research services are typically offered
under contracts to governmental agencies, diagnostic test kit manufacturers and
biomedical researchers.
The Company does not have long-term contracts with its customers for
Quality Control Products and Diagnostic Components. The Company's products are
sold to its customers pursuant to purchase orders for discrete purchases.
Laboratory Instruments sold on an OEM basis are usually done so under a one
year contract with monthly delivery dates. Although the Company believes that
its relationships with these customers are satisfactory, termination of the Company's
relationship with any one of suchits customers could have a material adverse effect
on the Company.
During the fiscal years 1994, 1995, 1996 and 1996,1997, sales to the Company's
three largest customers accounted for an aggregate of approximately 20% of the
Company's net sales, although the customers were not identical in each periodperiod.
During the fiscal years 1995, 1996 and no1997, the combined revenues to all
branches of the National Institutes of Health, a United States Government
agency, accounted for approximately 13% of total consolidated revenues of the
Company. While the Company believes that the loss of any one customer accounted for more than 10%would
have an adverse effect on its results, this risk is partially mitigated by the
diversity of net sales.
MANUFACTURING AND OPERATIONSits customer base within the IVD industry and the different
diseases and instrument platforms on which they focus.
Manufacturing and Operations
The Company manufactures and assembles substantially all of its
productsDiagnostic Products at its
facility in West Bridgewater, Massachusetts. Raw materials (primarily plasma
and serum) are acquired from a variety of vendors and through a program of
donor recruitment, donor screening, productmanagement, and plasma/serum collection product characterization and
donor
management.characterization. All important materials have multiple sources of supply.
Laboratory Instruments are manufactured and assembled at the Company's facility
in Garden Grove, California. Raw materials and subassemblies are acquired from
a variety of vendors with multiple sources of supply.
The Company also operates a specialty clinical laboratory in New
Britain, Connecticut, and a research and development laboratory in
Rockville,Gaithersburg, Maryland. See "Item 2 -- PROPERTIES."
COMPETITIONCompetition
The market for the Company's products and services is highly
competitive. Many of the Company's competitors are larger than the Company and
have greater financial, research, manufacturing, and marketing resources.
Important competitive factors for the Company's products include product
-12-
quality, price, ease of use, customer service and reputation. In a broader
sense, industry competition is based upon scientific and technical capability,
proprietary know-how, access to adequate capital, the ability to develop and
market products and processes, the ability to attract and retain qualified
personnel, and the availability of patent protection. To the extent that the
Company's products and services do not reflect technological advances, the
Company's ability to compete in those products and services could be adversely
affected.
-10-
In the area of Quality Control Products, the Company competes in the
United States primarily with NABI (formerly North American Biologicals, Inc.) in Run Controlsrun
controls and Quality Control Panel products, andquality control panel products. with Dade International, Bio-Rad
Laboratories, Inc., and Blackhawk Biosystems Inc. in Run Controls.run controls, and with a
number of smaller, privately held companies in quality control panels. In
Europe, in addition to the above, the Netherlands Red Cross has recently begun
offering several Run Controlrun control and panel products. The Company believes that all three
of these competitors currently offer a more limited line of panel and run
control products than the Company, although there can be no assurance these
companies will not expand their product lines.
In the Diagnostic Components area, the Company competes against
integrated plasma collection and processing companies such as Serologicals,
Inc. and NABI, as well as smaller, independent plasma collection centers and
brokers of plasma products. In the Diagnostic Components area, the Company
competes on the basis of quality, breadth of product line, technical expertise
and reputation.
The laboratory instrument manufacturing industry is diverse and highly
competitive. The Company believes its technology base, reputation for
reliability, systems integration and service capabilities provide it with a
competitive advantage over its competitors which include: Dynatech Corp,
Kollsman Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part
of Colorado Medtech, Inc.), as well as numerous, smaller companies, such as
Awareness Technology Inc.
In the Specialty Clinical Laboratory Testing services portion of the
Company's business, it competes with large national reference laboratories,
such as LabCorp of America, Corning ClinicalQuest Laboratories and SmithKline Beecham Clinical
Laboratories, as well as several independent regional laboratories, hospital
laboratories, government contract laboratories and large research institutions.
The Company believes that by focusing on the specialty clinical laboratory
market, it is able to offer its customers a higher value-added service on the
more complex diagnostic tests than the larger national reference laboratories.
INTELLECTUAL PROPERTY
None of the Company's Quality Control Products or Diagnostic Components
have been patented.Intellectual Property
The Company has decided to holdholds as trade secrets current technology used to prepare
Basematrix and other blood-based products. None of the Company's Quality
Control Products or Diagnostic Components has been patented. The Company relies
primarily on a combination of trade secrets and non-disclosure and
confidentiality agreements and in certain limited circumstances, patents, to establish and protect its proprietary rights in
its technology and products. There can be no assurance that others will not
independently develop or otherwise acquire the same, similar or more advanced
trade secrets and know-how.
BBI Source has also relied on trade secrets and proprietary know-how
for its Laboratory Instruments which it protects in part by entering into
confidentiality agreements with persons or parties deemed appropriate by
management. In addition, the Company currently has five issued United States
patents, and one United States patent application on file, covering significant
aspects of the Company's core instrument technology and techniques, as well as
several electronic and mechanical designs employed in the Company's existing
products.
The Company hasowns two United States patents related to its contracts and
services work, and, jointly with UNC, has filed three series offour additional United States and foreign patent applicationspatents
relating to compounds, pharmaceutical compositions and therapeutic methods in
connection with the Company's drug discovery program at
-13-
UNC. One additional United States application and foreign applications for all
five of the joint patents are pending.
The Company has no reason to believe that its products and proprietary
methods infringe the proprietary rights of any other party. There can be no
assurance, however, that other parties will not assert infringement claims in
the future.
GOVERNMENT REGULATIONGovernment Regulation
The manufacture and distribution of medical devices, including products
manufactured by the Company that are intended for in vitro diagnostic use, are
subject to extensive government regulation in the United States and in other
countries.
In the United States, the Food, Drug, and Cosmetic Act ("FDCA")
prohibits the marketing of most in vitro diagnostic products until they have
been cleared or approved by the FDA, a process that is time-consuming,
expensive, and uncertain. In vitro diagnostic products must be the subject of
either a premarket notification clearance (a "510(k)") or an approved premarket
approval application ("PMA"). With respect to devices reviewed through the
510(k) process, a Companycompany may not market a device for diagnostic use until an
order is issued by the FDA finding the product to be substantially equivalent
to a legally marketed device. A 510(k) submission may involve the presentation
of a substantial volume of data, including clinical data, and may require a
substantial period of review. With respect to devices reviewed through the PMA
process, a Companycompany may not market a device until FDA has approved a PMA
application, which must be supported by extensive data, including preclinical
and clinical trial data, literature, and manufacturing information to prove the
safety and effectiveness of the device.
-11-
The Company's AccurunAccurun(r) Run Controls, when marketed for diagnostic
use, have been classified by the FDA as medical devices. The Accurun 1(R)
Multi-Marker Run Control, which include eight analytes, has been cleared through
the 510(k) process. The Company expects that, in the future, most of its
products that need FDA premarket review also will be reviewed through the 510(k)
process. The FDA could,
however, require that some products be reviewed through the PMA process, which
generally involves a longer review period and the submission of more
information to FDA. There can be no assurance that the Company will obtain
regulatory approvals on a timely basis, if at all. Failure to obtain regulatory
approvals in a timely fashion or at all could have a material adverse effect on
the Company.
AllAs of March 1, 1998, a total of nine products in the Accurun 1(r) line
and fourteen Accurun(r) single analyte controls have received 510(k) clearance
from the FDA. An additional three Accurun(r) single analyte controls have been
submitted but have not yet received FDA clearance.
Some of the Company's Quality Control Products, with the exception of
Accurun 1(R),Accurun(r) run controls are currently marketed
"for research use only,only." whichSuch products do not require FDA
premarket clearance or approval, and not for diagnostic uses, which docurrently require FDA premarket
clearance or approval. The labeling of these products limits their use to
research. It is possible, however, that some purchasers of these products may
use them for diagnostic purposes despite the Company's intended use. In these
circumstances, the FDA could allege that these products should have been
cleared or approved by the FDA prior to marketing, and initiate enforcement
action against the Company, which could have a material adverse effect on the
Company. The FDA has recently issued a Draft Policy Compliance Guideline,
which, if it takes effect as written, will strictly limit the sale of products
labeled "for research use only." The Company is monitoring this situation, and
will adapt its policies as required.
BBI Source obtains 510(k) approval for all laboratory instrumentation
designed and manufactured in its Garden Grove facility.
The Company's Diagnostic Products and Laboratory Instruments product
groups are both registered as medical device manufacturers with the FDA, and
file listings of their products semi-annually. The Company's facilities in West
Bridgewater, Massachusetts for Diagnostic Products and Garden Grove, California
for Laboratory Instruments are FDA Good Manufacturing Practices
-14-
(FDA/GMP) facilities, and, as such, maintain high standards of quality in
manufacturing, testing and documentation, and implement strict GMP guidelines
governing reagent and instrument manufacturing.
Once cleared or approved, medical devices are subject to pervasive and
continuing regulation by the FDA, including, but not limited to, good
manufacturing practices ("GMP") regulations governing testing, control, and
documentation; and reporting of adverse experiences with the use of the device.
Ongoing compliance with GMP and other applicable regulatory requirements is
monitored through periodic inspections. FDA regulations require agency
clearance or approval for certain changes if they do or could affect the safety
and effectiveness of the device, including, for example, new indications for
use, labeling changes or changes in design or manufacturing methods. In
addition, both before and after clearance or approval, medical devices are
subject to certain export and import requirements under the FDCA. Product
labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. Products may be promoted by
the Company only for their approved use. Failure to comply with these and other
regulatory requirements can result, among other consequences, in failure to
obtain premarket approvals, withdrawal of approvals, total or partial
suspension of product distribution, injunctions, civil penalties, recall or
seizures of products and criminal prosecution.
The Company believes that its Quality Control Panels are not regulated
by the FDA because they are not intended for diagnostic purposes. The Company
believes that its Diagnostic Components, which are components of in vitro
diagnostic products, may be subject to certain regulatory requirements under
the FDCA and other laws administered by the FDA, but do not require that the
Company obtain a premarket approval or clearance. There can be no assurance,
however, that the FDA would agree or that the FDA will not adopt a different
interpretation of the FDCA or other laws it administers, which could have a
material adverse effect on the Company.
The Company's Diagnostic Products and Laboratory Instruments groups are
both ISO9001 certified, with registration by TUV Rheinland. The Laboratory
Instrument group is also certified to EN46001, a set of supplementary
requirements applicable to their products.
Laws and regulations affecting some of the Company's products are in
effect in many of the countries in which the Company markets or intends to
market its products. These requirements vary from country to country. Member
states of the European Economic Area (which is composed of the European Union
members and the European Free Trade Association members) are in the process of
adopting various product and servicesservice "Directives" to address essential health,
safety, and environmental requirements associated with the subject products and
services. The "Directives" cover both quality system requirements (ISO Series
9000 Standards)Standards and the EN46001 Requirements) and product and marketing related
requirements. In addition, some jurisdictions have requirements related to
marketing of the Company's products. There can be no assurance that the Company
will be able to obtain any regulatory approvals required to market its products
on a timely basis, or at all. Delays in receipt of, or failure to receive such
approvals, or the failure to comply with regulatory requirements in these
countries or states could lead to compliance
-12- action, which could have a
material adverse effect on the Company's business, financial condition, or
results of operations.
The Company's service-related business (clinical trials, infectious
disease testing, and contract research) is subject to other national and local
requirements. The Company's facilities are subject to review, inspection,
licensure or accreditation by some states, national professional organizations
(College of American Pathologists), and other national regulatory agencies
(Health Care Financing Administration). Studies to evaluate the safety or
effectiveness of FDA regulated products (primarily human and animal drugs or
biologics) must also be conducted in conformance with relevant FDA
requirements, including Good Laboratory Practice ("GLP") regulations,
investigational new drug or device regulations, Institutional Review Board
("IRB") regulations and informed consent regulations.
-15-
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA")
prohibits laboratories from performing in vitro tests for the purpose of
providing information for the diagnosis, prevention or treatment of any disease
or impairment of, or the assessment of, the health of human beings unless there
is in effect for such laboratories a certificate issued by the U.S.US Department of
Health and Human Services ("HHS") applicable to the category of examination or
procedure performed.
The Company currently holds permits issued by HHS (CLIA license),
Centers for Disease Control and Prevention (Importation of Etiological Agents
or Vectors of Human Diseases), the U.S.US Department of Agriculture (Importation
and Transportation of Controlled Materials and Organisms and Vectors) and the
U.S.US Nuclear Regulatory Commission (in vitro testing with byproduct material
under general license, covering the use of certain radioimmunoassay test
methods).
The Company is also subject to government regulation under the Clean
Water Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Atomic Energy Act, and other national, state and local
restrictions relating to the use and disposal of biohazardous, radioactive and
other hazardous substances and wastes. The Company is an exempt small quantity
generator of hazardous waste and has a U.S.US Environmental Protection Agency
identification number. The Company is also registered with the U.S.US Nuclear
Regulatory Commission for use of certain radioactive materials. The Company is
also subject to various state regulatory requirements governing the handling of
and disposal of biohazardous, radioactive and hazardous wastes. The Company has
never been a party to any environmental proceeding.
Internationally, some of the Company's products are subject to
additional regulatory requirements, which vary significantly from country to
country. Each country in which the Company's products and services are offered
must be evaluated independently to determine the country's particular
requirements. In foreign countries, the Company's distributors are generally
responsible for obtaining any required government consents.
EMPLOYEESEmployees
As of December 31, 19961997 the Company employed 191282 persons, all of whom
were located in the United States. Eighty ofOf these, 102 persons were employed inby the
West Bridgewater, Massachusetts 62 incompany, 65 by the New Britain, Connecticut
company, 48 by the Gaithersburg, Maryland company, and 49 at67 by the Rockville, Maryland site.Garden Grove,
California company. None of the Company's employees is covered by a collective
bargaining agreement. The Company believes that it has a satisfactory
relationship with its employees.
