AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Boston Biomedica, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
2835
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
04-2652826
(I.R.S.
EMPLOYER
IDENTIFICATION
NUMBER)
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375 WEST STREET, WEST BRIDGEWATER, MASSACHUSETTS 02379 (508) 580-1900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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RICHARD T. SCHUMACHER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BOSTON BIOMEDICA, INC.
375 WEST STREET
WEST BRIDGEWATER, MASSACHUSETTS 02379
(508) 580-1900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
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COPIES TO:
STEVEN R. LONDON, ESQ. PAUL JACOBS, ESQ.
BROWN, RUDNICK, FREED & GESMER FULBRIGHT & JAWORSKI L.L.P.
ONE FINANCIAL CENTER 666 FIFTH AVENUE
BOSTON, MASSACHUSETTS 02111 NEW YORK, NEW YORK 10103
TEL: (617) 856-8200 TEL: (212) 318-3000
FAX: (617) 856-8201 FAX: (212) 752-5958
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective by the
Securities and Exchange Commission.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED OFFERING PRICE[F1] FEE
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Common Stock, $.01 par value $22,080,000 $7,614
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Underwriters' Warrants(2) $ 160
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Common Stock, $.01 par
value(3)(4) $ 2,592,000 $ 894
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TOTAL $8,509
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(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) To be sold by the Company to the Underwriters. No additional
registration fee is included pursuant to Rule 457(g).
(3) Issuable upon exercise of the Underwriters' Warrants.
(4) Such presently indeterminate number of additional shares of Common
Stock, $.01 par value, are registered hereunder as may be issued in the
event certain anti-dilution provisions with respect to the Underwriters'
Warrants become operational. No additional registration fee is included for
these shares.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED AUGUST 23, 1996
PROSPECTUS
SHARES
[LOGO]
BOSTON BIOMEDICA, INC.
COMMON STOCK
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All of the shares of Common Stock (the "Common Stock") offered
hereby are being sold by Boston Biomedica, Inc. (the "Company").
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for information
relating to the determination of the initial public offering price. Application
will be made to have the Common Stock approved for listing on the Nasdaq
National Market under the symbol "BBII."
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SEE "RISK FACTORS" beginning on page 6 for a discussion of certain factors that
should be considered by prospective purchasers of the Common Stock offered
hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share $ $ $
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Total(3) $ $ $
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(1) Excludes the value of warrants to be issued to the Underwriters and a 1%
non-accountable expense allowance payable to the Underwriters, of which
$40,000 has been paid to date. The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to additional shares of Common
Stock at the Price to Public less Underwriting Discounts and Commissions to
cover over-allotments, if any. If all such additional shares are purchased,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
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The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the office of
Oscar Gruss & Son Incorporated in New York, New York on or about , 1996.
OSCAR GRUSS & SON INCORPORATED KAUFMAN BROS., L.P.
THE DATE OF THIS PROSPECTUS IS , 1996.
Description of photograph:
Under the caption "Total Quality System," there is a collage of the Company's
products which are a part of its Total Quality System. In the upper left corner
is a photograph of a TQS Qualification Panel, proceeding clockwise to the upper
right corner is a photograph of an Accurun 1(R) vial and pipette superimposed
over a typical Levey-Jennings daily quality control chart. In the lower right
corner is a photograph of a lab technician operating equipment in one of the
Company's laboratories, and finally, in the lower left corner, is a photograph
of Anti-HIV 1 Western Blots for seven different Company Panel Products.
The BBI logo is a trademark of the Company. Accurun 1(R) is a registered
trademark of the Company. Accurun(tm) is a trademark of the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TQS Logo
TOTAL QUALITY SYSTEM
* TARGETED TO THE EMERGING END-USER MARKET FOR INFECTIOUS DISEASE TEST KIT
QUALITY CONTROL
* USER-FRIENDLY PRODUCTS FOR MONITORING LABORATORY PROFICIENCY, LOT ACCEPTANCE,
TROUBLESHOOTING AND TRAINING
* DESIGNED TO EVALUATE THE KEY ELEMENTS IN THE TESTING PROCESS: TEST KIT,
EQUIPMENT AND PERSONNEL
* ESSENTIAL PRODUCTS IN AN OVERALL QUALITY ASSURANCE PROGRAM
Photograph of four of the Company's
Quality Control Panel Products
WORLD LEADER IN QUALITY
CONTROL PRODUCTS FOR INFECTIOUS
DISEASE TESTS
* SEROCONVERSION PANELS, PERFORMANCE PANELS AND SENSITIVITY PANELS FOR THE
EVALUATION OF INFECTIOUS DISEASE TEST KITS
* KNOWN AND ACCEPTED THROUGHOUT THE WORLD BY TEST KIT MANUFACTURERS AND
REGULATORS
* DEVELOPED FROM AN EXTENSIVE INVENTORY OF HUMAN BLOOD SPECIMENS
* CONTRIBUTING TO THE IMPROVED SENSITIVITY OF INFECTIOUS DISEASE TESTS WORLDWIDE
Inside Front Cover
Title at top of page reads: "Serving Our Customer's Needs Throughout the Entire
Product Life Cycle."
Description of Photograph: Photograph is comprised of a pie chart superimposed
over photographs of the Company's products and services. The pie chart has four
sections and eight subsections. The four sections refer to the four stages in
the test kit life-cycle and are captioned: "R&D," "Regulatory," "Production" and
"Marketing." Each subsection has a corresponding photograph of a Company product
or service. The eight subsections are captioned: "Performance Panels,"
"Seroconversion Panels," "Highly Characterized Specimen Bank," "Clinical
Trials," "Characterized Disease State Sera," "Basematrix," "Run Controls" and
"OEM and Custom Panels."
Underneath the photograph are the words: "Your Partner in Infectious Disease
Quality Control" and the Company's logo is to the immediate left.
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
(including the financial statements and notes thereto) appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
(i) assumes no exercise of the Underwriters' option to purchase from the Company
up to _____ additional shares of Common Stock to cover over-allotments, if any,
(ii) gives effect to a 1-for-2 reverse stock split with respect to the Common
Stock to be effected in September 1996, (iii) gives effect to certain changes to
the Company's Articles of Organization and By-Laws which are anticipated to be
approved by the Company's stockholders in September 1996, and (iv) gives effect
to the termination of certain redemption provisions relating to 117,647 shares
of Common Stock upon completion of this Offering. Unless the context indicates
otherwise, all references to the "Company" are to Boston Biomedica, Inc. and its
two wholly-owned subsidiaries, BTRL Contracts and Services, Inc. ("BTRL"), and
BBI -- North American Clinical Laboratories, Inc. ("BBI -- NACL"). For a
discussion of certain matters that should be considered by purchasers of the
Common Stock offered hereby, see "Risk Factors." For the definition of certain
technical and scientific terms, see "Glossary."
THE COMPANY
Boston Biomedica, Inc. is a leading 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 and provides specialty laboratory services, including clinical
trials.
To date, the Company has sold its products primarily to test kit
manufacturers and regulatory agencies, but it has recently begun selling Quality
Control Products directly to the emerging end-user market for quality control
products for infectious disease test kits. In late 1994 the Company received
United States Food and Drug Administration ("FDA") clearance for Accurun 1(R),
its first Quality Control Product designed specifically for end-users, and
subsequently has introduced 24 additional Accurun(tm) Quality Control Products.
In July 1996, the Company introduced its Total Quality System ("TQS"), a
marketing platform that combines Accurun(tm) with other Quality Control Products
to provide test kit end-users with the products needed in an overall quality
assurance program. TQS products allow end-users to evaluate each of the key
elements of the testing process: the test kit, laboratory equipment and
laboratory personnel.
The Company's customers include Abbott Diagnostics, Boehringer Mannheim,
Chiron, Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson & Johnson) and
Sanofi Diagnostics; 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 end-users of
diagnostic test kits, such as blood banks, hospitals and clinical laboratories.
The increased threat of infectious diseases has created a large and growing
market for infectious disease test kits. Venture Planning Group, a medical
products research firm, estimates that the worldwide infectious disease test kit
market was approximately $2.7 billion in 1995 and will grow to $5.0 billion by
2000. The related market for quality control products for in vitro diagnostic
testing for infectious and non-infectious disease totaled approximately $600
million in 1994, according to the Genesis Report Dx, a medical products survey.
The Company believes that quality control products for infectious disease test
kits currently represent less than five percent of the overall quality control
market, primarily as a result of the limited use of such products by end-users.
The Company believes that the market for quality control products for
infectious disease test kits will continue to expand, particularly among
end-users, primarily as a result of several key factors: (i) increased
regulatory scrutiny due to public concern about the dangers of infectious
diseases such as AIDS and Hepatitis; (ii) growing recognition of the value of
using quality control products to ensure the greatest possible safety of the
blood supply, to achieve the earliest possible diagnosis of infection, and to
minimize the occurrence of false negative results; (iii) the discovery of new
infectious diseases and the development of new treatments for diseases requiring
periodic monitoring, such as viral load testing for HIV, Hepatitis B and C and
other diseases; and (iv) the emergence of new testing technologies and
equipment.
3
The Company offers three product groups in infectious disease diagnostics:
Quality Control Panels, Accurun(tm) Run Controls and Diagnostic Components.
These 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) 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.
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 domestic and foreign test kit manufacturers.
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.
The Company believes that it has several competitive advantages that will
help it implement its strategy:
* an inventory of approximately 50,000 distinct human blood specimens
accumulated since 1986 through its worldwide sources of blood-supply, which
enable the Company to quickly respond to market trends;
* the ability to offer specialty laboratory services and conduct clinical
trials, which helps it to maintain contact and enhance credibility with test
kit manufacturers and regulatory authorities, and allows the Company to
remain at the forefront of market trends and customer needs;
* proprietary manufacturing know-how resulting from ten years of experience
working with leading worldwide manufacturers in the development of their
infectious disease test kits; and
* its reputation as an authority in infectious disease quality control products
among test kit manufacturers and regulatory agencies.
The Company, a Massachusetts corporation, was organized in 1978, but did not
commence significant operations until 1986. The Company's principal offices are
located at 375 West Street, West Bridgewater, MA 02379, and its telephone number
is (508) 580-1900.
THE OFFERING
Common Stock Offered...... shares(1)
Common Stock to be
Outstanding after the
Offering................ shares(1)(2)
Use of Proceeds........... Repayment of indebtedness, capital
expenditures, and general corporate purposes,
including working capital and potential
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol........... BBII
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(1) Does not include up to _____ shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Does not include 1,161,057 shares of Common Stock issuable upon exercise of
outstanding options and warrants and 14,333 shares of Common Stock issuable
upon conversion of an outstanding subordinated convertible note. See
"Capitalization" and Notes 6, 10 and 11 of Notes to Consolidated Financial
Statements.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
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1993(1) 1994 1995 1995 1996
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STATEMENT OF OPERATIONS
DATA:
Product sales $3,942 $ 5,982 $ 6,622 $ 3,024 $ 3,946
Service revenue 5,215 4,741 5,649 2,540 2,982
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Total revenue 9,157 10,723 12,271 5,564 6,928
Income from
operations 312 405 508 104 307
Net income (loss) 142 97 103 (36) 83
Net income (loss) per
share(2) $ 0.06 $ 0.04 $ 0.04 $ (0.01) $ 0.03
Weighted average
common and common
equivalent shares
outstanding(2) 2,480 2,629 3,192 2,640 3,266
JUNE 30, 1996
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PRO FORMA
ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Working capital $ 4,497 $
Total assets 10,047
Long term debt, less current maturities 2,798 --
Redeemable common stock 899 --
Total stockholders' equity 3,332
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(1) On June 30, 1993, the Company exercised its option to pre-pay the
acquisition note issued in connection with the 1992 purchase of BTRL at a
discount from the balance due, resulting in an extraordinary gain of
$50,000, net of taxes of $33,000. The 1993 net income per share before such
extraordinary gain was $0.04.
(2) The effect of the common stock equivalents on net income per common share
has been excluded from the calculation for 1993 and 1994 and the six months
ended June 30, 1995 as its inclusion was antidilutive.
(3) Adjusted to reflect: (i) application of the estimated net proceeds from the
sale of _____ shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $ _____ per share, after deducting
estimated underwriting discounts and commissions and offering expenses, and
(ii) the termination of redemption provisions relating to 117,647 shares of
Common Stock upon completion of this Offering.
5
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the shares of Common Stock offered hereby.
UNDEVELOPED END-USER MARKET FOR QUALITY CONTROL PRODUCTS FOR INFECTIOUS
DISEASE TEST KITS
The Company intends to focus its product development and sales and marketing
efforts on quality control products for end-users of infectious disease test
kits. Currently, most quality control products for infectious disease test kits
are sold to test kit manufacturers and regulators. End-users of infectious
disease test kits are currently using quality control products only to a very
limited extent. See "Business -- Industry Overview." The Company's strategy is
based primarily upon significant growth in sales of quality control products to
the end-user market. See "Business -- Strategy." There can be no assurance that
end-users of infectious disease test kits will increase their use of quality
control products, or that the Company will be able to increase its sales of
quality control products to such end-users. Clearance or approval by the United
States Food and Drug Administration (the "FDA") will be necessary before quality
control products may be sold for clinical laboratory use rather than for
research purposes only. See "-- Stringent Government Regulation." If the
end-user market for quality control products does not develop, or if the Company
is unable to increase its sales to this market, the Company's future growth
could be materially and adversely affected.
COMPETITION
In sales of both its products and specialty laboratory services, the Company
experiences substantial competition and the threat of competition from
established and potential competitors, most of which have greater financial,
manufacturing and marketing resources than the Company. Competition for
customers is intense and depends principally on the ability to provide products
of the quality and in the quantity required by customers, as well as the ability
to provide sophisticated specialty laboratory services, at competitive prices.
The Company currently competes against independent reference laboratories,
integrated plasma collection and processing centers and manufacturers of quality
controls and other Diagnostic Components. In addition, the Company understands
that a leading manufacturer of quality control products for non-infectious
diseases recently entered the quality control market for infectious disease test
kits. There can be no assurance that other such manufacturers or other companies
will not enter this market. The entrance of any of these companies into the
quality control market for infectious disease test kits could have a material
adverse effect on the Company, particularly its ability to achieve its strategy
to capitalize on the end-user market for quality control products for infectious
disease test kits. In addition, certain of the Company's products are derived
from donors with rare antibody characteristics. Competition for blood specimens
from such donors may increase, which may increase the cost of obtaining such
specimens. There can be no assurance that such increased competition will not
adversely affect the Company. See "-- Difficulty in Obtaining Certain Raw
Materials" and "Business -- Competition."
ABILITY TO MANAGE GROWTH
The Company's future success will depend in part on its ability to manage
growth as it increases its production capacity and broadens distribution of its
products. To compete effectively and manage future growth, if any, the Company
will be required to continue to implement and improve its operational, financial
and management information systems, procedures and controls on a timely basis,
and to expand, train, motivate and manage its workforce. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's future operations. The failure to implement
new and improved existing operational, financial and management systems or to
expand, train, motivate or manage employees could have a material adverse effect
on the Company's business, operating results and financial condition. There can
be no assurance that the Company will continue to grow or, if it does, that the
Company will manage the growth successfully.
6
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's results of operations have been subject to quarterly
fluctuations due to a variety of factors, including customer purchasing patterns
and seasonal demand for 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. For example, total revenue for the fourth quarter
ended December 31, 1994 and 1995 were $3.0 million and $3.8 million compared
with total revenue for the first quarter ended March 31, 1995 and 1996 of $2.7
million and $3.1 million. The Company believes that its customers may expend
end-of-year budget surpluses in the fourth quarter, thereby causing the
Company's fourth quarter product sales to be higher at the expense of first
quarter product sales. In addition, demand for laboratory services tends to be
somewhat higher in the third and fourth quarters of the fiscal year due to the
seasonal nature of Lyme Disease testing, the Company's highest volume test.
Moreover, the Company's margins for its different products and services vary,
with Quality Control Products generally having the highest margins and Contract
Research the lowest. Therefore, the Company's results may vary from period to
period as a result of the mix of products and services and the mix among
products. As a result, quarterly results of operations may not be indicative of
future results of operations. Also, variations in the Company's quarterly
results of operations may affect the market price of the Common Stock. See " --
Volatility of Price of Common Stock" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
RISK OF ACQUISITIONS
The Company intends to pursue strategic acquisitions to expand its core
product line, strengthen its base in medical science and technology, and secure
new sources of blood supply. The Company is subject to various risks associated
with an acquisition strategy, including the risk that the Company will be unable
to identify and attract suitable acquisition candidates or to integrate and
manage any acquired business. The Company will compete for acquisition
candidates with companies which have significantly greater financial and
management resources than the Company. Acquisitions could place a significant
burden on the Company's management and operating personnel. Implementing the
Company's expansion strategy may also require significant capital resources.
Capital is needed not only for acquisitions, but also for the effective
integration, operation and expansion of such businesses. The Company may need to
raise capital through the issuance of long-term or short-term indebtedness or
the issuance of its securities in private or public transactions, which could
result in dilution of existing equity positions, increased interest and
amortization expense or decreased income to fund future expansion. There can be
no assurance that acceptable financing for future acquisitions will be available
or that the integration of future acquisitions and expansion of existing
business can be achieved. See "-- Ability to Manage Growth."
DIFFICULTY IN OBTAINING CERTAIN RAW MATERIALS
The Company manufactures its products from human plasma and serum which the
Company obtains from nonprofit and commercial blood centers, primarily in the
United States, but also from similar sources throughout the world. Certain of
the Company's products, including its Seroconversion and Performance Panels, are
comprised of unique and rare plasma specimens obtained from individuals during
the short period of time when the disease markers of particular diseases are
converting from negative to positive. See "Business -- Products." As a result,
the quantity of any such panel is limited, so the Company must replace such
panels as they sell out with another panel comprised of specimens equally unique
and rare. Competition to obtain such specimens may increase, which may increase
the cost of obtaining such products. There can be no assurance that the Company
will continue to be successful in obtaining a steady and adequate supply of the
unique and rare specimens of plasma and serum necessary for certain of its
products. The inability to continue to obtain such specimens, or any significant
delays in obtaining such specimens, would have a material adverse effect on the
Company. See "-- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in large part upon its ability to attract and
retain highly qualified scientific and management personnel. The Company
competes for such individuals with other companies, academic institutions,
government entities and other organizations. There can be no
7
assurance that the Company will be successful in hiring or retaining requisite
personnel. The failure of the Company to recruit and retain qualified scientific
and management personnel could have a material adverse effect on the Company.
None of the Company's key management or scientific personnel is subject to an
employment agreement with the Company. The loss of the services of any such key
personnel, including Richard T. Schumacher, President and Chief Executive
Officer of the Company, could have a material adverse effect on the Company. The
Company maintains key person life insurance on certain of its officers,
including Mr. Schumacher, on whose life the Company has $4,750,000 of insurance,
$2,000,000 of which has been pledged to the Company's lender. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Business -- Competition" and "Management --
Directors and Executive Officers."
DEPENDENCE ON KEY CUSTOMERS
The Company's three largest customers accounted for an aggregate of
approximately 20% of the Company's revenues in 1993, 1994 and 1995 and the six
months ended June 30, 1995 and 1996, although the customers were not identical
in each period. In addition, the majority of the Company's revenues are based
upon purchase orders. None of the Company's customers are contractually
committed to make future product purchases from the Company. The loss of any
major customer or a material reduction in a major customer's purchases would
have a material adverse effect upon the Company.
A single U.S. government services contract accounted for approximately 7.5%
and 7.3% of the Company's revenues in 1995 and the six months ended June 30,
1996. This contract is due to expire in February 1997. The Company has responded
to a Request for Proposals by the United States government for a new four year
contract to replace this contract. There can be no assurance that the Company's
response to the Request for Proposals will be accepted by the United States
government. Failure to receive the new contract would have a material adverse
effect on the Company. See "Business -- Services."
STRINGENT GOVERNMENT 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 (the "FDCA")
prohibits the marketing of in vitro diagnostic products until they have been
cleared or approved by the FDA, a process that is time-consuming, expensive and
uncertain. Once clearance or approval is obtained, the FDA requires additional
clearances or approvals for product changes that could affect the safety and
effectiveness of the device, including, for example, new indications for use or
changes in the design or manufacturing process. Additional clearances or
approvals may also be required for changes in claims relating to uses of
products. There can be no assurance that the Company will obtain regulatory
clearances or approvals on a timely basis, if at all, for future products,
changes in existing products or changes in claims relating to uses of products.
Delays in obtaining or failure to obtain requisite FDA clearances or approvals
could have a material adverse effect on the Company.
All of the Company's Quality Control Products with the exception of Accurun
1(R) are marketed "for research use only," which do not require FDA premarket
clearance or approval of the product, and not marketed for diagnostic purposes,
which do require FDA premarket clearance or approval. The Company's labeling for
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. Failure to obtain, or delays in obtaining, FDA
clearances or approval would adversely affect the Company's strategy of
capitalizing on the end-user market.
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
8
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.
In addition, both before and after clearance or approval, medical devices,
such as Accurun 1(R), are subject to certain export and import requirements
under the FDCA.
The Company is also subject to strict FDA good manufacturing practices
("GMP") regulations governing testing, control and documentation, and to other
postmarketing restrictions with respect to the manufacture of the Company's
medical device products. Ongoing compliance with GMP and other applicable
regulatory requirements is monitored through periodic inspections by the
regulatory authorities. Failure to comply with GMP or other regulatory
requirements can result, among other consequences, in the failure to obtain
premarket clearances or approvals, withdrawal of clearances or approvals, total
or partial suspension of product distribution, injunctions, civil penalties,
recall or seizures of products, and criminal prosecution, each of which would
have a material adverse effect on the Company.
Laws and regulations affecting the Company's products are in effect in many
of the countries, states and other jurisdictions in which the Company markets or
intends to market its products. There can be no assurance that the Company will
be able to obtain any required regulatory clearances or approvals on a timely
basis, or at all. Delays in receipt of or failure to obtain such clearances or
approvals, or the failure to comply with regulatory requirements in these
countries, states or other jurisdictions, could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
The Company is also subject to other national, state and local laws and
regulations, including those relating to the use and disposal of biohazardous,
radioactive and other hazardous substances and wastes. Failure to comply with
such laws and regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Government Regulation."
FOREIGN RESTRICTIONS ON IMPORTATION OF BLOOD DERIVATIVES
Sales outside the United States in 1993, 1994 and 1995 represented
approximately 15%, 21% and 25%, respectively, of the Company's revenues for
those years, and 27% in each of the six months ended June 30, 1995 and 1996.
Foreign sales are primarily to Western Europe and Japan. Concern over blood
safety has led to movements in a number of European and other countries to
restrict the importation of blood and blood derivatives, including antibodies.
Such restrictions continue to be debated and there can be no assurance that
additional restrictions will not be imposed in the future. If imposed, such
restrictions could have a material adverse effect on the Company's business.
RISK OF TECHNOLOGICAL CHANGE
The infectious disease test kit industry is characterized by rapid and
significant technological change and changes in customer requirements. As a
result, the Company's success will be dependent upon its ability to enhance its
existing products and to develop or acquire and introduce in a timely manner new
products that take advantage of technological advances and respond to customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing such new products or enhancements to the Company's
existing products on a timely basis or that such products will adequately
address the changing needs of the marketplace. Furthermore, rapid technological
development by the Company or others may result in products or services becoming
obsolete or noncompetitive before the Company recovers its investment in
research, development and commercialization.
RISK OF BROAD MANAGEMENT DISCRETION IN APPLICATION OF PROCEEDS
A significant portion of the estimated net proceeds from this Offering will
be allocated to working capital and general corporate purposes, including
potential acquisitions. Accordingly, the Company will have broad discretion as
to the application of the net proceeds and may allocate
9
portions of such proceeds to uses which the Company's stockholders may not deem
desirable. There can be no assurance that the proceeds will be used in a way to
yield a significant return. See "Use of Proceeds."
PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
None of the Company's Quality Control Products or Diagnostic Components have
been patented and the Company does not intend to seek patent protection for such
products. The Company's ability to compete effectively with other companies will
depend, in part, on its ability to maintain the proprietary nature of its
technologies and products and operate without infringing the rights of third
parties. 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.