-13-
EXECUTIVE OFFICERS OF THE REGISTRANT-16-
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the current
executive officers of the Registrant as of December 31, 1996:
NAME AGE POSITION
---- --- --------
Richard T. Schumacher 46 President; Chief Executive Officer and
Chairman of the Board
Kevin W. Quinlan 46 Senior Vice President, Finance; Chief
Financial Officer; Treasurer and Director
Patricia E. Garrett, Ph.D. 53 Senior Vice President, Regulatory Affairs
& Strategic Programs
Mark M. Manak, Ph.D. 45 Senior Vice President, Research and
Development
Richard C. Tilton, Ph.D. 60 Senior Vice President, Specialty
Laboratory Services
Barry M. Warren 49 Senior Vice President, Sales & Marketing
Ronald V. DiPaolo, Ph.D. 52 Vice President of Operations
1997:
Name Age Position
- ---- --- --------
Richard T. Schumacher 47 President; Chief Executive Officer and
Chairman of the Board
Kevin W. Quinlan 47 Senior Vice President, Finance; Chief
Financial Officer; Treasurer and
Director
Patricia E. Garrett, Ph.D. 54 Senior Vice President, Regulatory
Affairs & Strategic Programs
Mark M. Manak, Ph.D. 46 Senior Vice President, Research and
Development
Richard A Sullivan 57 Senior Vice President, Laboratory
Instrumentation
Richard C. Tilton, Ph.D. 61 Senior Vice President, Specialty
Laboratory Services
Barry M. Warren 50 Senior Vice President, Sales &
Marketing
Ronald V. DiPaolo, Ph.D. 53 Vice President, Manufacturing
Richard H. Newhouse, Ph.D. 54 Vice President, Materials Management
Mr. Schumacher, the founder of the Company, has been the President and
a Director since 1986, and Chief Executive Officer and Chairman since 1992. Mr.
Schumacher served as the Director of Infectious Disease Services for Clinical
Science Laboratory, a New England-based medical reference laboratory, from 1986
to 1988. From 1972 to 1985, Mr. Schumacher was employed by the Center for Blood
Research, a nonprofit medical research institute associated with Harvard
Medical School. Mr. Schumacher received a B.S. in zoology from the University
of New Hampshire.
Mr. Quinlan, a Director of the Company since 1986, has been Senior Vice
President, Finance, Treasurer, and Chief Financial Officer and Treasurer since January 1993.
From 1990 to December 1992, he was the Chief Financial Officer of ParcTec, Inc.
a New York-based leasing company. Mr. Quinlan served as Vice President and
Assistant Treasurer of American Finance Group, Inc. from 1981 to 1989 and was
employed by Coopers & Lybrand from 1975 to 1980. Mr. Quinlan is a certified
public accountant and received a M.S. in accounting from Northeastern
University and a B.S. in economics from the University of New Hampshire.
Dr. Garrett has been Senior Vice President, Regulatory Affairs &
Strategic Programs since 1988. From 1980 to 1987, Dr. Garrett served as the
Technical Director of the Chemistry Laboratory, Department of Laboratory
Medicine at the Lahey Clinic Medical Center. Dr. Garrett earned her Ph.D. from
the University of Colorado and was a postdoctoral research associate at Harvard
University, Oregon State University, Massachusetts Institute of Technology and
the University of British Columbia.
Dr. Manak has served as Senior Vice President, Research and Development
since 1992. From 1980 to 1992, he served as Senior Research Scientist,
Molecular Biology, of Biotech Research Laboratories. Dr. Manak received his
Ph.D. in biochemistry from the University of Connecticut and completed
postdoctoral research work in biochemistry/virology at Johns Hopkins
University.
Mr. Sullivan has served as Senior Vice President, Laboratory
Instrumentation since the Company's acquisition of the business of Source
Scientific, Inc. ("Source") in July 1997. Prior to that from 1994 to 1997, Mr.
Sullivan was Chairman, President and Chief Executive Officer of Source. He held
the position of Executive Vice President and General Manager of Source from
1993 to 1994, and was Vice President Sales & Marketing for MicroProbe
Corporation from 1989 to 1993. Previously, he was President of LAB2000 in
Florida, a company specialized in import and export of clinical and industrial
products worldwide. Mr. Sullivan holds a BS in Medical Technology from the
University of Buffalo, New York and a MBA from Pace University, New York.
Dr. Tilton has served as Senior Vice President, Specialty Laboratory
Services since the Company's acquisition of BBI Clinical Laboratories, Inc.
("BBICL") in 1993 and was one of the
-17-
founders of BBICL, where he served as President from 1989 to 1993. Dr. Tilton
has 25 years of experience in university hospital clinical microbiology
laboratories and is board certified in medical and public health microbiology.
Dr. Tilton received his Ph.D. in microbiology from the University of
Massachusetts.
Mr. Warren has served as Senior Vice President, Sales & Marketing since
1993. From 1985 to 1993, Mr. Warren served as Group Director of Marketing of
Organon Teknika, a manufacturer of -14-
infectious disease reagents. Mr. Warren
received an M.A. in political science from Loyola University of Chicago and a
B.A. from Loyola University.
Dr. DiPaolo has recently been appointed Vice President, Manufacturing.
Prior to that he served as Vice President of Operations since 1993. Prior to
joining the Company, Dr. DiPaolo served as Vice President and General Manager
of the Biomedical Products Division of Collaborative Research, a medical
research products company from 1986 to 1989. From 1975 to 1986 he was employed
by DuPont New England Nuclear, an in vitro test kit manufacturer. Dr. DiPaolo
received his Ph.D. in biochemistry from Massachusetts Institute of Technology
and later completed postdoctoral research at the Eunice Shriver Center in
Waltham, Massachusetts.
Dr. Newhouse has been Vice President of Materials Management since
1997. Prior to joining the Company, Dr. Newhouse served as Vice President of
Laboratory Services for Serologicals Corporation, an Atlanta, Georgia based
biopharmaceutical company from 1989 to 1997. Prior to that he was employed for
20 years in several medical diagnostics companies holding titles such as Vice
President Operations, Laboratory Director, and Director of Manufacturing. Dr.
Newhouse received his Ph.D. in clinical pathology from the University of
Maryland.
Officers are elected by, and serve at the pleasure of, the Board of Directors.
ITEM 2. PROPERTIES.
The Company'sCompany owns its corporate offices and Diagnostic Products
manufacturing facilities arefacility located in a two story, 22,50032,000 square foot building in
West Bridgewater, Massachusetts. The Company ownshas been renovating and operatesexpanding
this building. The Company is
currently expandingfacility during the manufacturing capacity by approximately 7,500 square
feet,past year, and believes that following theseupon completion of
renovations in mid 1998, its facility in West Bridgewater will be sufficient to
meet its foreseeable needs.
The Company leases 41,000 square feet of space in Garden Grove,
California where it manufactures Laboratory Instruments. The lease continues
until February 1, 2002 and the Company has an option to renew at market rates.
The Company leases its laboratory facilities in Rockville,Gaithersburg, Maryland
and New Britain, Connecticut. The RockvilleGaithersburg facility contains 21,00036,500 square
feet of custom built laboratory space, and is occupied under a five-yearten-year lease
that is due to expire on June 30, 1997. The
Company is currently considering extending the lease for an additional period,
as well as relocating its laboratory.October 31, 2007. The New Britain facility has 15,000
square feet, most of which is dedicated to laboratory space. The lease is for
five years and is due to expire on July 30, 2000; the Company has an option to
renew for an additional five years.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company or
its subsidiaries.
-18-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 19961997 to a
vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
The Company completed an initial public offering of its Common Stock,
$.01 par value, (the "Common Stock") on October 31, 1996. The Common Stock is
listed on the NASDAQ National Market under the symbol "BBII".
For the period
from October 31, 1996 through December 31, 1996,The following table sets forth the high and low closing prices
ofprice, by
quarter, since the Company's Common Stock on NASDAQ were 8 1/2 and 6 3/4, respectively.initial public offering.
Q1 Q2 Q3 Q4
------------- ------------- ------------- -------------
High Low High Low High Low High Low
------ ----- ------ ----- ------ ----- ------ -----
1997 10.250 6.063 11.375 7.750 8.875 6.000 8.000 4.875
1996 --- --- --- --- --- --- 8.500 6.750
As of December 31, 1996,1997, there were 20,000,000 shares of Common Stock
authorized of which 4,378,1574,622,566 shares of Common Stock were outstanding, held of record by
approximately 1661,500 stockholders.
The Company has not declared or paid any dividends on its Common Stock.
PaymentIn accordance with the terms of dividends on Common Stock is restricted under the Company's loan agreement with its bank.
-15-bank,
payment of dividends on Common Stock requires bank approval. The Company does
not expect to recommend the payment of a dividend as it plans to continue to
reinvest profits to expand its business.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The statement of income data for each of the fiscal years in the fourfive
year period ended December 31, 1996,1997, and the balance sheet data as of December
31, 1993, 1994, 1995, 1996 and 1996,1997, have been derived from the consolidated
financial statements of the Company which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The statement of income data of the Company for the
fiscal year ended December 31, 1992 and the balance sheet data as of December
31, 1992 have been derived from consolidated financial statements of the Company
which have been audited by other independent public accountants. This data should be read in
conjunction with "Item 8"--Item 8--"Consolidated Financial Statements and Supplementary
Data", and "Item 7"--Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
(2)(3) (1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
REVENUE:
Product salesProducts $11,711 $ 8,470 $6,622 $5,982$ 6,622 $ 5,982 $3,942
$2,955
Services 10,588 7,039 5,649 4,741 5,215
1,680
-------- -------- -------- ----------------- --------- --------- --------- --------
Total revenue 22,299 15,509 12,271 10,723 9,157
4,635
-------- -------- -------- ----------------- --------- --------- --------- --------
COSTS AND EXPENSES:
Cost of product sales 5,773 4,252 3,564 3,194 2,088
1,638
Cost of services 7,239 4,856 4,168 3,416 3,965
1,443
Research and development 1,311 797 375 469 279
222
Selling and marketing 3,241 2,188 1,340 1,192 894
353
General and administrative 3,343 2,401 2,316 2,047 1,619
745--------- --------- --------- --------- -------- -------- -------- -------- -------
Total operating costs and expenses 20,907 14,494 11,763 10,318 8,845
4,401
-------- -------- -------- ----------------- --------- --------- --------- --------
Income from operations 1,392 1,015 508 405 312
234
Interest expense, net 213 336 244 179 113
-------- -------- -------- --------283 (213) (336) (244) (179)
--------- --------- --------- --------- --------
Income before income taxes and extraordinary item 1,675 802 172 161 133
121
extraordinary item
Provision for income taxes (670) (321) (69) (64) (41)
(45)
-------- -------- -------- ----------------- --------- --------- --------- --------
Income before extraordinary item 1,005 481 103 97 92 76
Extraordinary item-gain on elimination of debt, net of income taxes -- -- -- -- 50
--
-------- -------- -------- ----------------- --------- --------- --------- --------
Net income $ 1,005 $ 481 $ 103 $ 97 $ 142
$ 76
97
-------- -------- -------- ----------------- --------- --------- --------- --------
Net income per share(4)share, basic $ 0.140.23 $ 0.17 $ 0.04 $ 0.04 $ 0.06
Net income per share, diluted $ 0.04
Weighted average common and common equivalent0.21 $ 0.14 $ 0.03 $ 0.03 $ 0.05
Number of shares outstanding(4)used to calculate net income per share
Basic 4,438 2,916 2,570 2,552 2,403
Diluted 4,780 3,340 3,151 2,587 2,438 2,1603,040 3,019 2,794
DECEMBERDecember 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
1992--------- --------- --------- -------- --------
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:Consolidated Balance Sheet Data: (In thousands, except per share data)
Working capital(5)capital(3) $ 9,576 $12,836 $4,829$4,688 $4,686 $ 3,612 $2,457$3,612
Total assets 23,630 19,798 9,928 8,076 6,870 4,828
Long term debt, less current maturities(3) 216 41 4,216 3,180 2,381
1,760
maturities(5)
Total stockholders' equity 18,067 16,290 3,187 3,041 2,762 1,837
Dividends -- -- -- -- --
- ---------------------------------
(1) Effective July 1, 1992,1997, the Company acquired through its BTRL subsidiary the business and net assets of
a division of Cambridge Biotech CorporationSource Scientific, Inc. for $762,000$1,994,000 which increased 19921997 revenues by
$1,450,000.$2,608,000.
(2) On June 30, 1993, the Company exercised its option to pre-pay the
acquisition note in connection with the 1992 purchase of BTRLBBI Biotech at a
substantial discount from the balance due, resulting in an extraordinary
gain of $50,000 net taxes of $33,000. The 1993 net income per share before
such extraordinary gain was $0.04.
(3) Effective January 1, 1993,Due to a modification of its maturity date, the Company acquired the net assets of North
American Laboratory Group Ltd., Inc. for $425,000, which increased 1993
revenues by $2,019,000.
(4) The effect of the common stock equivalents on net income per share has been
excluded from the calculation for years ended December 31, 1992 through 1994
as its inclusion was antidilutive.
(5) The Company's demand line of
credit with an outstanding amountsamount of $1,091,000
and $1,895,000 as of December 31, 1992 and 1993, respectively,
has been presented as part of long-term debt (and excluded from current
liabilities in calculating working capital) for 1992 and 19931993. This change was made
to be consistent with its reclassification to long-term debt in 1994 1995 and
1996 due to a
modification of its maturity date.
-16-1995.
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEWOverview
The Company generates revenue from products and services provided
primarily to the in vitro diagnostic infectious disease industry. There are two
broad product classes: Diagnostic Products and Laboratory Instruments.
Diagnostic Products consist of three groups: Quality Control Panels, Accurun(TM)Accurun(r)
Run Controls and Diagnostic Components. Services consist of Specialty Clinical
Laboratory Testing, Contract Research, Clinical Trials, Laboratory
Instrumentation Services, and Drug Screening. In the threefive full years since the
Company's acquisition of BBI Biotech Research Laboratories ("BTRL"BBI Biotech") and
BBI Clinical Laboratories, Inc. ("BBICL"), the Company has experienced a shift
in revenue mix towards increased product sales, as product revenue as a
percentage of total revenue increased from 43.1% in 1993 to 54.6%52.5% in 1996,1997, with
a corresponding decrease in the percentage of total revenue provided by
services.
The Company's gross profit margin increased from 33.9% in 1993 to 41.3%41.6%
in 19961997 principally as a result of the increased percentage of higher margin
product revenues. Within products, the Company's Quality Control Products
(Accurun(TM)(Accurun(r) Run Controls and Quality Control Panels) have higher margins than
the Company's Laboratory Instruments and Diagnostic Components. Within
services, Contract Research gross margins are lower than other services.