The Company has two United States patents and, jointly with the University
of North Carolina at Chapel Hill ("UNC"), has filed three series of United
States and foreign patent applications relating to compounds, pharmaceutical
compositions and therapeutic methods in connection with the Company's drug
discovery program at the University of North Carolina at Chapel Hill. See
"Business -- Services," and " -- Strategic Alliances." There can be no assurance
that patent applications will result in issued patents, that issued patents will
provide any competitive advantage or that patents will not be challenged,
circumvented or invalidated.
Third parties may be issued patents to, or may otherwise acquire the rights
to, technology necessary or potentially useful to the Company. The success of
the Company is dependent in part upon its not infringing patents or other
intellectual property rights of third parties. Litigation relating to the
infringement of the patents or other intellectual property rights of others
could result in substantial costs to the Company. Litigation which could result
in substantial costs to the Company may also be necessary to enforce the
Company's intellectual property rights or to determine the scope and validity of
the proprietary rights of others. Any such substantial costs would have a
material adverse effect on the Company.
UNCERTAINTY RELATED TO HEALTHCARE REFORM; NO ASSURANCE OF ADEQUATE
REIMBURSEMENT
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Although to date Congress
has failed to pass comprehensive health care reform legislation, the Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery and payment systems and may in the future
propose and adopt legislation effecting fundamental changes in the healthcare
delivery system. Legislative debate is expected to continue in the future. In
addition, the private sector has been changing the healthcare industry as well
through consolidations and alternatives in healthcare delivery systems. The
Company cannot predict what impact the adoption of any federal or state health
care reform measures or future private sector reform may have on its industry or
business.
In both domestic and foreign markets, sales by the Company's customers of
products and services that incorporate or affect the demand for the Company's
products may depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
There can be no assurance that pricing pressures experienced by the Company's
customers will not adversely affect the Company because of a determination that
its products are not cost effective or because of inadequate third-party
reimbursement levels to such customers. In addition, where the payor for the
Company's specialty laboratory services is the patient rather than third-party
payors, there is a greater risk of non-payment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
RISK OF HAZARDOUS WASTE AND PRODUCT LIABILITY; ABSENCE OF INSURANCE
The Company's manufacturing processes involve the controlled use of
biohazardous materials and chemicals. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result,
10
and any such liability could exceed the resources of the Company. The Company
may incur substantial costs to maintain safety in the use of biohazardous
materials and to comply with environmental regulations as the Company further
develops its manufacturing capacity. See "Business -- Government Regulation."
Further, the Company's business exposes it to liability risks that are
inherent in the testing, manufacturing and marketing of its products. The
Company does not currently have product liability insurance. Product liability
claims could expose the Company to substantial liabilities and expenses, which
could materially and adversely affect the Company.
RISKS ASSOCIATED WITH EXPORT SALES
The Company generated significant sales outside the United States and
anticipates that foreign sales will continue to account for a significant
percentage of the Company's net revenues. The Company's foreign operations
accounted for approximately 15%, 21% and 25% of the Company's total revenues for
the years ended December 31, 1993, 1994 and 1995 and approximately 27% in each
of the six months ended June 30, 1995 and 1996, and 36%, 38% and 47% of the
Company's product sales for the years ended December 31, 1993, 1994 and 1995 and
50% and 48% for each of the six months ended June 30, 1995 and 1996. The Company
therefore is subject to risks associated with foreign sales, including United
States and foreign regulatory requirements and policy changes, political and
economic instability, difficulties in accounts receivable collection,
difficulties in managing distributors or representatives and seasonality of
sales. Although the Company's sales have been denominated in United States
dollars, the value of the United States dollar in relation to foreign currencies
may also adversely affect the Company's sales to foreign customers. To the
extent that the Company expands its international operations or changes its
pricing practices to denominate prices in foreign currencies, the Company will
be exposed to increased risks of currency fluctuation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 5 of the Notes to Consolidated Financial Statements.
POSSIBLE ADVERSE EFFECT OF CONTROL BY EXISTING STOCKHOLDERS
Upon consummation of this Offering, Richard T. Schumacher, President and
Chief Executive Officer, his relatives and the existing officers and directors
of the Company collectively will have voting control over approximately ___% of
the outstanding shares of Common Stock. Accordingly, these stockholders, should
they choose to act in concert, will be in a position to exercise a significant
degree of control over the Company, and to significantly influence stockholder
votes on the election of the Company's directors, increasing the Company's
authorized capital stock, mergers, and sales of the Company's assets. See
"Principal Stockholders."
POSSIBLE ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Organization and Restated Bylaws could have the effect of discouraging a third
party from pursuing a non-negotiated takeover of the Company and preventing
certain changes in control. These provisions include a classified Board of
Directors, a fair price provision, advance notice to the Board of Directors of
stockholder proposals and stockholder nominees for the Board of Directors,
limitations on the ability of stockholders to remove directors and call
stockholders meetings, the provision that vacancies on the Board of Directors be
filled by a majority of the remaining directors and the ability of the Board to
issue, without further stockholder approval, preferred stock with rights and
privileges which could be senior to the Common Stock. The Company also is
subject to Chapter 110F of the Massachusetts General Laws which, subject to
certain exceptions, prohibits a Massachusetts corporation from engaging in any
of a broad range of business combinations with any "interested stockholder" for
a period of three years following the date that such stockholder became an
interested stockholder. These provisions could discourage a third party from
pursuing a takeover of the Company at a price considered attractive by many
stockholders, since such provisions could have the effect of preventing or
delaying a potential acquiror from acquiring control of the Company and its
Board of Directors. See "Description of Capital Stock -- Preferred Stock," "--
Massachusetts Anti-Takeover and Related Statutes" and " -- Certain Provisions of
the Company's Articles of Organization and By-laws."
11
NO ASSURANCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE OF COMMON
STOCK
Prior to this Offering, there has been no public trading market for the
Common Stock. There can be no assurance that a regular trading market for the
Common Stock will develop after this Offering or that, if developed, it will be
sustained. The initial public offering price of the Common Stock will be
determined by negotiations between the Company and Representatives of the
Underwriters and may not be indicative of the price at which the Common Stock
will trade after completion of this Offering. For factors that will be
considered in determining the initial public offering price, see "Underwriting."
After completion of this Offering, the market price of the Common Stock could be
subject to significant fluctuations in response to various factors and events,
including the liquidity of the market for the shares of Common Stock, variations
in the Company's operating results, changes in earnings estimates by securities
analysts, publicity regarding the Company, the infectious disease test kit
industry or the healthcare industry generally, new statutes or regulations or
changes in the interpretation of existing statutes or regulations affecting the
healthcare industry in general or the infectious disease test kit industry in
particular. In addition, the stock market in recent years has experienced broad
price and volume fluctuations that often have been unrelated to the operating
performance of particular companies. These market fluctuations also may
adversely affect the market price of the shares of Common Stock.
DILUTION
Purchasers of shares in the Offering will suffer immediate dilution of
$ in net tangible book value per share. See "Dilution" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of the Common Stock and the ability of the Company to raise capital
through a public offering of its equity securities. Upon completion of this
Offering, the Company will have _____ shares of Common Stock outstanding ( _____
shares if the Underwriters' overallotment option is exercised in full). Of those
shares, the _____ shares sold in this Offering ( _____ shares if the
Underwriters' overallotment option is exercised in full) will be freely
tradeable without restriction (except as to affiliates of the Company) or
further registration under the Securities Act. The Company's directors,
executive officers and certain other stockholders holding in the aggregate _____
shares of Common Stock have agreed not to offer to sell, sell or otherwise
dispose of any shares of Common Stock prior to the expiration of 180 days from
the date of this Prospectus. Oscar Gruss & Son Incorporated may, in its sole
discretion and at any time without prior notice, release all or any portion of
the shares of Common Stock subject to the lockup agreements. Following the
expiration of the 180-day lockup period, _____ shares of Common Stock will be
eligible for sale in the public market without registration, subject to certain
volume and other limitations, pursuant to Rule 144 or Rule 701 under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining shares
of Common Stock held by existing stockholders, including shares issuable upon
exercise of options, will become eligible for sale under Rule 144 or otherwise
at various times thereafter. All shares of Common Stock outstanding on the date
of this Prospectus will be eligible for sale to certain qualified institutional
buyers in accordance with Rule 144A under the Securities Act. The Company
intends to register under the Securities Act, shortly after the consummation of
the Offering, shares of Common Stock issuable upon exercise of employee stock
options, including 934,387 shares issuable upon exercise of such options
outstanding on the date of this Prospectus. Two of the Company's stockholders
and the holder of a warrant to purchase Common Stock have the right to cause the
Company to register their shares under the Securities Act and to include their
shares in certain future registrations of securities effected by the Company
under the Securities Act. An aggregate of 1,175,390 shares of Common Stock,
including _____ shares of Common Stock issuable upon exercise of outstanding
warrants, are covered by such registration rights. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales may have an adverse effect
on the market price of the Common Stock. If the Company is required to include
in a Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. See "Certain
Transactions," "Principal Stockholders" and "Shares Eligible for Future Sale."
12
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the _____
shares of Common Stock offered hereby are estimated to be $ _____ ($_____ if the
Underwriters over-allotment option is exercised in full), at an assumed public
offering price of $_____ per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company.
The Company expects to use approximately $3.6 million of the net proceeds to
repay outstanding indebtedness, as described below, and approximately $1.0
million for capital expenditures to expand its manufacturing capacity in West
Bridgewater, of which approximately $500,000 will be spent on building expansion
and approximately $500,000 will be spent on equipment. The Company anticipates
using the remaining net proceeds for general corporate purposes, including
working capital, as well as for potential acquisitions and alliances. See "Risk
Factors -- Risk of Broad Management Discretion in Application of Proceeds."
At August 1, 1996, the approximately $3.6 million of indebtedness to be
repaid from the proceeds of this Offering consists of (i) approximately $1.7
million of indebtedness under a secured revolving line of credit due June 30,
1998 that bears interest at a rate equal to the prime rate plus 0.5% per annum;
(ii) a mortgage note in the principal amount of approximately $693,851 on the
West Bridgewater property that bears interest at a fixed rate of 8.3% per annum
until December 2000 and thereafter bears interest at a rate equal to the prime
rate plus 1% per annum, and which is due December 2002; (iii) a term note, in
the principal amount of $477,563, that bears interest at 9.01% per annum and is
due in October 1998; (iv) a term note, in the principal amount of $144,444, that
bears interest at the prime rate plus 1% per annum and is due October 1999; (v)
a term note, in the principal amount of $336,274, that bears interest at a rate
equal to the prime plus 1% per annum and is due August 2000; (vi) a term note,
in the principal amount of $90,000, that bears interest at a rate of 8.22% per
annum and is due December 2000; and (vii) various other notes that aggregate
$82,300 due from June 1997 to August 2000. The proceeds from borrowings incurred
within the past year were used for working capital, to acquire the West
Bridgewater property and to purchase capital equipment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 6 of Notes to the Consolidated Financial Statements.
With respect to potential acquisitions and alliances, the Company may use a
portion of the net proceeds to acquire blood donor centers and other businesses,
products or technologies that are complementary to the Company's current
business, although it currently has no commitments for such acquisitions or
alliances. See "Business -- Strategy."
The specific timing and amount of funds required for specific uses by the
Company cannot be precisely determined at this time. Pending such uses, the
Company intends to invest in short-term, investment grade, interest bearing
obligations.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock
and does not plan to pay any cash dividends in the foreseeable future. The
Company's current policy is to retain all of its earnings to finance future
growth. Any future determination to pay cash dividends will be at the discretion
of the Board of Directors and will be dependent upon the Company's financial
condition, operating results, capital requirements, general business conditions
and such other factors as the Board of Directors deems relevant. The Company is
subject to financial and operating covenants, including a prohibition against
the payment of cash dividends, under its bank financing agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
13
CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company after giving effect to the termination of certain redemption provisions
relating to 117,647 shares of Common Stock and as adjusted to give effect to the
sale of _____ shares of Common Stock offered by the Company hereby at an assumed
public offering price of $_____ per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company. This table should be read in conjunction with the Consolidated
Financial Statements and related notes thereto appearing elsewhere in this
Prospectus.