However, such contracts enable the Company to maintain certain scientific staff
and capability that it might otherwise not be able to afford. The Company
intends to continue to concentrate on the growth in sales of its Quality
Control Products.
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, including customer
purchasing patterns, primarily driven by end-of-year expenditures, and seasonal
demand during the summer months for certain laboratory testing services. In
particular, the Company's sales of its Quality Control Products and Diagnostic
Components typically have been highest in the fourth quarter and lowest in the
first quarter of each fiscal year, whereas Specialty Clinical Laboratory
Testing has generally reached a seasonal peak during the third quarter,
coinciding with the peak incidence of Lyme Disease. Research Contracts are
generally for large dollar amounts spread over a one or two year period, and
upon completion, frequently do not have renewal phases. As a result they can
cause large fluctuations in revenue and net income. In addition to staff
dedicated to internal research and development, certain of the Company's
technical staff work on both Contract Research for customers and Company
sponsored research and development. The allocation of certain technical staff
to such projects depends on the volume of Contract Research. As a result,
research and development expenditures fluctuate due to increases or decreases
in Contract Research.
To develop new Quality Control Products and support increased sales,
the Company hired additional research and development staff in the second half
of 1995 and sales and marketing staff in 1996.1996 and 1997. The Company intends to
continue to add staff to these departments. This should cause both research and
development and selling and marketing expenses to increase asdepartments but at a percentage of
revenue in 1997, compared to 1996.reduced rate. General and
administrative expenses are not expected to increase at the same rate, as the
Company has already incurred significant infrastructure expenses.
The Company does not have any foreign operations. However, the Company
does have significant export sales in Europe, the Pacific Rim countries and
Canada to agents under distribution agreements, as well as directly to test kit
manufacturers. All sales are denominated in U.S.US dollars. Export sales for the
years ended December 31, 1994, 1995, 1996, and 19961997 were $2.3$3.4 million, $3.1$4.3 million,
and $3.9$5.2 million, respectively. The Company expects that export sales will
continue to be a significant source of revenue and operating income.
-17-
RESULTS OF OPERATIONS-21-
Results of Operations
The following table sets forth for the periods indicated the percentage
of total revenue represented by certain items reflected in the Company's
consolidated statements of operations:
YEAR ENDED DECEMBERYear Ended December 31
----------------------
1997 1996 1995
1994
---- ---- ---------- ------ ------
Revenue:
Products 52.5% 54.6% 54.0%
55.8%
Services 47.5 45.4 46.0
44.2
---- ---- ---------- ------ ------
Total revenue 100.0 100.0 100.0
Gross profit 41.6 41.3 37.0 38.4
Operating expenses:
Research and development 5.9 5.1 3.1 4.4
Selling and marketing 14.5 14.1 10.9 11.1
General and administrative 15.0 15.5 18.9
19.1
---- ---- ---------- ------ ------
Total operating expenses 35.4 34.7 32.9
34.6
---- ---- ---------- ------ ------
Income from operations 6.2 6.5 4.1
3.8
Interest expense 1.4 2.7 2.3
--- --- ---income (expense) 1.3 (1.4) (2.7)
------ ------ ------
Income before income taxes 7.5 5.1 1.4
1.5
Net income 4.5 3.1 0.8
0.9
=== === ========= ====== ======
Product gross profit 50.7% 49.8% 46.2% 46.6%
Services gross profit 31.6% 31.0% 26.2%
28.0%
YEARS ENDED DECEMBERYears Ended December 31, 1997 and 1996
The most significant event in 1997 effecting comparability of results
with 1996 was the acquisition of the business of Source Scientific, Inc.
effective July 1, 1997. The acquisition was completed by a wholly owned
subsidiary of the Company, BBI Source Scientific, Inc., ("BBI Source") and was
accounted for as an asset purchase. This effected every line of the income
statement.
Total revenue increased 43.8%, or $6,790,000, to $22,299,000 in 1997
from $15,509,000 in 1996. The increase in revenue was the result of a 38.3%
increase in product revenue of $3,241,000 to $11,711,000 from $8,470,000, and a
50.4% increase in service revenue of $3,549,000 to $10,588,000 from $7,039,000
in 1996. Approximately $1,416,000 of the product increase was attributable to
the inclusion of BBI Source for the first time, and the balance of the increase
was a result of a 34.0% increase in sales of Quality Control Products,
particularly Accurun(r) from a higher volume of both new and existing products,
offset in part by price decreases. Service revenue included $1,192,000 from
inclusion of BBI Source, a 49.1% increase in contract research revenue as a
result of new contracts, and a 32.6% increase in specialty clinical laboratory
testing revenue as the Company's HIV PCR test introduced in September 1996, was
offered for a full year in 1997. Overall for both products and services, prices
declined slightly in 1997 versus 1996. In summary, even after excluding BBI
Source, the Company's total revenue increased 27.0% in 1997 compared to 1996
with a 21.5% increase in product revenue, and a 33.5% increase in service
revenue on strong volume performance by Quality Control Products, contract
research, and specialty clinical laboratory testing.
Gross profit increased 45.1%, or $2,886,000, to $9,287,000 for 1997
from $6,401,000 in 1996. Product gross profit increased 40.8%, or $1,720,000,
to $5,938,000 in 1997 from $4,218,000 in 1996 and product gross profit margin
increased to 50.7% in 1997 from 49.8%. The products gross margin increase was a
result of a favorable shift in product mix towards Accurun sales and overall
volume increase, thereby spreading fixed costs over a larger base, and despite
a lower gross profit margin in BBI Source's instrument sales. Services gross
profit increased 53.5%, or $1,167,000, to $3,350,000 in 1997 from $2,183,000 in
1996 as the testing volume increased at a faster rate than laboratory
headcount, thereby
-22-
causing the services gross profit margin to increase to 31.6% in 1997 from
31.0% in 1996. BBI Source's service gross profit margin was slightly higher
than the Company average, which is expected to continue.
Research and development expenditures increased 64.6%, or $514,000, to
$1,311,000 in 1997 from $797,000 in 1996. The increase resulted primarily from
new Laboratory Instrument development activities at BBI Source, as well as
increased development expenditures for Accurun(r), molecular and immunological
Run Controls, and specialized molecular assays.
Selling and marketing expenses increased 48.1%, or $1,053,000, to
$3,241,000 in 1997 from $2,188,000 in 1996. The increase was attributable
primarily to an eleven person expansion of the TQS sales, marketing, and
technical support staff and related increased trade show and travel expenses.
In addition, the inclusion of BBI Source added $167,000 of expense to this
category.
General and administrative costs increased 39.2%, or $942,000, to
$3,343,000 in 1997 from $2,401,000 in 1996. This increase was attributable
primarily to: the addition of a Director of Human Resources and wide area
network systems analyst; higher expenditures for accounting and legal
professionals and investor relations activities in our first full year as a
public company; increased travel associated with the BBI Source acquisition;
and non-recurring moving costs of $40,000 associated with moving BBI Biotech
Research Laboratories to a new facility in Gaithersburg Maryland. These
increases were partially offset by a lower provision for doubtful accounts as a
result of improved accounts receivable collections from patients at the
Company's clinical reference testing laboratory. In addition, the inclusion of
BBI Source added $442,000 of expense to this category.
Operating income increased 37.1%, or $377,000, to $1,392,000 in 1997
from $1,015,000 in 1996. This increase was primarily a result of continued
strong performance in the Company's Quality Control Products business and
clinic reference testing laboratory, partially offset by a loss at BBI Source
of $189,000.
The Company had net interest income of $283,000 in 1997 versus net
interest expense of ($213,000) in 1996 as substantially all of the Company's
debt was repaid in November 1996 with a portion of the proceeds from its IPO.
The Company had positive cash balances to invest for all of 1997.
Net income increased 108.9%, or $524,000, to $1,005,000 in 1997 from
$481,000 in 1996. Of this increase, 43% was attributable to higher operating
income, and the balance was due to the shift from net interest expense in 1996
to net interest income in 1997. Diluted earnings per share increased 50% to
$0.21 for 1997 versus $0.14 in 1996. This increase was achieved even though
weighted average diluted shares outstanding increased 43%. Basic earnings per
share increased 35% to $0.23 for 1997 versus $0.17 in 1996.
Years Ended December 31, 1996 ANDand 1995
Total revenue increased 26.4%, or $3,239,000, to $15,509,000 in 1996
from $12,271,000 in 1995. The increase in revenuesrevenue was the result of a 27.9%
increase in product revenuesrevenue of $1,848,000 to $8,470,000 from $6,622,000, and a
24.6% increase in service revenuesrevenue of $1,390,000 to $7,039,000 from $5,649,000
in 1995. The increase in product revenue was attributable to an increase in the
volume of sales of Quality Control Products, particularly Accurun. The
increase in service revenue was primarily the result of increased volume of
specialty clinical laboratory testing and a favorable mix shift towards higher
priced molecular testing, and the impact of two new research contracts. This
was partially offset by lower volume of clinical trial services.
Gross profit increased 41.0%, or $1,862,000, to $6,400,599 for 1996
from $4,539,000 in 1995. Products gross profit increased 38.0%, or $1,160,000,
to $4,217,000 in 1996 from $3,057,000 in 1995 as the products sales increase was
positively impacted by an increase inand products gross profit margin
(toincreased to 49.8% in 1996 from 46.2%). The products gross margin increase was a
result of a favorable mix shift towards Accurun sales. Services gross profit
increased 47.3%, or $701,000, to $2,183,000 in 1996 from $1,481,000 in 1995 as
the testing volume increased at a
-23-
faster rate than laboratory headcount increased, and thereby caused the
services gross profit margin to increase to 31.0% in 1996 from 26.2% in 1995.
Research and development expenditures increased 112.1%, or $421,000, to
$797,000 in 1996 from $376,000 in 1995. The increase resulted from increased
costs of personnel hired in the second half of 1995 to step-up the rate of new
product introductions, and increased research project expenditures. Development
projects included Accurun(TM)Accurun(r), molecular and immunological Run Controls,
specialized molecular assays, and expenditures related to the Company's drug
discovery program.
Selling and marketing expenses increased 63.3%, or $848,000, to
$2,188,000 in 1996 from $1,340,000 in 1995. The increase was attributable
primarily to additional sales and marketing staff and overhead; increased
advertising, promotion, trade show and travel expenses due to the commencement
of the Company's "Total Quality System" (TQS) marketing campaign; and costs
associated with participation by the Company's Specialty Clinical Laboratory in
the Roche Diagnostics' Amplicor( Access program in connection with Roche's
launch of their new FDA approved HIV PCR test kit. The -18-
Amplicor( kit is
primarily used to monitor the HIV viral load (level) in patients prior to and
during drug therapy.
General and administrative costs increased 3.7%, or $85,000, to
$2,401,000 in 1996 from $2,316,000 in 1995. This increase was attributable
primarily to additional staffing in support of revenueCompany growth and higher
reserve provisions for doubtful accounts associated with the increased volume
of revenue related to testing in situations in which payment to the Company
depends on collecting from the patient rather than a healthcare institution.
Operating income increased 100.0%, or $507,000, to $1,015,000 in 1996
from $508,000 in 1995. This increase was primarily a result of a very strong
performance in the Company's Quality Control Products business and clinic
reference testing laboratory.
Net interest expense decreased 36.6%, or $123,000, to $213,000 in 1996
from $336,000 in 1995, as the proceeds from the Company's initial public
offering were used to pay down almost all debt in early November, and the
remaining amount invested in short term, investment grade securities.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenueNet income increased 14.4%367.2%, or $1,548,000,$378,000, to $12,271,000$481,000 in 1996 from
$103,000 in 1995. Diluted earnings per share increased 325% to $0.14 for 1996
versus $0.03 in 1995. Weighted average diluted shares outstanding only
increased 10% in 1996 over 1995 as the Company's shares issued in connection
with its IPO were outstanding for only two months in 1996. Basic earnings per
share increased 312% to $0.17 for 1996 versus $0.04 in 1995.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash and cash equivalents of
approximately $2,772,000 and working capital of $9,633,000. Trade accounts
receivable increased $2,143,000 or 62.7%, primarily from $10,723,000 in 1994. The increase in revenues was the resultinclusion of a 10.7%
increase in product revenues of $640,000 to $6,622,000 from $5,981,000, and a
19.1% increase in service revenues of $908,000 to $5,649,000 from $4,741,000 in
1995 compared to 1994. The increase in product revenue was attributable to an
increase in prices at the beginning of 1995 and an increaseBBI
Source in the volume of
sales of Quality Control Products and Basematrix (part of the Diagnostic
Components group), which increase was partially offset by the absence of
revenues in 1995 from two OEM Quality Control Panel contracts which were
completed in 1994. The Company also reduced emphasis on certain lower margin
Diagnostic Components as it focused more effort on sales of its proprietary
Basematrix product, which carries a higher margin. During 1995, the Company
reorganized its sales and marketing department and believes that this had an
adverse effect on sales growthyear end balance sheet for the period. The increasefirst time, and significant growth
in servicefourth quarter revenue wasin 1997. Inventory increased $1,723,000 or 41.2%,
again primarily due to the resultinclusion of increased specialty clinical laboratory testing, two
new research contracts and increased clinical trial services, particularly inBBI Source for the area of HIV.
Gross profit increased 10.4%, or $426,000, to $4,539,000 for 1995 from
$4,113,000 in 1994. Products gross profit increased 9.7%, or $270,000, to
$3,057,000 in 1995 from $2,787,000 in 1994 as the products sales increase was
offset by a small decrease in products gross profit margin (to 46.2% in 1995
from 46.6%). The products gross margin decrease was a result of a small increase
in material handling personnel costs. Services gross profit increased 11.8%, or
$156,000, to $1,481,000 in 1995 from $1,326,000 in 1994 as the sales increase
was offset by a decrease in services gross profit margin to 26.2% in 1995 from
28.0% in 1994. Services gross margin declined primarily as a result of increased
personnel costs in the specialty clinical laboratory and an increase in contract
research activities, which carry a lower margin.
Research and development expenditures decreased 20.0%, or $94,000, to
$376,000 in 1995 from $469,000 in 1994. The decrease resulted from certain
technical staff being utilized for Company sponsored research and development in
1994 and Contract Research in 1995. Development projects included Accurun(TM),
molecular and immunological Run Controls, specialized molecular assays,first time, and the
developmentaddition of a second generation Lyme Disease western blot test kit for
internal use by the Company's specialty testing laboratory.