JUNE 30, 1996
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Current maturities of long term debt $ 490 $ --
========= =========
Long-term debt, less current maturities:
Line of credit 1,398 --
Bank term debt 719 --
Mortgage term debt 620 --
Other notes payable 61 --
--------- ---------
2,798 --
--------- ---------
Redeemable common stock, $.01 par value;
authorized, issued and outstanding
117,647, and none pro forma as adjusted 899 --
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; authorized
15,000,000 shares; issued and
outstanding 2,572,417(1] actual, and
pro forma as adjusted 26
Preferred Stock
Additional paid-in capital 2,717
Retained earnings 589 589
--------- ---------
Total stockholders' equity 3,332
--------- ---------
Total capitalization $7,029 $
--------- ---------
--------- ---------
- -------------
(1) Excludes the following at June 30, 1996: (i) 934,387 shares of Common Stock
issuable pursuant to the exercise of stock options outstanding at a weighted
average exercise price of $3.15 per share, of which options to purchase
653,684 shares were then exercisable, (ii) 226,670 shares of Common Stock
issuable pursuant to the exercise of warrants outstanding at a weighted
average exercise price of $2.50 per share, all of which were then
exercisable, and (iii) 14,333 shares of Common Stock issuable upon
conversion of the subordinated convertible note at $1.50 per share. Since
June 30, 1996, no stock options were exercised, granted or became
exercisable. See "Management -- Stock Plans."
14
DILUTION
At June 30, 1996, the Company had a net tangible book value of $4,137,943 or
$1.54 per share of Common Stock. "Net tangible book value per share" represents
the tangible book value of the Company (total tangible assets less total
liabilities) divided by the number of shares of Common Stock outstanding (on a
pro forma basis to give effect to the termination of certain redemption
provisions relating to 117,647 shares of Common Stock). Without taking into
account any changes in such net tangible book value as of June 30, 1996, other
than to give effect to the sale by the Company of the _____ shares of Common
Stock offered hereby at an assumed initial public offering price of $ _____ and
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company, the pro forma net tangible book value
of the Company at June 30, 1996 would have been $ _____, or $ ______ per share.
This represents an immediate increase in the net tangible book value per share
of $ _____ to existing stockholders and an immediate dilution of the net
tangible book value per share of $ ______ to persons purchasing the Common Stock
offered hereby (the "New Investors"). The following table illustrates this per
share dilution:
Assumed initial public offering price per share $
Net tangible book value per share before the
Offering $ 1.54
Increase per share attributable to New Investors
------
Pro forma as adjusted net tangible book value
per share after the Offering
-------
Dilution per share to New Investors $
-------
-------
The following table sets forth on a pro forma basis, as of June 30, 1996,
the total number of shares purchased from the Company after giving effect to the
sale of the shares of Common Stock offered by the Company hereby, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by New Investors at an assumed initial public offering
price of $ _____ per share:
SHARES PURCHASED TOTAL CONSIDERATION
------------ -------------
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ----- -------- ----- -------
Existing Stockholders 2,690,064 % $ 3,835,373 % $1.43
New Investors % %
------- ----- ------- -----
Total 100.0% $ 100.0%
------- ------- ------- -----
------- ------- ------- -----
The above information assumes (i) no exercise of the Underwriters' warrants
and (ii) no exercise of any other outstanding options and warrants after June
30, 1996. As of June 30, 1996, there were outstanding options, warrants and a
subordinated convertible note to purchase an aggregate of 1,175,390 shares of
Common Stock at exercise prices ranging from $0.25 to $8.50 per share. Since
June 30, 1996, no stock options were exercised, granted or became exercisable.
To the extent these options and warrants are exercised, there will be further
dilution to New Investors. See "Management -- Stock Plans," "Certain
Transactions" and Note 10 of Notes to Consolidated Financial Statements.
15
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data of
the Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The statement of operations data for the fiscal years 1993, 1994 and 1995, and
the balance sheet data as of December 31, 1994 and 1995, have been derived from
the Consolidated Financial Statements of the Company which have been audited by
Coopers & Lybrand L.L.P., independent accountants, and which appear elsewhere in
this Prospectus. The balance sheet data as of December 31, 1993 are derived from
consolidated financial statements that have been audited by Coopers & Lybrand
L.L.P. The statement of operations data of the Company for the fiscal years
ending December 31, 1991 and 1992 and the balance sheet data as of December 31,
1991 and 1992 have been derived from consolidated financial statements of the
Company which have been audited by other independent public accountants. The
unaudited consolidated financial data as of June 30, 1996, and for the six
months ended June 30, 1996 and 1995, have been prepared on a basis consistent
with the audited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition and results of
operations for the periods presented. The results for the six months ended June
30, 1996, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. This data should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
SIX MONTHS ENDED
----------------
YEAR ENDED DECEMBER 31,
-----------------------
JUNE 30, JUNE 30,
1991 1992(1) 1993(2)(3) 1994 1995 1995 1996
---- ------- ---------- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUE:
Product sales $2,146 $2,955 $3,942 $ 5,982 $ 6,622 $3,024 $ 3,946
Services 264 1,680 5,215 4,741 5,649 2,540 2,982
Total revenue 2,410 4,635 9,157 10,723 12,271 5,564 6,928
COSTS AND EXPENSES:
Cost of product sales 1,172 1,638 2,088 3,194 3,564 1,646 2,007
Cost of services 191 1,443 3,965 3,416 4,168 1,960 2,250
Research and development 104 222 279 469 375 159 362
Selling and marketing 372 353 894 1,192 1,340 638 915
General and administrative 436 745 1,619 2,047 2,316 1,057 1,088
Total operating costs and expenses 2,275 4,401 8,845 10,318 11,763 5,460 6,622
Income from operations 135 234 312 405 508 104 306
Interest expense, net 101 113 179 244 336 164 168
Income (loss) before income taxes and
extraordinary item 34 121 133 161 172 (60) 138
Provision for income taxes (5) (45) (41) (64) (69) 24 (55)
Income (loss) before extraordinary item 29 76 92 97 103 (36) 83
Extraordinary item-gain on elimination of debt,
net of income taxes -- -- 50 -- -- -- --
Net income (loss) $ 29 $ 76 $ 142 $ 97 $ 103 $ (36) $ 83
Net income (loss) per share(4) $ 0.01 $ 0.03 $ 0.06 $ 0.04 $ 0.04 $(0.01) $ 0.03
Weighted average common and common equivalent
shares outstanding(4) 1,990 2,202 2,480 2,629 3,192 2,640 3,266
16
DECEMBER 31, JUNE 30,
------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
WORKING CAPITAL(5) $1,698 $2,457 $3,612 $4,686 $4,829 $ 4,497
TOTAL ASSETS 2,624 4,828 6,870 8,076 9,928 10,047
LONG TERM DEBT, LESS CURRENT MATURITIES(5) 993 1,760 2,381 3,180 4,216 2,798
REDEEMABLE COMMON STOCK -- -- -- -- -- 899
TOTAL STOCKHOLDERS' EQUITY 993 1,837 2,762 3,041 3,187 3,332
DIVIDENDS -- NONE
<FN>
(1) Effective July 1, 1992, the Company acquired the net assets of a division of
Cambridge Biotech Corporation for $762,000 which increased 1992 revenues by
$1,450,000.
(2) On June 30, 1993, the Company exercised its option to pre-pay the
acquisition note in connection with the 1992 purchase of BTRL 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, 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, 1991 through 1994
and the six months ended June 30, 1995 as its inclusion was antidilutive.
(5) The Company's demand line of credit with outstanding amounts of $880,000,
$1,091,000 and $1,895,000 as of December 31, 1991, 1992 and 1993,
respectively, has been presented as part of long-term debt (and excluded
from current liabilities in calculating working capital) for 1991 through
1993 to be consistent with its reclassification to long-term debt in 1994,
1995 and 1996 due to a modification of its maturity date.
</FN>
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company generates revenue from products and services provided to the in
vitro diagnostic infectious disease industry. Products consist of three groups:
Quality Control Panels, Accurun(tm) Run Controls and Diagnostic Components.
Services consist of Specialty Clinical Laboratory Testing, Contract Research,
Clinical Trials and Drug Screening. In the three full years since the Company's
acquisition of BTRL and BBI-NACL, 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 54.0% in 1995, 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 37.0% in
1995 principally as a result of the increased percentage of higher margin
product revenues. Within products, the Company's Quality Control Products
(Accurun(tm) Run Controls and Quality Control Panels) have higher margins than
the Company's 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. See
"Risk Factors -- Fluctuations in Quarterly Results of Operations."
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. 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 as a percentage of revenue in
1996 and 1997, compared to 1995. 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 to agents under distribution agreements, as well
as directly to test kit manufacturers. All sales are denominated in U.S.
dollars. Export sales for the years ended December 31, 1993, 1994, and 1995 were
$1.4 million, $2.3 million, and $3.1 million, respectively, and for the six
months ended June 30, 1995 and 1996 were $1.5 million and $1.9 million,
respectively. The Company expects that export sales will continue to be a
significant source of revenue and operating income. See "Risk Factors -- Risks
Associated with Export Sales."
18
The Company's cash flow from operations over the last three years has been
negative as it funded investment in research and development, increased sales
and marketing expenditures, and supported growth-driven working capital needs.
The Company funded the shortfall through a combination of sales of common stock
and bank financing. The Company anticipates using a portion of the net proceeds
of this Offering for working capital requirements until such time as its cash
flow from operations becomes sufficient.
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 SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Revenue:
Products 43.1% 55.8% 54.0% 54.4% 57.0%
Services 56.9 44.2 46.0 45.6 43.0
---- ---- ---- ---- ----
Total revenue 100.0 100.0 100.0 100.0 100.0
Gross profit 33.9 38.4 37.0 35.2 38.6
Operating expenses:
Research and development 3.0 4.4 3.1 2.9 5.2
Selling and marketing 9.8 11.1 10.9 11.4 13.2
General and administrative 17.7 19.1 18.9 19.0 15.7
---- ---- ---- ---- ----
Total operating expenses 30.5 34.6 32.9 33.3 34.1
---- ---- ---- ---- ----
Income from operations 3.4 3.8 4.1 1.9 4.4
Interest expense 2.0 2.3 2.7 3.0 2.4
--- --- --- --- ---
Income (loss) before income taxes 1.5 1.5 1.4 (1.1) 2.0
Net income (loss) 1.6 0.9 0.8 (0.6) 1.2
=== === === ==== ===
Product gross profit 47.0% 46.6% 46.2% 45.6% 49.1%
Services gross profit 24.0% 28.0% 26.2% 22.8% 24.6%
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Total revenue increased 24.5%, or $1,364,000, to $6,928,000 for the six
months ended June 30, 1996 from $5,564,000 in the prior year period. This
increase was the result of an increase in product sales of 30.4%, or $921,000,
to $3,946,000 from $3,025,000 and an increase in specialty laboratory services
of 17.4%, or $443,000, to $2,983,000 from $2,540,000. Product revenue increased
primarily as a result of an overall increase of 34.5% in Quality Control
Products, due to sales of new products and increased volume of existing
products, including an increase of 132.5% in the sales of Accurun(tm). The
increase in service revenue was primarily attributable to a 19.0% increase in
Specialty Clinical Laboratory Testing revenue, particularly molecular (PCR)
testing, and the addition of two new research contracts with the National
Institutes of Health in the fourth quarter of 1995.
Gross profit increased 36.5%, or $714,000, to $2,672,000 for the six months
ended June 30, 1996 from $1,958,000 in the prior year period. The gross profit
margin increased to 38.6% in the six months ended June 30, 1996 versus 35.2% in
the prior year period. Gross margins improved in both products, (45.6% to
49.1%), and services (22.8% to 24.6%), as the Company benefited from an improved
revenue mix at the higher volume level.
Research and development expenses increased 127.4%, or $203,000, to $362,000
for the six months ended June 30, 1996 from $159,000 in the prior year period.