Selling and marketing expenses increased 12.4%, or $148,000,39 new products to $1,340,000 in 1995 from $1,192,000 in 1994. The increase was primarily
attributable to additional sales and marketing staff and overhead, partially
offset by lower trade show and travel expenses as the Company realized greater
benefits from its distributor network.
General and administrative costs increased 13.1%, or $269,000, to
$2,316,000 in 1995 from $2,047,000 in 1994. This increase was primarily
attributable to additional staffing in support of revenue growth and higher
reserve provisions for doubtful accounts associated with the increased volume of
revenue related to testing in situations where payment to the Company depends on
collecting from the patient rather than a healthcare institution. These
increases were partially offset by lower professional
-19-
fees. Also included in general and administrative expense was approximately
$60,000 of nonrecurring costs associated with the move of the specialty testing
laboratory into a larger, custom-designed facility.
Interest expense increased 37.8%, or $92,000, to $336,000 in 1995 from
$244,000 in 1994, as the Company funded its working capital needs primarily
through increased borrowings.
LIQUIDITY AND CAPITAL RESOURCESinventory.
On October 31, 1996, the Company's Common Stock commenced trading on the
NASDAQ as a result of itscompleting the initial public offering of its common
stock ("IPO"), selling 1,600,000 shares at $8.50 per share. Net proceeds
received after underwriting discounts, commissions and offering costs was
approximately $11,633,000. On November 5, 1996, the Company repaid
substantially all of its outstanding bank debt which totaled approximately $3.9
million.
The Company has financed its operations to date through cash flow from
operations, borrowings from banks and sales of equity. With the repayment of
debt from the IPO proceeds, theThe Company expects its
cash flow and cash position to meet existing operational needs, although amounts repaid on its
Revolving
Linerevolving line of Credit Agreement (the "Revolver")credit will be available as needed for reborrowing as
needed.working capital.
-24-
Net cash provided by operations for 19961997 was $1,460,000$727,000 as compared to
cash used$1,460,000 in operations of $29,000 in 1995. This increase1996. As discussed above, this decrease in cash flow was
primarily attributable to an increase in net income, improved working capital
position,carrying additional accounts receivable and inventory
as of year end. This was partially offset by an increase in deferred revenue
from a payment of $306,000$331,000 under a research contract for future clinical trial
services.services, and a net increase in accounts payable and accrued expenses of
$696,000. Also benefiting net cash from operations for 1997 was a $290,000
reduction in current federal tax liability as a result of non-qualified stock
option exercises. Cash flow used in operations in 19941995 was $554,000$29,000 as working
capital needs due to sales growth exceeded cash generated from net income
adjusted by non cash expenses.
Cash used in investing activities for 1997, 1996 1995 and 19941995 amounted to
$5,396,000, $1,412,000, $1,320,000, and $405,000,$1,320,000, respectively. In addition to equipment
purchasesnormal
capital expenditures, four items accounted for most of the 1997 investing
activities. First, the Company exercised its option to purchase an additional
165,000 shares of BioSeq, Inc. stock at an aggregate cost of $750,000, thereby
increasing its ownership of BioSeq to 19.9%. Second, in May 1997, the Company's
BBI Biotech subsidiary signed a ten year lease for new laboratory space in
Gaithersburg, Maryland and spent $566,000 on leasehold improvements for new
laboratory space for its contract research and product development activities.
Third, the expansion and renovation of its Diagnostic Products manufacturing
facility in West Bridgewater, Massachusetts commenced construction and
approximately $920,000 was expended as the project is now over two-thirds
complete. Finally, effective on July 1, 1997, the Company completed the
acquisition of the business and net assets of Source Scientific, Inc. at a
purchase price of $1,994,000 including acquisition costs. The Company has
accounted for the acquisition as an asset purchase, and is amortizing goodwill
of approximately $2.2 million over 15 years. See Note 2 to the Company's Notes
to Consolidated Financial Statements in Item 8 hereunder. The cash used in
investing activities in 1996 included the Company purchased common stockinitial investment in BioSeq, Inc. forof
$732,500, which represents an ownership position of approximately 14% in BioSeq,
Inc. The increased use of cash inwhile 1995 compared to 1994 was the result ofincluded the purchase of the Company's West Bridgewater
facility.facility for $806,000.
During 1997, net cash generated from financing activities included
$300,000 from the exercise of warrants, and $182,000 from exercising stock
options. Also in 1997, $1,124,000 was used to pay down debt acquired in
connection with the Source acquisition. In 1996, net cash generated from
common stock issued, including the IPO, approximated $12,600,000. This was
used to pay down net debt of $4,577,000. Net cash provided by borrowings for
1995 and 1994 amounted to $1,240,000, and
$846,000, and net proceeds from the sale of Common Stock for
the same periods
amounted to $176,000 and $170,000, respectively.period was approximately $176,000. The proceeds of such debt were used
for working capital, to acquire the West Bridgewater property and to purchase
capital equipment.
In 1997, 1996 1995 and 19941995 capital expenditures amounted to $2,613,000,
$669,000, and $1,316,000, respectively. The 1997 expenditures included both
the Massachusetts and $405,000, respectively. InMaryland facility improvement, and the 1995 $806,000 of the Company's
capital expenditures
related to the purchase of the West Bridgewater facility.facility, all as discussed
above.
On April 26, 1996 the Company entered into a new five year distribution
agreement with Kyowa Medex, Co., Ltd., a foreign distributor, extending a six
year old relationship. Simultaneously, Kyowa Medex, Co., Ltd. purchased 117,647 shares of the
Company's Common Stock at a price of $8.50 per share. Under the distribution
agreement, Kyowa has been granted an exclusive right to sell and distribute
the Company's products in Japan and to continue to purchase product from the
Company at a discount. In return, Kyowa is obligated to achieve certain
minimum sales levels, provide market, sales and regulatory information, and has
agreed not to compete with the Company.
On March 9, 1998, the Company announced plans to modify a previously
announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent
company, ABX Hematologie, SA (France). Under the contract, the Company provided
technical, customer and field services for instruments sold by ABX in the
United States. Under the modified agreement, individual customer service
contracts will be assigned to ABX and ABX will assume responsibility for its
United States instruments. The Company will provide certain consulting services
through March 1999 to assist ABX in establishing a sales, customer service,
technical support, and field service operation in the United States for its
hematology
-25-
instrument and reagent business. In addition, the Company has agreed to allow
ABX to occupy space at its California facility during the period of the
agreement. The Company's personnel associated with this contract, included the
nationwide field service organization and hotline technical support, will be
offered employment by ABX.
The Company is accounting for its investment in BioSeq on the
cost-basis in accordance with the provisions of APB 18 since its cumulative
investment is less than 20% of the equity of BioSeq and the Company does not
exert significant influence or control. BioSeq needs to obtain additional
financing in 1998 to continue operations and there can be no assurances that
any such financing will be available upon acceptable terms. Due to the
uncertainty of technology based development stage enterprises, the Company
performs a periodic analysis of the investment to determine whether the
carrying value of its investment in BioSeq has been other than temporarily
impaired. In performing the analysis of its investment in BioSeq for the
current year, management considered BioSeq's positive factors including its
technology, patent positions, business prospects, and the possibility of
raising capital and achieving financial success; as well as its negative cash
flow and net worth, and limited cash and other resources, and failure to date
to raise significant capital independent of the Company. Management has
concluded that its investment has not been other than temporarily impaired, if
at all. If it is subsequently determined to be impaired, the Company will
adjust the carrying value of its investment by taking a charge to earnings
which could amount to the full value of its $1,482,500 investment as of
December 31, 1997. See also Note 14 relating to the Company's $600,000
purchase of certain technology rights from BioSeq.
The Company anticipates capital expenditures to increase overbegin slowing down in
1998 as most of the near
term as it expects to use approximately $1.0 million from the IPO proceeds to
expand its manufacturing capacity in West Bridgewater during 1997, of which
approximately $500,000 will be spent on building expansionMaryland and approximately $500,000 will be spent on equipment. The Company expects to make a final
investment in BioSeq in 1997two-thirds of $750,000 which will increase its ownership
position to 19.9%. This final payment is mandated if BioSeq attains certain
technical milestones by July 31, 1997, and at the Company's option by December
31, 1997 if such milestones are not achieved.Massachusetts
projects have been completed. The Company believes that existing cash balances,
the borrowing capacity available under the Revolver,revolving line of credit, and cash
generated from operations are sufficient to fund operations and anticipated
capital expenditures for the foreseeable future. Except for purchase orders in
connection with the manufacturing expansion, and the BioSeq investment described
above, there were no material financial
commitments for capital expenditures as of December 31, 1996.
-20-
In March 1997,1997.
Year 2000 Computer Systems Compliance
Concerns have been widely expressed regarding the inability of certain
computer programs to process date information beyond year 1999. These concerns
focus on the impact of the Year 2000 problem on business operations and the
potential costs associated with identifying and addressing the problem. The
Company is in the process of evaluating and taking steps to deal with the
potential impact of this problem in areas under its control, including its
products and sources of supply, as well as its operations management,
administration and financial systems.
Based on its review to date, the Company entered into an Asset Purchase Agreementbelieves that its products are
"Year 2000 compliant." The Company plans to correct or replace its
administrative and business systems in time to avoid material problems. The
Company has confirmed with Source Scientific, Inc.existing software vendors that Year 2000 compliant
versions either exist or will be available to acquire substantially all of their assets. Also
in March,upgrade or replace its operations
management, administrative and financial systems. Where it believes that a
particular supplier's situation poses unacceptable risks, the Company entered intoplans to
identify an alternative source.
Based upon its review, the Company does not believe that the Year 2000
problem will have a new linematerial adverse affect on the Company. However, there can
be no assurances that failure to comply with Year 2000 by parties outside its
control will not have a material adverse affect on the Company.
-26-
Recent Accounting Pronouncements
Comprehensive Income
Statement of credit agreement with its bank
replacing the Revolver. See Note 12 to the Company's Notes to Consolidated
Financial Statements in Item 8 hereunder.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128
("130, "Reporting
Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after
December 15, 1997. SFAS 128"), "Earnings per Share", which130 requires that changes in comprehensive income be
shown in a financial statement that is displayed with the presentation of basic and
diluted earning per share (EPS). Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities orsame prominence as
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. Basic EPS replaces
primary EPS. Diluted EPS is computed similarly to fully diluted EPS under the
existing rules.financial statements. The Company will adopt SFAS 128 as130 in fiscal year
ended December 31, 1998. Adoption of this statement is not expected to have an
impact on the Company's consolidated financial position and results of
operations.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
financial statements for periods beginning after December 15, 19971997. This
statement will change the way companies report annual financial statements and
upon
adoption, will restate all prior period EPS data presented.requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. The Company haswill
adopt SFAS 131 in the fiscal year ended December 31, 1998. Adoption of this
statement is not yet quantified whatexpected to have an impact on the impactCompany's consolidated
financial position and results of SFAS 128 will be on EPS.
FORWARDoperations.
Forward - LOOKING INFORMATIONLooking Information
The Annual Report on Form 10-K contains forward-looking statements
concerning the Company's financial performance and business operations. The
Company wishes to caution readers of this Annual Report on Form 10-K that
actual results might differ materially from those projected in the
forward-looking statements contained herein.
Factors which might cause actual results to differ materially from
those projected in the forward-looking statements contained herein include the
following: inability of the Company to develop the end user market for quality
control products; inability of the Company to integrate the business of Source
Scientific, Inc. into the Company's business; inability of the Company to grow
the sales of Source Scientific, Inc. to the extent anticipated; inabilityfailure to
execute a definitive agreement with ABX Hematologie for the transfer to them of
Source Scientific, Inc.certain service activities in connection with the letter of intent to repaymodify
the $650,000 loan made by the Company;existing contract; a material adverse change in the business, financial
condition or prospects of BioSeq, Inc., an early stage biotechnology company in
which the Company has made a significant investment;investment, including inability to
develop its technology to the level of commercial utilization; inability of the
Company to obtain an adequate supply of the unique and rare specimens of plasma
and serum necessary for certain of its products; significant reductions in
purchases by any of the Company's major customers; and the potential
insufficiency of Company resources, including human resources, plant and
equipment and management systems, to accommodate any future growth. Certain of
these and other factors which might cause actual results to differ materially
from those projected are more fully set forth under the caption "Risk Factors"
in the Company's Registration Statement on Form S-1 (SEC File No. 333-10759).
-21-ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
-27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------------------------------
1997 1996
1995
--------------------------- --------------
ASSETS
------
CURRENT ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 8,082,642 $ 11,463$2,772,360 $8,082,642
Accounts receivable, less allowances of $446,517
in 1997 and $352,058 in 1996 and
$142,372 in 19955,558,710 3,415,994
3,075,870
Inventories (Note 2)5,902,821 4,180,334 3,676,851
Prepaid expense and other 288,481 239,950 254,199
Deferred income taxes (Note 7)328,562 283,200
110,766
-------------- --------------------------- ------------
Total current assets 14,850,934 16,202,120
7,129,149
-------------- --------------------------- ------------
Property and equipment, net (Note 3)4,980,164 2,699,158 2,614,982
OTHER ASSETS:
Long term investment (Note 4)1,482,500 732,500 -
Goodwill and other intangibles, net (Note 1)2,212,220 95,302 100,820
Notes receivable and other 124,178 69,234
83,422
-------------- -------------------------- ------------
3,818,898 897,036
184,242
-------------- -------------------------- ------------
TOTAL ASSETS $ 19,798,314 $ 9,928,373
============== ==============$23,649,996 $19,798,314
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long term debt (Note 6)$ 14,878 $ 12,820
$ 436,509
Accounts payable 2,218,685 991,839 745,216
Accrued compensation 1,103,837 840,666 395,755
Accrued income taxes 132,802 427,140 36,582
Other accrued expenses 498,247 264,262 303,820
Deferred revenue 1,249,024 829,477
523,401
-------------- -------------------------- -----------
Total current liabilities 5,217,473 3,366,204
2,441,283
-------------- -------------------------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 6)Deferred rent and other liabilities 215,937 40,948 4,215,501
Deferred income taxes (Note 7)149,333 101,580 84,641
COMMITMENTS AND CONTINGENCIES
(Note 8)
STOCKHOLDERS' EQUITY (Note 10):EQUITY:
Common stock, $.01 par value; authorized 20,000,000 shares in
19961997 and 1995;1996; issued and outstanding 4,622,566 in 1997 and
4,378,157 in 1996 and issued
2,640,417 in 199546,226 43,782 26,404
Additional paid-in capital 16,029,049 15,258,656 2,798,620
Retained earnings 1,991,978 987,144
505,924
-------------- --------------
16,289,582 3,330,948
Less treasury stock, at cost-80,000 shares in 1995 and none in 1996 - (144,000)
-------------- -------------------------- ------------
Total stockholders' equity 18,067,253 16,289,582
3,186,948
-------------- -------------------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 19,798,314 $ 9,928,373
============== ==============$23,649,996 $19,798,314
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
-22--28-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
1994
-------------- ------------- ------------------------- ------------
REVENUE:
Product salesProducts $11,711,026 $ 8,469,890 $ 6,621,631
$ 5,981,378
Services 10,588,311 7,039,406 5,649,099
4,741,376
-------------- ------------- ------------------------- ------------
Total revenue 22,299,337 15,509,296 12,270,730 10,722,754
COSTS AND EXPENSES:
Cost of product sales 5,773,417 4,252,068 3,564,241 3,194,217
Cost of services 7,238,527 4,856,630 4,167,625 3,415,777
Research and development 1,311,190 796,805 375,712 469,358
Selling and marketing 3,241,422 2,188,152 1,339,792 1,191,573
General and administrative 3,342,829 2,400,681 2,315,814
2,047,256
-------------- ------------- ------------------------- ------------
Total operating costs and expenses 20,907,385 14,494,336 11,763,184 10,318,181
Income from operations 1,391,952 1,014,960 507,546
404,573
Interest expense,income (expense), net 212,969 335,899 243,694
--------------282,771 (212,969) (335,899)
------------- ------------------------- ------------
Income before income taxes 1,674,723 801,991 171,647 160,879
Provision for income taxes (Note 7)(669,889) (320,771) (68,657)
(64,351)
-------------- ------------- ------------------------- ------------
Net income $ 1,004,834 $ 481,220 $ 102,990
$ 96,528
============== ============= ========================= ============
Net income per share, basic $ 0.23 $ 0.17 $ 0.04
Net income per share, diluted $ 0.21 $ 0.14 $ 0.04 $ 0.04
============== ============= =============
Weighted average common and common
equivalent0.03
Number of shares outstandingused to calculate net income per share
Basic 4,437,801 2,915,522 2,569,641
Diluted 4,780,070 3,340,236 3,151,477 2,587,1373,040,188
The accompanying notes are an integral part of these consolidated financial
statements
-23--29-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock
--------------------------------------------- Additional Total
$.01 Par Paid-In Retained Treasury Stockholders'
Shares Value Capital Earnings Stock Equity
------------ ---------- -------------- ---------------------- ----------- ------------------------ --------- -------------
BALANCE, December 31, 1993 2,525,028 $ 25,250 $ 2,430,100 $ 306,406 - $ 2,761,756
Issuance of common stock 29,862 299 139,403 139,702
Stock options and warrants exercised 23,975 240 30,197 30,437
Tax benefit of stock options exercised 12,800 12,800
Net income 96,528 96,528
------------ ---------- -------------- ------------ ----------- ---------------
BALANCE, December 31, 1994 2,578,865 25,789 2,612,500 402,934 - 3,041,223
Issuance of common stock 8,535 85 58,160 58,245
Stock options and warrants exercised 47,200 472 117,068 117,540
Conversion of note payable 5,817 58 9,542 9,600
Treasury stock purchased - 80,000 shares (144,000) (144,000)(144,000
Tax benefit of stock options exercised 1,350 1,350
Net income 102,990 102,990
------------ ---------- -------------- ---------------------- ----------- ------------------------ --------- -------------
BALANCE, December 31, 1995 2,640,417 26,404 2,798,620 505,924 (144,000) 3,186,948
Issuance of common stock, net of issuance costs 1,637,647 16,377 12,371,469 144,000 12,531,846
Stock options and warrants exercised 85,760 858 67,210 68,068
Conversion of note payable 14,333 143 21,357 21,500
Net income 481,220 481,220
------------ ---------- -------------- ---------------------- ----------- ------------------------ --------- -------------
BALANCE, December 31, 1996 4,378,157 $ 43,782 $ 15,258,656 $ 987,144 - 16,289,582
Stock options and warrants exercised 244,409 2,444 480,032 482,476
Tax benefit of stock options exercised 290,361 290,361
Net income 1,004,834 1,004,834
---------- ---------- ----------- ---------- -------- -------------
BALANCE, December 31, 1997 4,622,566 $ 16,289,582
============46,226 $16,029,049 $1,991,978 - $18,067,253
========== ============== ====================== =========== ========================= ======== =============
The accompanying notes are an integral part of these consolidated financial
statements
-24--30-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------------------------------------------
1997 1996 1995
1994
------------- ------------ -------------
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,004,834 $ 481,220 $ 102,990 $ 96,528
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 858,434 600,495 441,356 360,512
Provision for doubtful accounts 174,925 247,080 181,084
102,099
Deferred rent (71,381) (87,152) (45,792) 5,908
Deferred income taxes 2,391 (155,495) (61,765) (42,798)
Tax benefit of stock options exercised 290,361 - 1,350 12,800
Changes in operating assets and liabilities:
Accounts receivable (1,907,413) (587,204) (997,112) (529,157)
Note receivable and other assets (13,930) 14,188 (61,343)
(3,720)
Inventories (640,301) (503,483) (67,335)
(567,420)
Prepaid expenses 2,546 14,249 (98,082)
(3,500)
Accounts payable 797,690 246,623 (42,190) (86,130)
Accrued compensation and other expenses (102,199) 883,063 94,126
100,767
Deferred revenue 330,855 306,076 523,401
-
------------- ------------ ------------------------ ----------- -----------
Net cash provided by (used in) operating activities 726,812 1,459,660 (29,312)
(554,111)
------------- ------------ ------------------------ ----------- -----------
CASH FLOWS FROMFOR INVESTING ACTIVITIES:
Payments for additions to property and equipment (2,612,697) (669,154) (1,316,217) (404,639)
Purchase of intangible assets (39,625) (9,999) (4,000) -
Purchase of long term investment (750,000) (732,500) -
Net assets of acquisition, net of cash acquired (1,993,722) - ------------- ------------ --------------
----------- ----------- -----------
Net cash used in investing activities (5,396,044) (1,411,653) (1,320,217)
(404,639)
------------- ------------ ------------------------ ----------- -----------
CASH FLOWS FROMFOR FINANCING ACTIVITIES:
Proceeds from long term debt - 226,300 1,517,867 1,734,425
Repayments of long-term debt (1,123,526) (4,803,042) (277,789) (887,989)
Proceeds of common stock issued 482,476 13,581,315 175,785 170,139
Offering costs associated with common stock issued - (981,401) - -
Purchase of treasury stock - - (144,000)
-
------------- ------------ ------------------------ ----------- -----------
Net cash (used in) provided by financing activities (641,050) 8,023,172 1,271,863
1,016,575
------------- ------------ ------------------------ ----------- -----------
(DECREASE) INCREASE (DECREASE) IN CASH:CASH AND CASH EQUIVALENTS: (5,310,282) 8,071,179 (77,666)
57,825
Cash and cash equivalents, beginning of year 8,082,642 11,463 89,129
31,304
------------- ------------ ------------------------ ----------- -----------
Cash and cash equivalents, end of year $ 8,082,642$2,772,360 $8,082,642 $ 11,463
$ 89,129
============= ============ ======================== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Conversion of note payable to common stock - $ 21,500 $ 9,600 -
Noncash exercise of warrants to stockholder - $ 180,650 - -
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 662,304 $ 85,460 $ 168,994
$ 33,718
Interest paid $ 300,5875,731 $ 331,495300,587 $ 254,133331,495
The accompanying notes are an integral part of these consolidated financial
statements
-25--31-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIESBusiness and Significant Accounting Policies
Boston Biomedica, Inc. ("BBI") and Subsidiaries (together, the
"Company") provide infectious disease diagnostic products, clinical
instrumentation, contract research and specialty infectious disease testing
services to the in-vitro diagnostic industry, government agencies, blood banks,
hospitals and other health care providers worldwide. The Company is subject to
risks common to companies in the Biotechnology industry, including but not
limited to, development by the Company or its competitors of new technological
innovations, dependence on key personnel, protection of proprietary technology,
and compliance with FDA government regulations.
Significant accounting policies followed in the preparation of these
consolidated financial statements are as follows:
(I) PRINCIPLES OF CONSOLIDATION(i) Principles of Consolidation
The consolidated financial statements include the accounts of BBI and
its wholly-owned subsidiaries, BBI Biotech Research Laboratories, Inc. ("BTRL"BBI
Biotech") and, BBI Clinical Laboratories, Inc. ("BBICL"), and BBI Source
Scientific, Inc. ("BBI Source"). All significant intercompany accounts and
transactions have been eliminated in the consolidation. Certain amounts
included in the prior year's financial statements may have been reclassified to
conform to the current presentation.
(II) USE OF ESTIMATES(ii) Use of Estimates
To prepare the financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In particular, the Company records reserves for estimates
regarding the collectability of accounts receivable as well as the net
realizable value of its inventory. Actual results could differ from the
estimates and assumptions used by management.
(III) REVENUE RECOGNITION(iii) Revenue Recognition
Product revenues are recognized as sales upon shipment of the products
or, for specific orders at the request of the customer, on a bill and hold
basis after completion of manufacture. All bill and hold transactions meet
specified revenue recognition criteria which include normal billing, credit and
payment terms, and transfer to the customers of all risks and rewards of
ownership. Accounts receivable as of December 31, 19961997 and 19951996 include bill
and hold receivables of $23,000$31,000 and $179,000,$23,000, respectively.
The Company periodically enters into barter transactions whereby the
Company exchanges inventory for testing services. Revenue on these transactions
are recognized when both the products have been shipped and the testing
services have been completed and are recorded at the estimated fair market
value of the inventory based upon standard Company prices. The revenue
recognized on these transactions for the years ended December 31, 1997, 1996
and 1995 was $261,000, $244,000, and 1994 was $244,000,
$213,000, and $192,000, respectively.
Services are recognized as revenue upon completion of tests for
specialty laboratory services. Revenue from service contracts and research and
development contracts for the Company's laboratory instrumentation business is
recognized as the service and research and development activities are performed
under the terms of the contracts.
Revenue under long-term contracts, including funded research and
development contracts, is recorded under the percentage of completion method,
wherein costs plus profit is recorded as service revenue and billed monthly as
the work is performed. Certain customers make advance payments that are
deferred until revenue recognition is appropriate. Unbilled amounts for fee
retainage are included in accounts receivable at December 31, 19961997 and 1995,1996,
and are immaterial. When the current contract estimates indicate a loss,
provision is made for the total anticipated loss. The Company does not believe
there are any material collectability issues associated with these receivables.
Total revenue related to funded research and development contracts was
approximately $1,737,000, $1,126,000, $728,000, and $660,000$728,000 for the years ended December
31, 1997, 1996 1995 and 1994,1995, respectively. Total contract costs associated with
these agreements were approximately $1,438,000, $975,000 $575,000 and $511,000$575,000 for the
years ended December 1997, 1996 and 1995, and 1994, respectively.
-26--32-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIESBusiness and Significant Accounting Policies -- (CONTINUED)
(IV) CASH AND CASH EQUIVALENTS(Continued)
(iv) Cash and cash equivalents
The Company's policy is to invest available cash in short-term,
investment grade, interest bearing obligations, including money market funds,
municipal notes, and bank and corporate debt instruments. Securities purchased
with initial maturities of three months or less, are valued at cost plus
accrued interest, which approximates fair market value, and classified as cash
equivalents. At December 31, 1997 the Company's cash equivalents consisted of
$2,702,280 invested in a money market fund. At December 31, 1996 the Company's
cash equivalents consisted of $6,091,120$6,001,259 invested in a money market fund and a
banker's acceptance of $1,991,522.
(V) RESEARCH AND DEVELOPMENT COSTS(v) Research and Development Costs
Research and development costs are expensed as incurred.
(VI) INVENTORIES(vi) Inventories
Inventories are stated at the lower of average cost or net realizable
value and include material, labor and manufacturing overhead.
(VII) PROPERTY AND EQUIPMENT(vii) Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is recognized using accelerated and straight-line
methods, allocating the cost of the assets over their estimated useful lives
ranging from five years to ten years for certain manufacturing and laboratory
equipment, from three to five years for office equipment and management information systems and
office equipment, three years for automobiles and fifteen years for the
building. Upon retirement or sale, the cost and related accumulated
depreciation of the asset are removed from the books. Any resulting gain or
loss is credited or charged to income.
(VIII) GOODWILL AND INTANGIBLES(viii) Goodwill results fromand Intangibles
The Company has classified as goodwill the cost in excess of fair value
of the purchase prices over the acquired
net assets of BTRL and BBICL andbusiness acquired. Goodwill is being amortized on a straight
line basis over ten to fifteen years. Other intangibles primarily consist of
patents, licenses, and intellectual property rights and are amortized over four
to ten years.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires that an impairment loss be recognized for
long-lived assets and certain identified intangibles when the carrying amount of
these assets may not be recoverable. The Company has adopted SFAS 121 effective
in 1996 and the adoption did not have a material impact on the financial
statements.
(IX) INCOME TAXES(ix) Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred taxes arise from temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance is provided for net
deferred tax assets if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. Tax credits are recognized when realized using the flow through
method of accounting.
(X) CONCENTRATION OF CREDIT RISK(x) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents, and
accounts receivable. The Company places its cash in federally chartered banks,
each of which is insured up to $100,000 by the Federal Deposit Insurance
Corporation. The Company limits credit risk in cash equivalents by investing
only in short term, investment grade securities including money market funds
restricted to such securities. Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom the Company makes
substantial sales (see also Note 5)6). The Company does not require collateral
from its customers. To reduce risk, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
-27-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(XI) DEFERRED REVENUE(xi) Deferred Revenue
Deferred revenue consists of payments received from customers in
advance of services performed.