Research and development costs as a percentage of revenues increased to 5.2% for
the six months ended June 30, 1996 from 2.9% in the comparable 1995 period. This
increase was primarily the result of increased costs of personnel hired in the
second half of 1995 which enabled the Company to introduce over 30 new products
in the first half of 1996 compared with 15 new introductions in the prior year
period.
19
Selling and marketing expenses increased 43.6%, or $278,000, to $915,000 for
the six months ended June 30, 1996 from $638,000 in the prior year period. This
increase was primarily attributable to increased personnel costs associated with
the addition of tele-sales staff for Quality Control Products, particularly
Accurun(tm), and increased advertising costs due to the commencement of the
Company's "Total Quality System" (TQS) marketing campaign.
General and administrative expenses increased 3.0%, or $31,000, to
$1,088,000 for the six months ended June 30, 1996 from $1,057,000 in the prior
year period. As a result, general and administrative expenses decreased as a
percentage of revenues to 15.7% for 1996 from 19.0% in the prior year period as
management maintained close control of expense levels.
Interest expense was essentially unchanged in the six months ended June 30,
1996 versus the prior year period as the prime rate increases in late 1995 were
offset by reduced borrowing due to both additional equity raised and prepayments
from certain customers for contract research services.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenue increased 14.4%, or $1,548,000, to $12,271,000 in 1995 from
$10,723,000 in 1994 . The increase in revenues was the result 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 increase 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 growth for the period. The increase in service revenue
was primarily the result of increased specialty clinical laboratory testing, two
new research contracts and increased clinical trial services, particularly in
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. See "-- Years Ended December 31, 1994 and
1993." Development projects included Accurun(tm), molecular and immunological
Run Controls, specialized molecular assays, and the development 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, 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
20
patient rather than a healthcare institution. These increases were partially
offset by lower professional 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.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Total revenue increased 17.1%, or $1,566,000, to $10,723,000 in 1994 from
$9,157,000 in 1993. This increase was a result of a 51.7%, or $2,039,000,
increase in product sales, partially offset by a 9.1%, or $473,000, decrease in
service revenue. The product sales increase was primarily attributable to unit
volume growth of both existing and new Quality Control Panels for HIV and HCV,
and, to a lesser extent, to sales of the Company's first molecular-based Quality
Control Panel targeted for end-user PCR training. The service revenue decline
was primarily attributable to the completion in February 1994 of a government
contract with the United States Army for retrovirology research that reduced
contract research revenue by approximately $1,100,000 in 1994 compared with
1993. This decrease was partially offset by a $676,000, or 36.5%, increase in
specialty laboratory testing services.
Gross profit increased 32.5%, or $1,009,000, to $4,113,000 for 1994 from
$3,104,000 in 1993. Products gross profit increased 50.3%, or $933,000, to
$2,787,000 in 1994 from $1,855,000 in 1993 as the products sales increase was
partially offset by a small decrease in products gross margin (to 46.6% in 1994
from 47.0%). The products gross margin decrease was a result of higher costs
associated with pilot manufacturing of Accurun(tm). Services gross profit
increased 6.1%, or $76,000, to $1,326,000 in 1994 from $1,250,000 in 1993 as the
sales decrease was more than offset by an increase in services gross margin (to
28.0% in 1994 from 24.0%). Services gross margin increased primarily as a result
of improved economies of scale at its specialty clinical laboratory afforded by
higher test volume, and redeployment of staff into Company sponsored research
and development projects.
Research and development expenditures increased by 68.3%, or $190,000, to
$469,000 in 1994 from $279,000 in 1993 as the Company commenced several research
and development projects, including development of Quality Control Panels for
molecular diagnostics, increased expenditures related to the development of a
PCR test for Lyme Disease, and a second generation Lyme Disease western blot
test kit for internal use by the Company's specialty clinical laboratory.
Selling and marketing expenses increased 33.3%, or $297,000, to $1,192,000
in 1994 from $894,000 in 1993. This increase was primarily attributable to staff
additions in sales and customer service support for the products business and
also higher travel costs.
General and administrative expenses increased 26.4%, or $428,000, to
$2,047,000 in 1994 from $1,619,000 in 1993. This increase was primarily
attributable to a full year impact of staff additions in information systems,
regulatory affairs and accounting in support of the Company's sales growth and
growth expectations in both the Quality Control Products and the Specialty
Clinical Laboratory Services business.
Interest expense increased 36.4%, or $65,000, to $244,000 in 1994 from
$179,000 in 1993 as the Company funded its increased equipment and working
capital needs primarily from borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through cash flow from
operations, borrowings from banks and sales of equity.
At June 30, 1996 the Company had $1,398,000 outstanding and $2,028,000 of
availability under its $3.5 million Revolving Line of Credit Agreement due June
30, 1998 (the "Revolver"). Under the terms of the Revolver, the Company operates
under a zero balance account arrangement whereby cash receipts are received into
a lockbox at the bank and reduce the Revolver, while disbursements for
21
payroll and accounts payable items increase the outstanding balance of the
Revolver. Borrowings under the Revolver are limited to 80% of eligible accounts
receivable plus the lesser of 40% of inventory or $1.5 million. The Revolver
contains various covenants and restrictions and the amounts outstanding are
secured by all of the Company's assets and a $2 million life insurance policy on
an officer/stockholder. See Note 6 to Notes to the Consolidated Financial
Statements. The Company expects to use a portion of the proceeds of the Offering
to repay the outstanding amount under the Revolver, which at August 1, 1996 was
approximately $1,727,000. See "Use of Proceeds." Amounts repaid on the Revolver
will be available for reborrowing.
Net cash provided by operations for the six months ended June 30, 1996 was
$685,000 as compared to $105,000 in the prior year period. This increase in cash
flow was primarily attributable to an increase in net income and an increase in
deferred revenue from a payment of $308,000 under a research contract for future
clinical trial services. Cash flow used in operations in 1995, 1994 and 1993
amounted to $29,000, $554,000 and $427,000, respectively. The decrease in cash
used in operations in 1995 from 1994 was primarily attributable to an increase
in deferred revenue.
Cash used in investing activities for the six months ended June 30, 1996 was
$283,000 as compared to $216,000 in the prior year period. This increase in
investing activities was the result of increased capital expenditures for
production equipment associated with Accurun(tm) and other Quality Control
Products. Cash used in investing activities for 1995, 1994 and 1993 amounted to
$1,320,000, $405,000 and $850,000, respectively. The increased use of cash in
1995 versus 1994 was the result of the purchase of the Company's West
Bridgewater facility and in 1993 related to the acquisition of the net assets of
North American Laboratory Group Limited, Inc.
Cash used in financing activities for the six months ended June 30, 1996 was
$403,000 as compared to $151,000 provided by financing activities in the prior
comparable year period. Net cash was used in financing activities primarily as a
result of the repayment of $1,591,000 of the Revolver offset by $899,000 raised
through the sale of Common Stock to Kyowa Medex, Co., Ltd. Cash provided by
borrowings for 1995, 1994 and 1993 amounted to $1,240,000, $846,000 and
$494,000, respectively, and net proceeds from the sale of Common Stock for the
same periods amounted to $176,000, $170,000, and $765,000, respectively. The
proceeds of such debt were used for working capital, to acquire the West
Bridgewater property and to purchase capital equipment. The Company expects to
use a portion of the proceeds of the Offering to repay the outstanding balances
on these notes payable, which aggregated approximately $1,829,000 at August 1,
1996. See "Use of Proceeds."
Capital expenditures relate primarily to the Company's facilities and
related equipment. For the six months ended June 30, 1996 and 1995, capital
expenditures totaled $283,000 and $216,000 respectively. This represents an
increase of $67,000 in the six months ended June 30, 1996, as the Company
continues to invest in manufacturing equipment and information systems related
to both operations and finance. In 1995, 1994 and 1993 capital expenditures
amounted to $1,316,000, $405,000 and $461,000, respectively. In 1995, $806,000
of the Company's capital expenditures related to the purchase of the West
Bridgewater facility. As of August 1, 1996, the Company has available to it a
$250,000 five year term facility to finance equipment purchases, bearing
interest at prime plus 1%.
The Company anticipates capital expenditures to increase over the near term
as it expects to use approximately $1.0 million from the proceeds of this
Offering to expand its manufacturing capacity in West Bridgewater, of which
approximately $500,000 will be spent on building expansion and approximately
$500,000 will be spent on equipment. See "Use of Proceeds." The Company believes
that existing cash balances, the borrowing capacity available under the
Revolver, cash generated from operations and the proceeds of this Offering are
sufficient to fund operations and anticipated capital expenditures for the
foreseeable future. There were no material financial commitments for capital
expenditures as of June 30, 1996.
22
On April 26, 1996 the Company entered into a new five year distribution
agreement with a foreign distributor extending a six year old relationship.
Simultaneously, the distributor purchased 117,647 shares of the Company's Common
Stock at a price of $8.50 per share. The Purchase Agreement includes a
redemption right that may require the Company to repurchase the stock at $8.50
per share in the event the Company terminates the distribution agreement or it
expires prior to the Company completing an initial public offering of its Common
Stock. These shares have been presented in the Company's balance sheet
separately as redeemable Common Stock. Completion of this initial public
offering will terminate the redemption provisions and cause the reclassification
of these shares into stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which becomes
effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. However, entities are allowed to elect whether to measure
compensation expense for stock-based compensation under SFAS 123 or APB No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to continue
to account under APB No. 25 and will make the required pro forma disclosures of
net income and earnings per share as if the provisions of SFAS 123 had been
applied in its December 31, 1996 financial statements. The potential impact of
adopting this standard on the Company's pro forma disclosures of net income and
earnings per share has not been quantified at this time.
23
BUSINESS
GENERAL
The Company is a leading 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 and provides
specialty laboratory services, including clinical trials. 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.
INDUSTRY OVERVIEW
According to the World Health Organization ("WHO"), infectious diseases are
now the leading cause of premature death around the world and the third most
common cause of premature death in the United States. In 1995, more than 17
million people died from exposure to infectious diseases, constituting nearly
one-third of the approximately 52 million people worldwide who died from all
causes. Currently, the Company focuses on two infectious diseases, Viral
Hepatitis and AIDS, which are among the largest killers and are also a primary
focus of blood testing efforts worldwide.
WHO estimates that approximately 20 million people worldwide are infected
with HIV, and that approximately one million people died from AIDS-related
illnesses during 1995. WHO also estimates that up to 350 million people
worldwide are infected with Hepatitis Type B, one of several types of Viral
Hepatitis, and that over one million people died of Viral Hepatitis during 1995.
In developed countries, blood products are routinely screened for HIV and Viral
Hepatitis by use of infectious disease test kits.
The increased threat from infectious diseases has created a large and
growing market for test kits. Venture Planning Group, a medical products
research firm, estimates that the worldwide infectious disease test kit market
was approximately $2.7 billion in 1995, and will grow to $5.0 billion by 2000,
representing a compound annual increase of 13%.
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.
24
Most infectious disease tests currently use microbiological or immunological
methods. However, molecular diagnostic methods are increasingly being used in
research laboratories worldwide and the Company believes that soon they will be
accepted for routine use in the clinical laboratory setting. 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 ensure that test kits detect the
correct analyte (specificity), detect it the same way every time
(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.
According to the Genesis Report Dx (May 1994), a medical products survey,
the quality control market for in vitro diagnostic testing for infectious and
non-infectious disease in 1994 totaled approximately $600 million. The Company
believes that the market for quality control products for infectious disease
testing currently represents less than five percent of the overall quality
control market. At the present time, most quality control products for
non-infectious disease test kits are sold to end-users, who have used quality
control products as part of standard laboratory practice for several decades.
Conversely, most quality control products for the infectious disease test kit
segment of the market are sold to test kit manufacturers and regulators, and not
to end-users, who have historically used quality control products only on a
limited basis. The Company believes that this lower level of usage among
end-users of infectious disease test kits is primarily due to laboratory
practices that have evolved from earlier testing methods that did not require
routine and extensive use of external quality controls as part of standard
laboratory practice. However, the Company also believes that this lower level of
usage among end-users of test kits represents a major market opportunity since
current testing methods have been improving test kit performance to increasingly
higher levels of sensitivity, specificity and reproducibility. The Company
believes that these three key criteria of test kit performance can be best
monitored through the use of quality control products, such as those sold by the
Company.