(XII) COMPUTATION OF NET INCOME PER SHARE
Net income per common share is computed based upon the weighted average
number-33-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies -- (Continued)
(xii) Recent Accounting Standards
Comprehensive Income
Statement of common shares and common equivalent shares (using the treasury stock
method) outstanding after certain adjustments described below. Common equivalent
shares consist of common stock options and warrants outstanding. In accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued during the twelve month period prior
to the initial filing of the Company's S-1 Registration Statement (August 23,
1996) have been included in the calculation as if they were outstanding for all
periods using the treasury stock method and an initial public offering price of
$8.50 per share. Fully diluted net income per common share is not presented as
it does not differ from primary earnings per share.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement No. 128
("130, "Reporting
Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after
December 15, 1997. SFAS 128"), "Earnings per Share", which130 requires that changes in comprehensive income be
shown in a financial statement that is displayed with the presentation of basic and
diluted earning per share (EPS). Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities orsame prominence as
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. Basic EPS replaces
primary EPS. Diluted EPS is computed similarly to fully diluted EPS under the
existing rules.financial statements. The Company will adopt SFAS 128130 in fiscal year
ended December 31, 1998. Adoption of this statement is not expected to have an
impact on the Company's consolidated financial position and results of
operations.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
financial statements for periods beginning after December 15, 1997. This
statement will change the way companies report annual financial statements and
requires them to report selected segment information in their quarterly
reports issued to shareholders. It also requires entity wide disclosures about
the products and services an entity provides, the material countries in which
it holds assets and reports revenues, and its major customers. The Company
will adopt SFAS 131 in the fiscal year ended December 31, 1998. Adoption of
this statement is not expected to have an impact on the Company's consolidated
financial position and results of operations.
(2) Purchase of the Business and Net Assets of Source Scientific, Inc.
In July 1997, the Company, through its wholly owned subsidiary
BBI-Source Scientific, Inc., completed the acquisition of all of the assets,
business, and selected liabilities of Source Scientific, Inc. ("Source"). In
addition to the cash payment of $1,894,000 to Source, the total purchase price
was $1,994,000 including consulting, legal, accounting and other acquisition
costs, net of cash acquired. The acquisition is treated as an asset purchase as
of December 15,July 2, 1997 and upon
adoption, will restate all prior period EPS data presented.the results of operations have been included since that
date. The purchase price exceeded the fair market value of net assets acquired
by approximately $2,202,000, which is recognized as goodwill and is being
amortized on a straight line basis over fifteen years.
The following unaudited pro forma information combines the consolidated
results of operations of the Company hasand Source as if the asset purchase had
occurred at the beginning of 1996, after giving effect to certain adjustments,
including amortization of intangible assets, increased interest expense on the
acquisition debt, and related income tax effects. The unaudited pro forma
information is shown for comparative purposes only and does not yet quantified whatreflect the
impactsynergies expected to result from the integration of SFAS 128 will be on EPS.
(2) INVENTORIESSource's business into the
Company's business.
Years Ended December 31,
----------------------------
Unaudited 1997 1996
- --------- ------------- -------------
Revenue $24,051,796 $20,489,296
Operating income (loss) 688,808 539,960
Net income (loss) 371,285 239,976
Pro forma earnings per share, basic 0.08 0.08
Pro forma earnings per share, diluted 0.08 0.07
-34-
(3) Inventories
The Company purchases human plasma and serum from various private and
commercial blood banks. Upon receipt, such purchases generally undergo
comprehensive testing, and associated costs are included in the value of raw
materials. Most plasma is manufactured into Basematrix and other diagnostic
components to customer specifications. Plasma and serum with the desired
antibodies or antigens are sold or manufactured into Quality Control Panels,
Accurun(TM) run controls,Accurun(r) Run Controls, and reagents ("Finished Goods"). Panels and reagents
are unique to specific donors and/or collection periods, and require
substantial time to characterize and manufacture due to stringent technical
specifications. Panels play an important role in diagnostic test kit
development, licensure and quality control. Panels are manufactured in
quantities sufficient to meet expected user demand which may exceed one year.
Inventory balances at December 31, 19961997 and 19951996 consist of the following:
1997 1996
1995
-------------- ------------------------ ----------
Raw materials $ 1,359,569 $ 1,298,131
Work-in-processmaterials.............................. $2,033,040 $1,359,569
Work-in-process............................ 1,190,567 697,749
565,667
Finished goodsgoods............................. 2,679,214 2,123,016
1,813,053
-------------- --------------
$ 4,180,334 $ 3,676,851
============== ==============
-28-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT---------- ----------
$5,902,821 $4,180,334
========== ==========
(4) Property and Equipment
Property and equipment at December 31, 19961997 and 19951996 consist of the
following:
1997 1996
1995
-------------- -------------------------- ------------
Laboratory equipment $ 1,751,737 $ 1,630,872and manufacturing equipment........ $2,240,660 $1,751,737
Management information systemssystems................ 1,693,939 1,247,190
834,768
Office equipmentequipment.............................. 686,608 394,957
332,496
AutomobilesAutomobiles................................... 189,775 196,663
178,465
Leasehold improvementsimprovements........................ 687,714 122,419 108,892
Land, building and improvementsimprovements............... 2,160,932 956,386
941,175
-------------- -------------------------- ------------
7,659,628 4,669,352 4,026,668
Less accumulated depreciationdepreciation................. 2,679,464 1,970,194
1,411,686
-------------- -------------------------- ------------
Net book value $ 2,699,158 $ 2,614,982
============== ==============value................................ $4,980,164 $2,699,158
============ ============
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was approximately $731,000, $585,500, and $425,700 respectively. (4) LONG TERM INVESTMENTIncluded
in 1997 land, building and improvements is approximately $920,000 of
construction in progress.
(5) Long Term Investment
In October 1996, the Company entered into a License Agreement, Purchase
Agreement, Stockholders' Agreement and Warrant Agreement with BioSeq, Inc.
("BioSeq") a privately held, technology based development stage company. The
Company has agreed to purchase convertible preferred stock equivalent to
approximately 19% of the capital stock of BioSeq for an aggregate of $1,482,500
in three installments. Of the $1,482,500, $210,000 was invested at
the date of the agreements and $522,500$732,500 was invested in November 1996.
The
Company must make the remaining $750,000 installment if BioSeq attains certain
technical milestones by July 31, 1997. If such milestones are not attained by
BioSeq by July 31,In April 1997, the Company will still have theexercised its option to make the
remainingpurchase an
additional 165,000 shares of BioSeq at an aggregate cost of $750,000, thereby
increasing its ownership to 19%. The investment until December 31, 1997.is carried at cost of
$1,482,500 and classified as a long term investment. Under the operative
documents, the Company has price anti-dilution protection, pre-emptive rights
and the right to board representation. In addition, the Company was granted
warrants to acquire additional shares of common stock of BioSeq for additional
consideration under certain conditions, provided that this right is not
exercisable to the extent it would cause the Company's ownership
-35-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Long Term Investment (Continued)
to equal or exceed 20%. The Company is accounting for its investment in BioSeq
on the cost
basiscost-basis in accordance with the provisions of APB 18 since its
cumulative investment is and must remain less thatthan 20% of the equity of BioSeq and the Company
does not exert significant influence or control. BioSeq needs to obtain
additional financing in 1998 to continue operations and there can be no
assurances that any such financing will be available upon acceptable terms. Due
to the uncertainty of technology based development stage enterprises, and in accordance with the
provisions of SFAS 121, the
Company will performperforms a periodic analysis of the investment to determine whether the
carrying value of its investment in BioSeq has been other than temporarily
impaired. In performing the analysis of its investment in BioSeq for the
current year, management considered BioSeq's positive factors including its
technology, patent positions, business prospects, and the possibility of
raising capital and achieving financial success; as well as its negative cash
flow and net worth, and limited cash and other resources, and failure to date
to raise significant capital independent of the Company. Management has
concluded that its investment has not been other than temporarily impaired, if
at all. If soit is subsequently determined to be impaired, the Company wouldwill
adjust the carrying value of its investment by taking a charge to earnings.
Uponearnings
which could amount to the earlierfull value of paymentits $1,482,500 investment as of
the final installment ofDecember 31, 1997. See also Note 14 relating to the Company's aggregate $1,482,500 investment and December 31, 1997,$600,000
purchase of certain technology rights from BioSeq.
In accordance with the agreement, the Company will bewas granted a worldwide
right ("the License") to use the BioSeq technology relating to sequencing and
analysis services. The License will be exclusive until BioSeq commences
selling on a commercial basis the equipment used in the DNA sequencing and
analysis process, at which time the License will become non-exclusive. The
License provides that the Company will pay BioSeq market royalties ranging from five
percent to ten percentas a
percentage of net revenues arising out of the services performed by the Company
with the licensed technology. The Company will account for the royalty as a
cost of revenue as the revenues are earned. -29-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) REVENUE FROM SIGNIFICANT CUSTOMERS AND EXPORT SALES(See also Note 14.)
(6) Revenue from Significant Customers and Export Sales
The Company performs contract research and certain other services under
contracts, subcontracts and grants from United States Government Agencies,
primarily the National Institutes of Health ("NIH"). Revenue from such
contracts, subcontracts and grants was approximately $2,638,000 in 1997,
$1,920,000 in 1996, and $1,628,000 in 1995 and $1,677,000 in 1994.1995.
Export sales accounted forby geographic area are approximately $3,914,000, or 25% of
consolidated revenue in 1996; $3,104,000, or 25% in 1995; and $2,279,000, or 21%
in 1994.
(6) LONG TERM DEBT
The Company's revolving line of credit ("Revolver") has a due date of
June 30, 1998 and bears interest at prime plus 1/2%. Borrowings under the
Revolver are limited to 80% of eligible accounts receivable plus the lesser of
40% of inventory or $1,500,000. The Company had $3,500,000 available under it's
Revolver as of December 31, 1996. Amounts outstanding under the Revolver, if
any, are collateralized by all of the Company's assets and a $2 million life
insurance policy of an officer/stockholder. The Revolver contains covenants
regarding the Company's debt-to-equity ratio and certain minimum debt service
coverage ratios. The Revolver further provides for restrictions on the payment
of dividends, limitations on the acquisition of property and equipment,
limitations on additional borrowings, and certain minimum stock ownership levels
by the officer/stockholder referred to above.
In December 1995, the Company purchased its corporate headquarters and
manufacturing facility in West Bridgewater, MA from its former landlord at a
price of $806,800 including closing costs, and borrowed $750,000 from its bank
to finance the purchase. This mortgage on this property was repaid in December
1996 from proceeds of the Company's initial public offering of common stock. See
also Note 3.
During 1996, convertible debt in the amount of $21,500 was converted
into 14,333 shares of common stock at a price of $1.50 per share. During 1995,
convertible debt in the amount of $9,600 was converted into 5,817 shares of
common stock at a price of $1.65 per share.
The Company prepaid substantially all debt out of the proceeds of its
initial public offering. At December 31, 1996 and 1995, the Company had the
following debt outstanding:
1996 1995
------------ -------------
Revolving line of credit agreement due June 30, 1998. $ - $ 2,784,307
Four notes payable to one bank which had interest rates from 8.22% to 9.25%, and
due dates from October 1998 through December 2000. Collateralized by all the
assets of the Company. - 995,445
Note payable to a bank, due in 84 fixed payments of principal and interest of
$11,729, bearing interest fixed at 8.30% for the first five years, and floating at
prime plus 1.0% for the remaining term. Collateralized by a mortgage and all
of the assets of the Company. - 750,000
Subordinated convertible note payable, which was converted by the holder into
common stock at $1.50 per share. - 21,500
Other installment note payable with an interest rate of 9.75% and due August 2001.
Collateralized by office and laboratory equipment and furniture. 53,768 100,758
------------ -------------
Total long term debt 53,768 4,652,010
Less: current maturities (12,820) (436,509)
------------ -------------
$ 40,948 $ 4,215,501
============ =============
Debt maturities beyond current are $14,128 in 1998, $15,569 in 1999, and $11,251
in 2000.
-30-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) INCOME TAXES
The Company's effective tax rate does not significantly differ from the
federal and state income tax statutory rates. The components of the provision
for income taxes are as follows:
1996 1995 1994
------------ ------------ -----------
Current expense: federal and state $ 476,206 $ 130,422 $ 91,242
Deferred (benefit) expense: federal and state (155,495) (61,765) (26,891)
------------ ------------ -----------
Total $ 320,711 $ 68,657 $ 64,351
============ ============ ===========
Significant items making up deferred tax liabilities1997 1996 1995
---------- ---------- ----------
Europe $3,150,000 $2,844,000 $2,257,000
Pacific Rim 1,310,000 948,000 642,000
Others 694,000 534,000 531,000
---------- ---------- ----------
Total $5,154,000 $4,326,000 $3,430,000
(7) Deferred Rent and deferred tax
assets are as follows:
1996 1995
------------- -------------
Current deferred taxes:
Inventory $ 87,158 -
Accounts receivable allowance 115,548 $ 56,863
Other accruals 80,494 53,903
------------- -------------
Total deferred tax assets 283,200 110,766
Long term deferred taxes:
Accelerated tax depreciation (176,015) (207,361)
Goodwill 13,551 (22,795)
Tax credits - 106,710
State net operating loss carryforwards 60,884 38,805
------------- -------------
Total deferred tax liabilities (101,580) (84,641)
------------- -------------
Total net deferred tax (liabilities) assets $ 181,620 $ 26,125
============= =============
As of December 31, 1996, the state net operating loss carryforwards
expire at various dates beginning in 1999 through 2007.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, laboratory, and research
facilities under operating leases with various terms through July 2000. All the
real estate leases include renewal options at increasing levels of rent.Other Liabilities
One of the facility leases includes scheduled base rent increases over
the term of the lease. The amount of base rent payments is being charged to
expense on the straight-line method over the term of the lease. As of December
31, 19961997 and 1995,1996, the Company has recorded a liability of $189,867 and
$53,900, and $141,100,
respectively, included in accrued expenses to reflect the excess of rent expense over cash payments
since inception of the lease. In addition to base rent, the Company pays a
monthly allocation of the operating expenses and real estate taxes for the
above facilities.facility.
The Company's outstanding debt consists of an installment note payable
with an interest rate of 9.75%, due August 2001. The note is collateralized by
office furniture and laboratory equipment. The amount outstanding on December
31, 1997 and 1996 was $40,948 and $53,768, respectively. The current amounts of
such debt at December 31, 1997 and 1996 was $14,878 and $12,820, respectively.
During 1996, convertible debt in the amount of $21,500 was converted
into 14,333 shares of common stock at a price of $1.50 per share.
-36-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Deferred Rent and Other Liabilities (Continued)
Effective March 28, 1997, the Company entered into a $7.5 million
uncollateralized revolving line of credit (the "Line") with its bank. The Line
matures on June 30, 1999; bears interest at the Company's option based on
either base rate, LIBOR plus 1.75%, or overnight money market rate plus 1.75%;
and carries a facility fee of .25% per annum, payable quarterly. The Line
contains covenants regarding the Company's ratio of total
liabilities-to-equity, minimum tangible net worth, and minimum debt service
coverage ratio. The Line further provides for restrictions on the payment of
dividends, and limitations on additional borrowings. The Company did not draw
upon the Line during 1997.
(8) Income Taxes
The Company's effective tax rate does not significantly differ from the
federal and state income tax statutory rates. The components of the provision
for income taxes are as follows:
1997 1996 1995
---------- ---------- ----------
Current expense: federal and state $667,498 $476,206 $130,422
Deferred expense (benefit): federal and state 2,391 (155,495) (61,765)
---------- ---------- ----------
Total $669,889 $320,711 $68,657
========== ========== ==========
Significant items making up deferred tax liabilities and deferred tax
assets are as follows:
1997 1996
---------- ----------
Current deferred taxes:
Inventory $ 72,249 $ 87,158
Accounts receivable allowance 153,469 115,548
Other accruals 102,844 80,494
---------- ----------
Total current deferred tax assets 328,562 283,200
Long term deferred taxes:
Accelerated tax depreciation (217,029) (176,015)
Goodwill and intangibles 15,176 13,551
State net operating loss carryforwards 52,520 60,884
---------- ----------
Total long term deferred tax liabilities, net (149,333) (101,580)
---------- ----------
Total net deferred tax assets $179,229 $181,620
========== ==========
As of December 31, 1997, the state net operating loss carryforwards expire at
various dates beginning in 1999 through 2007.
-37-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Commitments and Contingencies
The Company leases certain office space, laboratory, research and
manufacturing facilities under operating leases with various terms through
October 2007. All of the real estate leases include renewal options at either
market or increasing levels of rent.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$506,300, $365,700, and 1994 was
$365,700, $477,600, and $549,700, respectively. At December 31, 1996, the
remaining fixed lease commitment was as follows:
Year Ended Amount
-------------- ----------
1997 254,600-------------------- ------------
1998 117,300$ 938,970
1999 124,800969,715
2000 79,700
--------
$576,400
--------971,993
2001 915,609
2002 578,326
2003 and thereafter 2,358,410
------------
$6,733,023
Commencing in February 1995, the Company committed under a sponsored
research agreement with a university to fund a research scientist at a cost of
$13,125 per quarter for three years which costs are charged to research and
development expense. In return, the Company has exclusive rights to any
anti-HIV compounds or derivatives developed in the course of this research,
provided the Company obtains certain regulatory approvals from the FDA.
-31-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) RETIREMENT PLAN(10) Retirement Plan
In January 1993, the Company adopted a retirement savings plan for its
employees, which has been qualified under Section 401(k) of the Internal
Revenue Code. Eligible employees are permitted to contribute to the plan
through payroll deductions within statutory limitations and subject to any
limitations included in the plan. Company contributions are made at the
discretion of management. To date, no such contributions have been made.
During 1997, the Company has made no contributions torecognized administrative expense of approximately
$23,000 in connection with the plan.
(10) STOCKHOLDERS' EQUITY
COMMON STOCK(11) Stockholders' Equity
Common Stock
On October 31, 1996, the Company commenced trading on the NasdaqNASDAQ
National Market as a result of the initial public offering of its common stock
("IPO"), raising net proceeds of $11,633,000 from the sale of 1,600,000 shares
at $8.50 per share.
On April 26, 1996, the Company entered into a Stock Purchase Agreement
and Exclusive Distributor Agreement for five years with a foreign distributor.
Pursuant to the Stock Purchase Agreement, the Company issued 117,647 shares of
redeemable common stock at a price per share of $8.50, for which it received
net proceeds of $898,503. Issuance costs were $101,497. Completion of the IPO
terminated the redemption feature. The distributor iswas restricted from selling
these securities for a one-year period after completion of the IPO. The Company
issued the 80,000 shares of Treasury Stock in connection with this transaction.
On August 8, 1996 the Board of Directors approved a 1-for-2 reverse
stock split and an increase in authorized common shares to 20,000,000, and
authorized 1,000,000 shares of preferred stock (par value $.01), which were
approved by the stockholders on September 10, 1996. The stock split has been
retroactively reflected in the accompanying financial statements and notes for
all periods presented.
OPTIONS-38-
BOSTON BIOMEDICA, INC. AND WARRANTSSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stockholders' Equity-(Continued)
Options and Warrants
The Company has twoa nonqualified option plan and an incentive stock
option plansplan both of which are administered by a committee of the Board of
Directors who determines the employees and affiliated
persons to receive options and the number and option price of shares covered by
each such option. Options granted under both plans may be either incentive stock
options or non-qualified stock options.Directors. In general, for incentive stock options, the option price shall not be less than the fair market
value at the time the option is granted. Generally, options become exercisable
at the rate of 25% at the end of each of the four years following the
anniversary of the grant. Options issued expire ten years from the date of
grant, or 30 days from the date of termination orof affiliation.
At December 31, 1996, 897,6001997, 775,806 shares have been reserved for
non-qualified stock options, of which 98,87592,250 are available for future grants.
At December 31, 1996, 750,0001997, 778,925 shares have been reserved for incentive stock
options, of which 574,462348,587 are available for future grants.
The Company applieshas elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretationsinterpretations in accounting for its employee stock options. Under APB 25,
because the plans. Accordingly,exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation costexpense is recorded.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Pro forma information regarding net income and
earnings per share is required by SFAS 123 and has been recognizeddetermined as if the
Company had accounted for the plans. Had compensation cost for the plans been determined onits employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant datesusing a Black-Scholes option pricing model with the following
weighted average assumptions for awards under the plans in 1996 and 1995 using the1997. The minimum value method consistent with SFAS No. 123option pricing model
was used for all grants prior to the IPO,
the Company's net income would have been reduced by $77,500 or $0.02 per share
in 1996, and by $23,300 or $0.01 per share in 1995. In computing these pro forma
amounts the Company has assumed a risk-free interest rate equal to approximately
6.18%, no dividends, and expected average option life of approximately five
years. There were no options granted subsequent to the IPO. SFAS 123 does not
apply to awards prior to 1995, and additional awards in future years are
anticipated. The average fair value of options granted during 1996 and 1995 is
estimated as $1.93they were granted prior to the
Company's IPO.
1997 1996 1995
-------- -------- --------
Risk-free interest rate 5.72% 6.18% 5.33%
Volatility factor .55 .001 .001
Weighted average expected life 5 years 5 years 5 years
Expected dividend yield 0 0 0
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and $1.59, respectively, onare fully transferable. In addition, option valuation models require the
dateinput of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the grant.fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company has issued warrants in connection with certain debt
financings. As of December 31,Company's
pro forma net income and pro forma net income per share is as follows:
1997 1996 120,000 shares of Common Stock have been
reserved for issuance pursuant to the exercise of such warrants at a weighted
average exercise price of $2.501995
---------- -------- --------
Net income-as reported $1,004,834 $481,220 $102,990
Net income-pro forma 851,408 424,921 80,196
Net income per share.
-32-share-as reported, basic .23 .17 .04
Net income per share-as reported, diluted .21 .14 .03
Net income per share-pro forma, basic .19 .14 .03
Net income per share-pro forma, diluted .17 .13 .03
-39-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY - (CONTINUED)(11) Stockholders' Equity-(Continued)
Because SFAS 123 provides for pro forma expense for options granted
beginning in 1995, the pro forma expense will likely increase in future years
as new option grants become subject to the pricing model. The average fair
value of options granted during 1997, 1996 and 1995 is estimated as $4.44,
$1.86 and $1.40, respectively.
In 1991 and 1993, the Company issued warrants in connection with
certain debt financings. During 1997 all of those warrants were exercised.
The Company has reserved shares of its authorized but unissued common
stock for the following:
Stock Options Warrants
---------------------------------------------------------------------------------------------- -----------------------
Weighted Weighted Total
Average price Average price ----------------------------Total
--------------------------
Shares per share Shares per share Shares Exercisable
---------------- --------------- -------------- --------------- ------------------------- --------- -------- --------- ----------- ------------
Balance outstanding, December 31, 1993 881,850 2.14 306,138 2.66 1,187,988 712,163
Granted - - - - -
Exercised (19,375) 0.68 (4,600) 3.75 (23,975)
Expired (81,525) 2.69 - - (81,525)
---------------- -------------- ---------------
Balance outstanding, December 31, 1994 780,950 2.12 301,538 2.73 1,082,488 827,576
Granted 73,187 6.00 - - 73,187
Exercised (6,000) 1.88 (41,200) 2.58 (47,200)
Expired (47,850) 2.64 - - (47,850)
---------------- -------------- ------------------------- -------- -----------
Balance outstanding, December 31, 1995 800,287 2.45 260,338 2.85 1,060,625 879,038
Granted 140,600 7.27 - - 140,600
Exercised (1,500) 4.50 (84,260) 2.88 (85,760)
Expired (21,500) 6.05 (56,078) 3.54 (77,578)
================ ============== ===============---------- -------- -----------
Balance outstanding, December 31, 1996 917,887 3.10 120,000 2.50 1,037,887 839,272
================ ============== ===============
The following table summarizes information concerning optionsGranted 263,050 7.42 - - 263,050
Exercised (124,409) 1.44 (120,000) 2.50 (244,409)
Expired (30,435) 7.36 - - (30,435)
---------- -------- -----------
Balance outstanding, and exercisable as of December 31, 1996:1997 1,026,093 4.27 - - 1,026,093 672,231
========== ======== ===========
The following table summarizes information concerning options outstanding and
exercisable as of December 31, 1997:
Options Outstanding Options Exercisable
-------------------------------- ---------------------------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Remaining Number of Exercise Number of Exercise
Range of Exercise Prices Weighted Weighted Weighted
Average Number of Average Number of Average
Remaining Life Options Exercise Price Options Exercise Price
------------------------------------------------------------------------------------------ ------------------------ --------- ------------ ---------- --------- ---------
$0.25 - $1.50 2.40 188,834 1.0975 188,834 1.0975
$1.65 3.49 359,500 1.21 359,500 1.21
$2.50 - $3.00 4.60 342,767 2.3869 342,767 2.3869
$4.50 5.59 359,600 2.98 328,538 2.89
$6.00- $6.63 8.10 259,917 5.9231 104,798 5.0106
$7.00 - $8.50 9.40 198,787 6.86 31,234 6.00
=============== ================
917,887 719,272
=============== ================8.60 234,575 7.7556 35,832 7.3645
------------ ---------
1,026,093 672,231
============ =========
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited (Amounts in thousands, except for per share data)
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---------- ---------- ---------- ----------
Total revenue $ 3,084 $ 3,844 $ 4,015 $ 4,566
Gross profit 1,051 1,621 1,752 1,976
Net income (loss) (97) 179 163 236
Income (loss) per share (0.04) 0.06 0.05 0.06
1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---------- ---------- ---------- ----------
Total revenue $ 2,728 $ 2,837 $ 2,896 $ 3,810
Gross profit 853 1,105 1,107 1,474
Net income (loss) (39) 3 (19) 159
Income (loss) per share (0.01) 0.00 (0.01) 0.05
-33--40-
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) SUBSEQUENT EVENTS
SOURCE SCIENTIFIC ACQUISITIONComputation of Net Income per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS 128 establishes a different method of computing net income per
share than is currently required under the provisions of Accounting Principles
Board opinion No. 15. The following illustrates the computation of basic and
diluted net income per share.
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Shares, basic 4,437,801 2,915,522 2,569,641
Net effect of dilutive common stock
equivalents-based on treasury stock
method using average market price 342,269 424,714 470,547
----------- ----------- -----------
Shares, diluted 4,780,070 3,340,236 3,040,188
=========== =========== ===========
Net income, basic and diluted $1,004,834 $ 481,220 $102,990
=========== =========== ===========
Net income per share-basic 0.23 0.17 0.04
Net income per share-diluted 0.21 0.14 0.03
=========== =========== ===========
(13) Selected Quarterly Financial Data (Unaudited)
Unaudited (Amounts in thousands, except for per share data)
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue $4,209 $4,649 $6,140 $7,301
Gross profit 1,678 1,921 2,541 3,148
Net income 148 176 246 435
Net income per share, basic 0.03 0.04 0.06 0.10
Net income per share, diluted 0.03 0.04 0.05 0.09
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Total revenue $3,084 $3,844 $4,015 $4,566
Gross profit 1,051 1,621 1,752 1,976
Net (loss) income (97) 179 163 236
Net (loss) income per share, basic (0.04) 0.07 0.06 0.06
Net (loss) income per share, diluted (0.04) 0.06 0.05 0.06
(14) Subsequent Event
On March 26, 199720, 1998 the Company entered intocompleted a license agreement with
BioSeq, Inc., a development stage biotech company of which BBI owns 19% (see
also Note 5). The license agreement provides the Company the sole and exclusive
worldwide right to use BioSeq technical information, licensed processes and
improvements to develop, manufacture, market and sell or sublicense products or
services in the field of human in vitro immunodiagnostics. The Company paid an
Asset Purchase Agreement
to acquire substantially allinitial license fee in the amount of the assets and business and assume selected
liabilities of Source Scientific, Inc. ("Source") for $2.1 million in cash. A
substantial majority of this purchase price will be allocated to goodwill and
other intangibles Goodwill is expected$600,000, to be amortized over 10 years. Source is
a developer and manufacturer of a broad line of clinical instrumentation and
biomedical devices for the worldwide in vitro diagnostic industry. The Company
has advanced Source $650,000 in the form of senior secured demand notes to fund
working capital, product development and other operational needs. The notes bear
interest of 15%. The Company expects to make additional advances prior to
closing. The proposed acquisition is subject to standard conditions, including
Source shareholder approval and will be recorded incapitalized with
intangible assets. In accordance with purchase
accounting.