MARKET TRENDS
The Company believes that end-users of test kits will become the most
significant users of quality control products in the infectious disease market
and that the market for infectious disease test kits and related quality control
products will continue to expand, primarily as a result of the following four
trends.
Increased Regulatory Scrutiny. Due to the high level of public concern with
the dangers of infectious diseases, particularly AIDS, Viral Hepatitis, and Lyme
Disease, governmental regulatory agencies are requiring additional tests to
improve the safety of the blood supply, and are requiring manufacturers and
end-users of test kits to adopt quality assurance programs applicable to the
entire test kit product life-cycle, from initial product design and development
through manufacture and end-use. The passage of the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") and its regulatory implementation
beginning in 1992 have resulted in a set of recommended laboratory practices,
including more stringent quality control programs, as well as regular government
inspections aimed at improving the overall standard of proficiency in clinical
laboratories. As a result, the Company believes that blood bank, hospital and
clinical laboratory personnel are adopting more comprehensive quality assurance
programs, especially in infectious disease testing, to minimize the risk of
errors and to comply with CLIA and other regulations.
25
Growing Recognition of the Value of Using Quality Control Products. To
ensure the greatest possible safety of the blood supply, to achieve the earliest
possible diagnosis of infection, and to minimize the occurrence of false
negative results, sensitivity of tests (i.e., their ability to accurately detect
very small amounts of the disease marker) is a critical element. The Company
believes there is increasing recognition of the benefit of continuously
monitoring test sensitivity using quality control products to help ensure the
accuracy of each test run.
New Diseases and the Development of New Therapies. In recent years, HIV,
Hepatitis C Virus ("HCV"), Borrelia burgdorferi ("Lyme Disease") and Ehrlichia,
among others, have emerged as significant human pathogens. New and drug
resistant strains of known pathogens, such as those causing tuberculosis, escape
mutants of Hepatitis B Virus ("HBV"), and Group O and other variants of HIV,
have also emerged. In response, new and improved tests are being developed. In
addition, as new drug therapies are introduced to treat infectious diseases, new
tests are needed to monitor the effectiveness of these therapies. For example,
the recent advances in AIDS drug therapy, which use a combination of several
drugs to treat infected patients, have prompted the creation of a new viral load
test used to periodically measure the precise amount of virus in the patient's
blood to evaluate the effectiveness of the drug therapy. The Company believes
that viral load testing will be applied to additional areas of infectious
disease, including Hepatitis B and C and Lyme Disease.
Advanced Test Technologies and Equipment. Test kit manufacturers are
continuing to enhance the sensitivity, specificity and reproducibility of their
tests. Molecular diagnostics now permit the direct detection of the nucleic
acids (DNA and RNA) specific to viruses and other pathogens and are being used
to complement traditional microbiological and immunological tests for infectious
disease. New tests for urine and saliva have been developed that offer
advantages in some settings over blood tests and may be more widely used in the
future. Test kit manufacturers are also developing assays on silicon chips,
laser-read microspot arrays, and are using electrochemi- luminescence detection,
among other technologies. The different types of information obtained through
the complementary use of various diagnostic methods can provide the physician
with a broader perspective on the diagnosis and prognosis of the disease, as
well as on the effectiveness of drug therapy.
THE BOSTON BIOMEDICA ADVANTAGE
The Company believes it offers the only integrated range of products for
quality assurance throughout the entire infectious disease 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. To directly address the emerging end-user market opportunity, the
Company introduced its TQS marketing platform based around its Accurun(tm) Run
Control products. The Company believes that TQS is the first comprehensive
package of quality control products designed specifically for infectious disease
test kit end-users, providing them with a customized approach to evaluate all of
the key elements of the testing process.
The Company believes that it has several competitive advantages which have
enabled it to achieve its current leadership position in quality control
products for infectious diseases:
Valuable Inventory. The Company has an inventory of approximately 50,000
distinct human blood specimens accumulated since 1986 through its worldwide
sources of blood-supply. This inventory cannot be easily or rapidly acquired on
the open market, and enables the Company to respond quickly to market trends and
customer needs.
Specialty Laboratory Services and Clinical Trials. The knowledge gained
through the Company's specialty laboratory services allows the Company to remain
at the forefront of emerging market trends and customer needs. By conducting
clinical trials of new test kits under development, the Company is able to
maintain close contact with manufacturers and to release Quality Control
Products for test kits soon after the test kits are introduced to the market. In
addition, by operating a specialty clinical laboratory, the Company is able to
better understand the requirements of the end-user.
26
Proprietary Manufacturing Know-How. As a result of ten years of experience
working with leading worldwide manufacturers in the development of their test
kits and with regulators to help in the evaluation of test kits, the Company has
developed proprietary know-how in manufacturing its Quality Control Products.
Reputation. The Company believes that it has developed a reputation as an
authority in quality control products for infectious disease among manufacturers
and regulators of infectious disease test kits. The Company believes that its
reputation, established over the past ten years, will assist it in penetrating
the emerging end-user market.
STRATEGY
The Company's strategy is to enhance its leadership position in the
infectious diseases quality control market and to take advantage of the emerging
opportunities in the end-user market for quality control products. There are
five key elements to this strategy:
Capitalize on Emerging End-User Market. In 1996 the Company introduced an
expanded line of Quality Control Products that are specifically designed for the
end-users of test kits, such as blood banks, hospitals and clinical
laboratories. The Company plans to continue to expand its line of Quality
Control Products, particularly its Accurun(tm) line of Run Controls, to cover a
wider range of immunological and molecular markers. The Company also recently
introduced its Total Quality System ("TQS") marketing platform, which combines
Accurun(tm) with other Quality Control Products to provide test kit end-users
with the products needed in an overall quality assurance program. The Company
intends to continue to expand its sales, marketing and distribution activities
to support its product development program for the emerging end-user quality
control market.
Develop New Products and Services. The Company intends to capitalize on its
reputation with manufacturers and regulators by developing Quality Control
Products and Diagnostic Components for use with test kits for both new test
methodologies and new diseases. For example, in response to a 1996 FDA mandate
that all blood collected for transfusion must be tested for the presence of the
HIV antigen, the Company recently introduced on an OEM basis the first quality
control training panels for use with the two FDA-licensed HIV antigen test kits
available in the United States. In addition, the Company has also provided a
training panel for end-users of the only FDA-licensed molecular amplification
test for HIV RNA, and has introduced a new line of HIV RNA controls to meet the
demand of the newly emerging viral load test market. In the future, the Company
expects to provide Quality Control Panels for use with tests that distinguish
among the subtypes of HIV, the serotypes of HCV, and the various strains of
Mycobacteria causing tuberculosis.
Enhance Technical Leadership. The Company seeks to expand its technical
capabilities by continually enhancing its strong scientific staff and
collaborating with other scientists worldwide, thus strengthening its reputation
in the area of quality control for infectious disease testing. The Company
maintains and enhances its technical leadership by participating in scientific
studies relevant to its products and services, and by making presentations at
scientific meetings on blood banking and infectious diseases. The Company's
scientists also publish articles in peer reviewed journals.
Capitalize on Complementary Business Operations. The Company intends to
capitalize on operational and marketing opportunities that arise out of its
activities in both infectious disease products and laboratory services. For
example, the Company conducts clinical trials for manufacturers of in vitro
diagnostic products, which allows the Company to maintain close contact with
test kit manufacturers and regulators, and enables the Company to evaluate new
technologies in various stages of development. The Company believes that the
reputation and experience of its laboratory and scientific staff, its large
number of unique Quality Control Panels, and its inventory of characterized
serum and plasma specimens assist the Company in marketing its clinical trial
services to its customers. Finally, the Company's specialty clinical laboratory
also affords the Company access to materials needed in the production of its
Quality Control Products and Diagnostic Components.
27
Pursue Strategic Acquisitions and Alliances. The Company intends to pursue
strategic acquisitions and alliances to expand its core product lines, to
strengthen its base in medical science and technology, and to secure sources of
blood supply. To date, the Company has acquired BTRL, a research and development
laboratory with a strong capability in molecular and cellular biology, and
BBI-NACL, formerly North American Laboratory Group Ltd., Inc., a microbiology
and immunology clinical laboratory specializing in the diagnosis of infectious
diseases, including tick-borne diseases. These acquisitions led to the
introduction in 1994 of the Company's first Quality Control Products for
molecular diagnostics. The Company believes that there may be additional
acquisition and alliance opportunities, such as blood donor centers in strategic
locations, that would strengthen its existing business.
PRODUCTS
The Company designs, develops and markets diagnostic products used for the
quality control, quality assurance and technical evaluation of test kits for the
laboratory diagnosis of infectious disease. The Company offers three product
groups: Quality Control Panels, Run Controls and Diagnostic Components.
The Company manufactures its 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. The Company
believes the current market value of this inventory is significantly in excess
of its book value.
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 Products are designed for measuring overall test kit performance and
laboratory proficiency, as well as for training laboratory professionals. The
Company's Data Sheets are an integral part of its Quality Control Products.
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 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 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. The following table describes the types of Quality Control Panel
products currently offered by the Company.
28
QUALITY CONTROL PANEL PRODUCTS
PRODUCT LINE DESCRIPTION USE CUSTOMERS
SEROCONVERSION PLASMA SAMPLES COMPARE THE TEST KIT
PANELS COLLECTED FROM A CLINICAL MANUFACTURERS AND
SINGLE INDIVIDUAL SENSITIVITY OF REGULATORS
OVER A SPECIFIC COMPETING
TIME PERIOD SHOWING MANUFACTURERS' TEST
CONVERSION FROM KITS, ENABLING THE
NEGATIVE TO USER TO ASSESS THE
POSITIVE FOR SENSITIVITY OF A
MARKERS OF AN TEST IN DETECTING A
INFECTIOUS DISEASE DEVELOPING
ANTIGEN/ANTIBODY
PERFORMANCE A SET OF 10 TO 50 DETERMINE TEST KIT TEST KIT
PANELS SERUM AND PLASMA PERFORMANCE AGAINST MANUFACTURERS AND
SAMPLES COLLECTED ALL EXPECTED LEVELS REGULATORS
FROM MANY DIFFERENT OF REACTIVITIES IN
INDIVIDUALS AND THE EVALUATION OF
CHARACTERIZED FOR NEW, MODIFIED AND
THE PRESENCE OR IMPROVED TEST
ABSENCE OF A METHODS
PARTICULAR DISEASE
MARKER
SENSITIVITY PANELS PRECISE DILUTIONS EVALUATE THE TEST KIT
OF HUMAN PLASMA OR LOW-END ANALYTICAL MANUFACTURERS
SERUM CONTAINING A SENSITIVITY OF A
KNOWN AMOUNT OF AN TEST KIT
INFECTIOUS DISEASE
MARKER AS
CALIBRATED AGAINST
INTERNATIONAL
STANDARDS
QUALIFICATION DILUTIONS OF HUMAN DEMONSTRATE THE CLINICAL REFERENCE
PANELS PLASMA OR SERUM CONSISTENT LABORATORIES, BLOOD
MANIFESTING A FULL LOT-TO-LOT BANKS, AND HOSPITAL
RANGE OF PERFORMANCE OF TEST LABORATORIES
REACTIVITIES IN KITS, TROUBLESHOOT
TEST KITS FOR A PROBLEMS, EVALUATE
SPECIFIC MARKER PROFICIENCY, AND
TRAIN LABORATORY
TECHNICIANS
OEM PANELS CUSTOM-DESIGNED TRAIN LABORATORY CUSTOM DESIGNED
QUALIFICATION PERSONNEL ON NEW WITH TEST KIT
PANELS FOR TEST KITS OR MANUFACTURERS AND
REGULATORS AND TEST EQUIPMENT REGULATORS AS AN
KIT MANUFACTURERS END-USER PRODUCT OR
FOR DISTRIBUTION TO FOR INTERNAL USE
CUSTOMERS OR FOR
INTERNAL USE
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. See "Risk Factors -- Difficulty in Obtaining Raw
Materials."