NEW LOAN AGREEMENT
Effective March 28, 1997,the agreement, the Company terminated its Revolver and
entered into a $7.5 million uncollateralized revolving line of credit ("New
Line") with its bank. The New Line matures on June 30, 1999; bears interest at
the Company's optionwill pay
BioSeq an annual royalty based on either base rate, LIBOR plus 1.75%, or overnight
money market rate plus 1.75%;net sales to customers and carries a facility fee of .25% per annum,
payable quarterly.sublicensees. The
New Line contains covenants regarding the Company's ratio
of total liabilities-to-equity, minimum tangible net worth,agreement is effective March 20, 1998 and minimum debt
service coverage ratio. The New Line further provides for restrictionsends on the payment of dividends, and limitations on additional borrowings.
(13) SUPPLEMENTARY PRO FORMA EARNINGS PER SHARE - (UNAUDITED)
Ifdate that the Offering had been completed on January 1, 1995, a portion of the
proceeds would have been used to retire all debt outstanding at that time, and
all debt incurred in 1995 and 1996 would not have been needed. Based on the
foregoing, supplemental pro forma net earnings per share of common stock would
have been $.19 and $.09 for the years ended December 31, 1996 and 1995,
respectively. Such net earnings per share of common stock are based on 3,544,183
and 3,626,391 shares of common stock respectively, consisting of 3,069,269 and
3,151,477 shares of common stock and common stock equivalents plus 474,914
shares assumed to be issued at $8.50 per share as if the Offering had occurred
on January 1, 1995 to retire indebtedness outstanding during 1995.
-34-last patent
expires, which is approximately 16 years.
-41-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
We have audited the accompanying consolidated balance sheets of Boston
Biomedica, Inc. and Subsidiaries as of December 31, 19961997 and 19951996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Boston
Biomedica, Inc. and Subsidiaries as of December 31, 19961997 and 19951996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 19961997 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 4, 1997,February 24, 1998 except as to
the information in Note 12,14, for
which the date is March 28, 1997
-35-20, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference to
the information under Part I, Item 1 - Business under the captionheading "Executive
Officers of the Registrant" at page 14 of this Report, and to the information
in the Registrant's definitive Proxy Statement which is expected to be filed by
the Registrant within 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement under the
heading "Executive Compensation," which is expected to be filed by the
Registrant within 120 days after the close of its fiscal year.
-42-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement under the
heading "Security Ownership of Directors, Officers and Certain Beneficial
Owners," which is expected to be filed by the Registrant within 120 days after
the close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Item 13 is incorporated by reference to
the information in the Registrant's definitive Proxy Statement under the
heading "Certain Relationships and Related Transactions," which is expected to
be filed by the Registrant within 120 days after the close of its fiscal year.
-36--43-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. INDEX TO FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................................22
Consolidated Statements of Income for the three years ended December 31, 1996......................23
Consolidated Statements of Changes in Stockholders' Equity for the three years ended
December 31, 1996.................................................................24
Consolidated Statements of Cash Flows for the three years ended December 31, 1996..................25
Notes to Consolidated Financial Statements.........................................................26
Report of Independent Accountants..................................................................35
(A) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule II-Valuation and Qualifying Accounts......................................................42
Report of Independent Accountants..................................................................43
(a) 1. Index to Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996.........28
Consolidated Statements of Income for the three years
ended December 31, 1997..............................................29
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 1997..................................30
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997....................................................31
Notes to Consolidated Financial Statements...........................32
Report of Independent Accountants....................................42
(a) 2. Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts........................49
Report of Independent Accountants....................................50
All supplemental schedules other than as set forth above are omitted as
inapplicable or because the required information is included in the
Consolidated Financial Statements or the Notes to Consolidated Financial
Statements.
(A) (a)3. EXHIBITS:
Exhibit No.
Exhibits:
Exhibit No.
-----------
3.1 Amended and Restated Articles of Organization of the
Company**
3.2 Amended and Restated Bylaws of the Company**
4.1 Specimen Certificate for Shares of the Company's Common
Stock**
4.2 Description of Capital Stock (contained in the Restated
Articles of Organization of the Company filed as Exhibit
3.1) **
10.1 Agreement, dated January 17, 1994, between Roche
Molecular Systems, Inc. and the Company**
10.2 Exclusive License Agreement, dated December 6, 1994, between the University of North Carolina at
Chapel Hill and the Company**
10.3 Contract, dated September 30, 1995, between the National Institutes of Health and the Company (No.
1-AI55273) **
10.4 Contract, dated September 30, 1995, between the National Institutes of Health and the Company (No.
1-AI-55277) **
10.5 Contract, dated March 1, 1993, between National Cancer Institute and the Company **
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and the Company**
10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland Facility between Cambridge Biotech
Corporation and the Company**
10.8 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut Facility between MB Associates
and the Company**
10.9 Worcester County Institution for Savings Warrant dated December 1, 1995 (No. 1) **
10.10 Worcester County Institution for Savings Warrant dated July 26, 1993 (No. 2) **
10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G Diagnostics Limited Partnership I and
the Company, as amended**
-37-
10.12 Purchase and Sale Agreement, dated December 6, 1994,
between the University of North Carolina at Chapel Hill
and the Company**
10.3 Contract, dated September 30, 1995, between the National
Institutes of Health and the Company (No. 1-AI55273) **
10.4 Contract, dated September 30, 1995, between the National
Institutes of Health and the Company (No. 1-AI-55277) **
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co.,
Inc. and the Company**
10.7 Lease Agreement, dated June 30, 1992, for Rockville,
Maryland Facility between Cambridge Biotech Corporation
and the Company**
10.8 Lease Agreement, dated July 28, 1995, for New Britain,
Connecticut Facility between MB Associates and the
Company**
10.9 Worcester County Institution for Savings Warrant dated
December 1, 1995 (No. 1) **
10.10 Worcester County Institution for Savings Warrant dated
July 26, 1993 (No. 2) **
10.11 Stock Purchase Agreement, dated June 5, 1990, between
G&G Diagnostics Limited Partnership I and the Company,
as amended**
-44-
10.14 Stock Purchase Agreement, dated April 26, 1996, between
Kyowa Medex Co., Ltd. And the Company**
10.15 1987 Non-Qualified Stock Option Plan**++
10.16 Employee Stock Option Plan**++
10.17 Underwriters Warrants, each dated November 4, 1996,
between the Company and each of Oscar Gruss & Son
Incorporated and Kaufman Bros., L.P. **
10.20 Purchase Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.21 Warrant Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.22 Stockholders' Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.23 License Agreement, dated October 7, 1996, between
BioSeq, Inc. and the Company**
10.24.1 Commercial Loan Agreement, dated as of March 28, 1997,
between The First National Bank of Boston and the
Company**
10.25 Asset Purchase Agreement, dated March 26, 1997 between
Source Scientific, Inc. and the Company**
10.26 Contract, dated March 1, 1997, between National Cancer
Institute and the Company**
10.27 Lease Agreement, dated May 16, 1997, for Gaithersberg,
Maryland facility between B.F. Saul Real Estate
Investment Trust and the Company
10.28 Lease Agreement, dated January 30, 1995 for Garden Grove,
California facility between TR Brell, Cal Corp. and Source
Scientific, Inc., and Assignment of Lease, dated July 2, 1997,
for Garden Grove, California facility between Source
Scientific, Inc. and BBI Source Scientific
11 1995, for 375 West Street Property between James
Leonard, Trustee, C.W.B. Trust and the Company**
10.13 Purchase and Sale Agreement, dated December 20, 1995, for 80 Manley Street Property between the
Company and Donald M. Leonard, Trustee, Live Oak Realty Trust**
10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa Medex Co., Ltd. and the Company**
10.15 1987 Non-Qualified Stock Option Plan**++
10.16 Employee Stock Option Plan**++
10.17 Underwriters Warrants, each dated November 4, 1996, between the Company and each of Oscar Grus &
Son Incorporated and Kaufman Bros., L.P. **
10.20 Purchase Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.22 Stockholders' Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company**
10.24.1 Commercial Loan Agreement, dated as of March 28, 1997, between
The First National Bank of Boston and the Company
10.25 Asset Purchase Agreement, dated March 26, 1997 between Source Scientific, Inc. and the Company
11.1 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
- ------------------------________________________
++ Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission,
which documents are hereby incorporated by reference.
(B) REPORTS ON FORM 8-K.(b) Reports on Form 8-K
The Registrant did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1996.
-38-1997.
-45-
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.authorized..
Date: March 28, 199730, 1998 Boston Biomedica, Inc.
By: /s/ /s/Richard T. Schumacher
----------------------------------------------------------
Richard T. Schumacher
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLES DATE
---------- ------ ----
/s/Richard T. Schumacher President, Chief Executive Officer, March 28, 1997
----------------------------------30, 1998
-------------------------- and Chairman of the Board
Richard T. Schumacher (Principal Executive Officer)
/s/Kevin W. Quinlan Senior Vice President, Finance; March 28, 1997
-----------------------------------30, 1998
-------------------------- Chief Financial Officer; Treasurer
Kevin W. Quinlan and Director
(Principal Accounting Officer)
/s/Calvin A. Saravis Director March 28, 1997
-----------------------------------30, 1998
--------------------------
Calvin A. Saravis
/s/Henry A. Malkasian Sr. Director March 28, 1997
-----------------------------------30, 1998
--------------------------
Henry A. Malkasian, Sr.
/s/Francis E. Capitanio Director March 28, 1997
-----------------------------------30, 1998
--------------------------
Francis E. Capitanio
-39--46-
EXHIBIT INDEX
- --------------
Exhibit No. Reference
----------- -----------
3.1 Amended and Restated Articles of Organization of the Company A**
3.2 Amended and Restated Bylaws of the Company A**
4.1 Specimen Certificate for Shares of the Company's Common Stock A**
4.2 Description of Capital Stock (contained in the Restated A**
Articles of A** Organization of the Company filed as Exhibit 3.1)
10.1 Agreement, dated January 17, 1994, between Roche Molecular A**
Systems, Inc. and A** the Company
10.2 Exclusive License Agreement, dated December 6, 1994, between A**
the University of A** North Carolina at Chapel Hill and the
Company
10.3 Contract, dated September 30, 1995, between the National A**
Institutes of Health A** and the Company (No. 1-AI55273)
10.4 Contract, dated September 30, 1995, between the National A**
Institutes of Health A** and the Company (No. 1-AI-55277)
10.5 Contract, dated March 1, 1993, between National Cancer Institute and the Company A**
10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. A**
and the Company A**
10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland A**
Facility between A** Cambridge Biotech Corporation and the Company
10.8 Lease Agreement, dated July 28, 1995, for New Britain, A**
Connecticut Facility A** between MB Associates and the Company
10.9 Worcester County Institution for Savings Warrant dated A**
December 1, 1995 (No. 1) A**
10.10 Worcester County Institution for Savings Warrant dated A**
July 26, 1993 (No. 2) A**
10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G A**
Diagnostics Limited A** Partnership I and the Company, as amended
10.12 Purchase and Sale Agreement, dated December 11, 1995, for 375 West Street A**
Property between James Leonard, Trustee, C.W.B. Trust and the Company
10.13 Purchase and Sale Agreement, dated December 20, 1995, for 80 Manley Street A**
Property between the Company and Donald M. Leonard, Trustee, Live Oak Realty
Trust
10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa A**
Medex Co., Ltd. A** and the Company
10.15 1987 Non-Qualified Stock Option Plan* A**
10.16 Employee Stock Option Plan* A**
10.17 Underwriters Warrants, each dated November 4, 1996, between B**
the Company and B** each of Oscar GrusGruss & Son Incorporated and
Kaufman Bros., L.P.
-40-
10.20 Purchase Agreement, dated October 7, 1996, between BioSeq, A**
Inc. and the Company A**
10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. A**
and the Company
A**-47-
10.22 Stockholders' Agreement, dated October 7, 1996, between A**
BioSeq, Inc. and the A** Company
10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. A**
and the Company A**
10.24.1 Commercial Loan Agreement, as of dated March 28, 1997, between C**
The First Filed herewith National Bank of Boston and the Company
10.25 Asset Purchase Agreement, dated March 26, 1997 between Source C**
Scientific, Inc. Filed herewith and the Company
11.110.26 Contract, dated March 1, 1997, between National Cancer D**
Institute and the Company
10.27 Lease Agreement, dated May 16, 1997, for Gaithersberg, Maryland E**
facility between B.F. Saul Real Estate Investment Trust and the
Company
10.28 Lease Agreement, dated January 30, 1995 for Garden Grove, Filed herewith
California facility between TR Brell, Cal Corp. and Source
Scientific, Inc., and Assignment of Lease, dated July 2, 1997,
for Garden Grove, California facility between Source
Scientific, Inc. and BBI Source Scientific
11 Statement re: Computation of Per Share Earnings Filed herewith
21.1 Subsidiaries of the Company Filed herewith
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith
27 Financial Data Schedule Filed herewith
- ------------------------________________________
A Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-10759)(the "Registration
Statement"). The number set forth herein is the number of the
Exhibit in said registration statement.
B Incorporated by reference to the Registration Statement, where
the Exhibit was filed as Exhibit No. 10.17 and contained in
Exhibit 1.1.
C Incorporated by reference to the Company's Annual Report on Form
10K for the fiscal year ended December 31, 1996.
D Incorporated by reference to the Company's Quarterly Report on
Form 10Q for the fiscal quarter ended March 31, 1997.
E Incorporated by reference to the Company's Quarterly Report on
Form 10Q for the fiscal quarter ended June 30, 1997.
* Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission, which
documents are hereby incorporated by reference.
-41--48-
SCHEDULE II
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Recoveries
Allowance for Balance at forFor Accounts Uncollectible BalaceBalance at
Doubtful Beginning Additions to Previously Accounts End of
Allowance for Doubtful
Accounts of Period Allowance Written Off Written Off PPeriod
------------------------------------------------------------------------------------Period
- -------------- ---------- ------------ ------------ ------------- ----------
1997 $352,058 $395,272 $194,154 $(494,967) $446,517
1996 $ 142,372 $ 429,677 $ 62,753 $(282,744) $(282,744) 352,058
1995 94,723 181,084 - (133,435) 142,372
1994 43,956 102,099 - (51,332) 94,723
-42--49-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:
In connection with our audits of the consolidated financial statements
of Boston Biomedica, Inc. and Subsidiaries, as of December 31, 19951996 and 1996,1997,
and for each of the three years in the period ended December 31, 1996,1997, which
financial statements are included in this Annual Report on Form 10-K, we have
also audited the consolidated financial statement schedule listed in Item 14
herein.
In our opinion, this consolidated financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 4, 1997
-43-February 24, 1998
-50-