The Company believes that it offers its customers a broad range of Quality
Control Panel products to address the requirements of the complete life-cycle of
a test kit, from initial research and development, through the regulatory
approval process, test kit production, training, troubleshooting and routine use
by end-users. The Company further believes that its Data Sheets, an integral
part of all panel products, offer its customers in-depth information on a
particular test kit of interest. Quality
29
Control Panels currently span the immunologic markers for AIDS (i.e., HIV),
Hepatitis B and C, Lyme Disease and ToRCH (Toxoplasma, rubella, cytomegalovirus
and herpes simplex virus). New introductions this year include molecular
Performance Panels for HBV and HCV, qualification panels for HIV, HBV and HCV,
and additional Seroconversion Panels for HIV, HBV, and HCV.
ACCURUN(TM) 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.
The Company believes its Accurun(tm) product line provides the following
benefits to end-users:
* Helps to satisfy the requirements of Good Laboratory Practice.
* Tracks the accuracy and precision of test runs.
* Detects laboratory errors and identifies trends before they become a
problem.
* Monitors test kit performance, equipment and personnel.
* Helps to meet National Committee For Clinical Laboratory Standards
("NCCLS") for molecular and immunological diagnostic methods for
infectious disease quality control.
* Documents the validity of test results, day to day, week to week.
The Company introduced its first four Accurun(tm) Run Control products in
the fourth quarter of 1993 and has since developed and released for sale an
additional 24 Accurun(tm) products. A limited number of these products are
available for diagnostic purposes; the others currently are limited to research
use. See " -- Government Regulation." Current Accurun(tm) Run Control products
range in price from $15 to $45 per milliliter and are described in the following
table.
ACCURUN(TM) RUN CONTROLS
CURRENT
NUMBER OF PRIMARY
PRODUCT LINE DESCRIPTION PRODUCTS CUSTOMER(S)
Accurun(tm) 1-99 Multi-marker Run Control for 4 Blood Banks
immunological tests
Accurun(tm) 100-199 Single-marker Run Control 17 Hospitals and clinical
for immunological tests reference laboratories
Accurun(tm) 200-299 Multi-marker Run Control for 1 Research and specialty
molecular tests laboratories
Accurun(tm) 300-399 Single-marker Run Control 3 Research and specialty
for molecular tests laboratories
Accurun(tm) 800-899 Negative Run Control for 3 All laboratories
immunological and molecular
tests
30
The Company's Accurun(tm) 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) products, in combination with its Quality Control Panel
products, provide an extensive line of products for quality assurance in
infectious disease testing. See "-- Sales and Marketing." The Company intends to
continue to expand its line of Accurun(tm) products, thereby providing its
customers with the convenience and cost effectiveness of a single supplier for
independent run controls. See "Risk Factors -- Undeveloped End-User Market For
Quality Control Products for Infectious Disease Test Kits."
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. Failure to obtain, or delays in
obtaining, such clearance would adversely affect the Company's strategy of
capitalizing on the end-user market. See "Risk Factors -- Stringent Government
Regulation" and "-- Government Regulation."
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.
The Company believes that it has several competitive advantages in
Diagnostic Components. Through its trained and experienced laboratory staff, the
Company is able to perform comprehensive in-house testing for a number of
markers in a particular material, and consequently is able to address the
demands of its customers. The Company's large inventory of approximately 50,000
specimens provides it with the flexibility to produce Diagnostic Components
efficiently and rapidly in response to customer requests. The Company believes
that its proprietary manufacturing knowledge enables it to manufacture stable,
high quality products to meet the demands of its worldwide customer base.
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. The Company operates an independent
specialty clinical 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 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
31
support, probe labeling and custom PCR assays. Cell biology and immunology
services include sterility testing, virus infectivity assays, cultivation 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 research services for assessment of the efficiency of
candidate HIV vaccines in a monkey model system under two separate contracts
with the National Institute for Allergy and Infectious Disease ("NIAID"), a part
of the National Institutes of Health ("NIH"). Each of these contracts has a two
year term which expires in September 1997. In addition, since 1983, the Company,
through its BTRL subsidiary, has provided blood processing and repository
services for the National Cancer Institute ("NCI"), also a part of the 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. While the current NCI repository contract terminates in February 1997,
the Company has responded to a Request for Proposals by the United States
government for a new four year contract to replace this contract. There can be
no assurance that any of these contracts will be replaced with new contracts.
See "Risk Factors -- Dependence on Key Customers."
Small Business Innovation Research ("SBIR") grants and other government
contracts similar to the ones described have enabled the Company to develop
technologies applicable to new product development and its specialty clinical
laboratory. For example, recent SBIR grants have enabled the Company to develop
PCR based assays for the detection of the nucleic acids of HIV, HCV and Lyme
Disease. Although the Company does not currently have any SBIR grants, it has
two pending applications for such grants and intends to continue to seek
government grants and contracts that further the Company's core technology and
commercial business. There can be no assurance that the Company will receive any
government research grants in the future.
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 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.
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.
RESEARCH AND DEVELOPMENT
The Company's research and development effort is focused on the development
of (i) new and improved Quality Control Products 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, and
(iv) infectious disease testing services using PCR and other amplification
assays for AIDS, Viral Hepatitis, Lyme Disease and Chlamydia, among others. The
Company has approximately 20 full or part-time employees dedicated to its
research and development effort. For the six months ended June 30, 1996 the
Company increased spending on research and development as a percentage of
revenues compared to the same period ended June 30, 1995 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 and manufacturing personnel to
identify and prioritize the development of new products and services.
32
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. For example, during 1996, the
Company has introduced 10 new Seroconversion, Performance and Sensitivity Panel
products as well as 14 new Accurun(tm) Run Controls; in addition, during July
1996, the Company released its first Qualification Panel products. The Company
is developing new Quality Control Products for use with molecular diagnostic
tests for HIV, HCV and HBV. Recently the Company expanded its Quality Control
Product line beyond the retrovirus 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 Products for these and other
diseases. The Company has increased the number of Quality Control Products it
offers from approximately 20 in 1990 to approximately 150 products in 1996.
The Company is also developing new and improved infectious disease specialty
tests for Lyme Disease and other tick-borne diseases for use in its specialty
laboratory business. For example, the Company was among the first to develop
enzyme immunoassays and Western Blot assays for Lyme Disease. The Company is
also pursuing new applications of PCR technology to infectious disease
diagnostics, such as amplification assays for the pathogens of AIDS, Viral
Hepatitis, Lyme Disease and Chlamydia, 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. government. See "-- Services."
STRATEGIC ALLIANCES
University of North Carolina at Chapel Hill. 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. 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."
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 certain royalties
based upon a percentage of sales of products arising out of the research. This
agreement expires in September 1998.
SALES AND MARKETING
The Company's sales and marketing efforts are directed by a Senior Vice
President of Sales and Marketing who supervises 15 sales people and four other
full-time sales and marketing 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. By serving its customers at all stages of the product life-cycle, the
Company expects to stay at the forefront of trends in infectious disease
testing, which in turn enables the Company to anticipate and respond to the
needs of the marketplace.
33
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 is implementing a major
marketing platform, known as "Total Quality System" ("TQS"). TQS is a package of
Quality Control Products, including the Company's Accurun(tm) 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 equipment 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) line of Run Control products. Since
the beginning of 1996, the Company has hired two new employees for the sales and
marketing of its Accurun(tm) line of products and expects to add six more direct
salespeople by the end of 1997.
The Company's products are currently sold through a combination of
telephone, mail, third party distributors and limited direct sales efforts.
Domestically, products are sold through an in-house tele-sales group consisting
of five sales representatives, two sales managers and one customer service
representative. Internationally, the Company distributes its products both
directly and through 17 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. During the fiscal
years 1993, 1994, 1995 and the six months ended June 30, 1995 and 1996 the
Company's distributors accounted for 1.9%, 3.5%, 6.2%, 2.8% and 8.8% of the
Company's total revenue, respectively. The Company intends to further expand
sales through international distributors, although there can be no assurances
that it will be able to do so. See "Risk Factors -- Risks Associated with Export
Sales."
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.
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
The Company's customers for Quality Control Product 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 clinical laboratories, public health laboratories and blood banks,
including the Swiss Red Cross, United Blood Services and Kaiser Permanente. In
1995, the Company sold products to approximately 100 diagnostics and
pharmaceutical manufacturers, 15 regulatory agencies, and 250 end-users. The
Company's Specialty Clinical Laboratory Testing services are sold to hospital
and clinical laboratories, blood banks, researchers and other health care
providers.
The Company does not have long-term contracts with its customers. The
Company's products are sold to its customers pursuant to purchase orders for
discrete purchases. Although the Company believes that its relationships with
these customers are satisfactory, termination of the Company's relationship with
any one of such customers could have a material adverse effect on the Company.
See "Risk Factors -- Dependence on Key Customers."
34
During the fiscal years 1993, 1994 and 1995, and the six months ended June
30, 1995 and 1996, 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 period and no one customer accounted for
more than 10% of net sales.
MANUFACTURING AND OPERATIONS
The Company manufactures and assembles substantially all of its products at
its facility in West Bridgewater, Massachusetts. The Company has computerized
purchasing, inventory, and test result and materials tracking systems in an
integrated operations management system, and believes that these systems are
adequate for its current level of production, but would require further
enhancements if the Company experiences substantial future growth. The Company
acquires raw materials from a variety of vendors and through a program of donor
recruitment, donor screening, product collection, product characterization and
donor management. All important materials have multiple sources of supply.
The Company's West Bridgewater facility contains environmentally-controlled
freezers and cold rooms, which are used to store raw materials for manufacturing
and finished products. More than 3,000 square feet of space in the West
Bridgewater facility is dedicated to freezers and cold rooms. The freezers and
cold rooms are monitored continuously and the Company maintains a natural gas
fired emergency generator in the event of a power outage.
The Company also operates a specialty clinical laboratory in New Britain,
Connecticut and a research and development laboratory in Rockville, Maryland.
See "-- Properties."
COMPETITION
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 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. See "Risk Factors --
Risk of Technological Change" and "-- Competition."
In the area of Quality Control Products, the Company competes in the United
States primarily with NABI (formerly North American Biologicals, Inc.) in Run
Controls and Quality Control Panel products and Blackhawk Biosystems Inc. in Run
Controls. In Europe, the Netherlands Red Cross has recently begun offering
several Run Control and panel products. The Company believes that all three of
these competitors currently offer a more limited line of 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 Company believes that it has competitive advantages in the quality
control products and diagnostic components industry. These include its access to
raw materials, technical know-how, broad product line and established reputation
among large diagnostics and pharmaceutical manufacturers, as well as regulatory
agencies.
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 Clinical 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.
35
GOVERNMENT 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. See "Risk Factors -- Stringent Government Regulation."
In the United States, the Food, Drug, and Cosmetic Act ("FDCA") prohibits
the marketing of 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 Company may not market a device for diagnostic use until an order is
issued by 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 Company 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.
The Company's Accurun 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.
All of the Company's Quality Control Products, with the exception of Accurun
1(R), are marketed "for research use only," which do not require FDA premarket
clearance or approval, and not for diagnostic uses, which do 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.
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
36
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.
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 services "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) 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 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.
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.
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. Department of Agriculture (Importation and
Transportation of Controlled Materials and Organisms and Vectors) and the U.S.
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. Environmental Protection Agency
identification number. The Company is also registered with the U.S. Nuclear
Regulatory Commission for use of certain radioactive materials. All hazardous
waste is manifested and disposed of properly. 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.
37
INTELLECTUAL PROPERTY
None of the Company's Quality Control Products or Diagnostic Components have
been patented. The Company has decided to hold as trade secrets current
technology used to prepare Basematrix and other blood-based products. 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.
The Company has two United States patents and, jointly with UNC, has filed
three series of United States and foreign patent applications relating to
compounds, pharmaceutical compositions and therapeutic methods in connection
with the Company's drug discovery program at UNC. See "-- Services," and " --
Research and Development."
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. See "Risk Factors -- Protection of Intellectual Property and
Proprietary Technology."
PROPERTIES
The Company's corporate offices and manufacturing facilities are located in
a two story, 22,500 square foot building in West Bridgewater, Massachusetts. The
Company owns and operates this building. The Company intends to use
approximately $1 million of the proceeds of this Offering to expand its
manufacturing capacity and to purchase necessary equipment at its West
Bridgewater site, and has submitted plans to local authorities for the
development of an additional 7,500 square feet, primarily for manufacturing
purposes. The Company anticipates that these renovations will begin this year.
The Company believes that following these renovations, its facility in West
Bridgewater will be sufficient to meet its foreseeable needs. See "Use of
Proceeds."
The Company leases its laboratory facilities in Rockville, Maryland and New
Britain, Connecticut. The Rockville facility contains 21,000 square feet and is
occupied under a five-year lease that is due to expire on June 30, 1997. The
Company is currently considering the exercise of its option to extend the lease
for an additional five years, as well as relocating its laboratory. The Company
believes that there is sufficient space available in the Rockville facility for
its current needs. 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.
EMPLOYEES
As of August 1, 1996 the Company employed 184 persons, all of whom were
located in the United States. Seventy-seven of these persons were employed in
West Bridgewater, Massachusetts, 58 in New Britain, Connecticut, and 49 at the
Rockville, Maryland site. 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.
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages are as
follows:
NAME AGE POSITION
Richard T. Schumacher<F1> 46 President; Chief Executive Officer and
Chairman of the Board
Kevin W. Quinlan<F2> 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
Francis E. Capitanio<F2> 52 Director
Henry A. Malkasian<F1> 79 Director
Calvin A. Saravis<F1><F2> 66 Director
- ------------------
<FN>
<F1> Member of the Compensation Committee.
<F2> Member of the Audit Committee.
</FN>
Mr. Schumacher, the founder of the Company, has been the President 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 its founding, has been Senior
Vice President, Finance, Treasurer, and Chief Financial Officer 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.
39
Dr. Tilton has served as Senior Vice President, Specialty Laboratory
Services since the Company's acquisition of BBI-North American Clinical
Laboratories, Inc. in 1993 and was one of the founders of BBI-NACL, 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 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 been 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 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.
Mr. Capitanio has served as a Director since January 1986. He has been
President, Treasurer and Director of Diatech Diagnostics Inc. (formerly
Immunotech Corporation), an in vitro diagnostics company and a wholly owned
subsidiary of Healthcare Technologies Ltd., since 1980. Mr. Capitanio received
an M.B.A. from the Sloan School of Management, Massachusetts Institute of
Technology and a B.S. in metallurgy from Massachusetts Institute of Technology.
Mr. Malkasian has served as a Director since the Company's organization in
1978. Mr. Malkasian is a practicing attorney-at-law and a member of the firm
Malkasian & Budge in Massachusetts. He received his J.D. degree from Harvard
University School of Law and a B.A. degree from Clark University.
Dr. Saravis has served as a Director since 1978. Since 1971, Dr. Saravis has
been a Senior Research Associate at the Mallory Institute of Pathology and since
1979 he has been a Senior Research Associate at the Cancer Research Institute --
New England Deaconess Hospital. Since 1984, Dr. Saravis has had an appointment
as an Associate Professor of Surgery (biochemistry) at Harvard Medical School
and an Associate Research Professor of Pathology at Boston University School of
Medicine. Dr. Saravis received his Ph.D. in immunology and serology from Rutgers
University.
In August 1990 the Board of Directors established a Compensation Committee
currently composed of Messrs. Schumacher, Saravis and Malkasian. The functions
of the Compensation Committee include presentation and recommendations to the
Board of Directors on compensation levels for officers and directors and
issuance of stock options to the Board of Directors, employees and affiliates.
In August 1990 the Board of Directors established an Audit Committee
currently composed of Messrs. Capitanio, Quinlan and Saravis. The functions of
the Audit Committee include recommending to the Board of Directors the
engagement of the independent accountants, reviewing the scope of internal
controls and reviewing the implementation by management of recommendations made
by the independent accountants.
The Company's Board of Directors is divided into three classes, with the
classes being elected for staggered three-year terms. At each annual meeting of
stockholders, directors will be elected to succeed those in the class whose term
then expires, and each elected director shall serve for a term expiring at the
third succeeding annual meeting of stockholders after such director's election,
and until the director's successor is elected and qualified. Thus, directors
stand for election only once in three years. Executive officers serve at the
discretion of the Board of Directors.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their
services. Each director is eligible to receive options to purchase Common Stock
under the Company's 1987 Non-Qualified Stock Option Plan. As of August 1, 1996,
options to purchase an aggregate of 249,750 shares have been granted to
directors of the Company under this Plan. During fiscal 1995, options to
purchase an aggregate of 15,000 shares of Common Stock were granted to the
Directors as follows: 5,000 shares to Mr. Capitanio, 5,000 shares to Mr.
Malkasian, and 5,000 shares to Dr. Saravis and no shares to either Mr.
Schumacher or Mr. Quinlan.
40
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal year ended
December 31, 1995 of each of the Chief Executive Officer and the six most highly
compensated officers of the Company (the "Named Executive Officers"), none of
whom received any bonuses during the fiscal year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
FOR FISCAL 1995
---------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY($) COMPENSATION($)
--------------------------- --------- ---------------
Richard T. Schumacher....................................................... 166,676 2,008<F1>
President and Chief Executive Officer
Kevin W. Quinlan............................................................ 120,615 1,650<F2>
Senior Vice President, Finance and Chief Financial Officer
Patricia E. Garrett, Ph.D. ................................................. 92,353 1,650<F2>
Senior Vice President, Regulatory Affairs & Strategic Programs
Mark M. Manak, Ph.D. ....................................................... 102,753 --
Senior Vice President, Research & Development
Richard C. Tilton, Ph.D. ................................................... 111,924 6,000<F3>
Senior Vice President, Specialty Laboratory Services
Barry M. Warren............................................................. 113,454 1,500<F2>
Senior Vice President, Sales & Marketing
Ronald V. DiPaolo, Ph.D. ................................................... 86,614 1,500<F2>
Vice President of Operations
<FN>
<F1> Consists of personal usage of Company vehicle, and includes the value of
premiums paid for a term life insurance policy.
<F2> Consists of automobile allowance, discontinued as of March 31, 1995.
<F3> Consists of automobile allowance.
</FN>
The following table sets forth the aggregate number and value of options
exercisable and unexercisable by the Named Executive Officers during fiscal
1995. No stock options were granted to, or exercised by, any of the Named
Executive Officers in fiscal 1995.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/95(#) AT 12/31/95($)<F1>
NAME AND PRINCIPAL POSITION EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------- ---------------------------------------------------
Richard T. Schumacher .............................. 127,500 2,500
President and Chief Executive Officer
Kevin W. Quinlan ................................... 58,000 10,000
Senior Vice President, Finance and Chief
Financial Officer
Patricia E. Garrett, Ph.D. ......................... 41,250 1,250
Senior Vice President, Regulatory Affairs &
Strategic Programs
Mark M. Manak, Ph.D. ............................... 26,250 8,750
Senior Vice President, Research & Development
Richard C. Tilton, Ph.D. ........................... 17,500 17,500
Senior Vice President, Specialty Laboratory
Services
Barry M. Warren .................................... 7,500 7,500
Senior Vice President, Sales & Marketing
Ronald V. DiPaolo, Ph.D. ........................... 25,000 1,000
Vice President of Operations
<FN>
<F1> There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $ _____ per share, less the
applicable exercise price.
</FN>
41
EMPLOYMENT AGREEMENTS
None of the Company's employees are subject to employment agreements with
the Company.
STOCK PLANS
1987 Non-Qualified Stock Option Plan: The Company adopted the 1987
Non-Qualified Stock Option Plan (the "Non-Qualified Plan") to provide an
opportunity to employees, officers, directors and consultants employed by or
affiliated with the Company or any of its subsidiaries to acquire stock in the
Company, to provide increased incentives to such persons to promote the success
of the Company's business and to encourage such persons to become affiliated
with the Company through the granting of options to acquire its capital stock.
Any employee of the Company or of a subsidiary of the Company, including
officers, as well as directors of the company and consultants or providers of
services to the Company are eligible to receive nonqualified stock options under
the Non-Qualified Plan. A total of 897,600 shares of Common Stock has been
reserved for issuance under the Non-Qualified Plan.
The Non-Qualified Plan is administered by a Committee currently consisting
of at least one member appointed by the Board of Directors, and after the
completion of this Offering to consist of at least two independent members of
the Board of Directors. The Committee has the authority and discretion to
determine those persons to whom options shall be granted under the Non-Qualified
Plan, to determine the number of shares to be granted, to establish the terms
and conditions upon which options may be exercised or transferred, to alter any
restrictions or conditions on the options and to make all other determinations
necessary or desirable for the administration of the Non-Qualified Plan. The
exercise price for options granted under the Non-Qualified Plan is determined by
the Committee, but is in no event less than the par value of the Common Stock.
Options granted under the Non-Qualified Plan continue in effect for such period
as the Committee determines. The Non-Qualified Plan terminates as of December
16, 1997.
As of August 1, 1996, options to purchase 749,850 had been issued pursuant
to the Non-Qualified Plan at exercise prices ranging from $.25 to $6.00,
including an aggregate of 249,750 shares to the Company's directors, Richard
Schumacher, Kevin Quinlan, Francis Capitanio, Henry Malkasian, and Calvin
Saravis.
Employee Stock Option Plan: The purpose of the Employee Stock Option Plan
(the "Employee Plan") is to provide increased incentives to employees, to
encourage new employees to become affiliated with the Company and to associate
more closely the interests of such persons with those of the Company. The
Employee Plan permits the issuance of options to purchase up to 750,000 shares
of Common Stock in the form of incentive stock options as defined in Section 422
of the Internal Revenue Code of 1986, as amended, and non-qualified stock
options. The Employee Plan is currently administered by a Committee consisting
of at least one member appointed by the Board of Directors, and after the
completion of this Offering, shall consist of at least two independent members
of the Board of Directors. The exercise price of stock options is determined by
the Committee, but is in no event less than par value, and the exercise price of
incentive stock options may not be less than the fair market value of the Common
Stock on the date of grant (or, in the case of holders of 10% or more of the
outstanding Common Stock, 110% of the fair market value on such date). The
Committee also determines the vesting schedule, number of shares and other terms
of the options. As of August 1, 1996, options to purchase 184,537 shares of
Common Stock at exercise prices ranging from $6.00 to $8.50 per share were
outstanding under the Employee Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Schumacher and
Malkasian and Dr. Saravis, each of whom has received options to purchase shares
of Common Stock. See "-- Director Compensation" and "-- Stock Plans."
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY; INDEMNIFICATION
AGREEMENTS
The Company's Amended and Restated Articles of Organization eliminate,
subject to certain exceptions, the personal liability of directors to the
Company or its stockholders for monetary damages for breaches of fiduciary
duties as directors. The Restated Articles do not provide for the elimination of
or any limitation on the personal liability of a director for (i) any breach of
the director's duty of loyalty
42
to the Company or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
certain unauthorized dividends, redemptions or distributions as provided under
Section 61 of the Massachusetts Business Corporation Law, (iv) certain loans of
assets of the Company to any of its officers or directors as provided under
Section 62 of the Massachusetts Business Corporation Law or (v) any transaction
from which the director derived an improper personal benefit. This provision of
the Amended and Restated Articles of Organization will limit the remedies
available to a stockholder in the event of breaches of any director's duties to
such stockholder or the Company.
The Company's Amended and Restated Articles of Organization provide that the
Company may, either in its By-laws or by contract, provide for the
indemnification of directors, officers, employees and agents, by whomever
elected or appointed, to the full extent permitted by law, as it may be amended
from time to time.
The Company intends to enter into indemnification agreements with each of
the directors and officers. The indemnification agreements will provide that the
Company will pay certain amounts incurred by a director or officer in connection
with any civil or criminal action or proceeding and specifically including
actions by or in the name of the Company (derivative suits) where the
individual's involvement is by reason of the fact that he is or was a director
or officer. Such amounts include, to the maximum extent permitted by law,
attorney's fees, judgments, civil or criminal fines, settlement amounts and
other expenses customarily incurred in connection with legal proceedings. Under
the indemnification agreements, a director or officer will not receive
indemnification if he is found not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Company.
43
CERTAIN TRANSACTIONS
Registration Rights. The Company is a party to a Registration Rights
Agreement dated June 5, 1990, as amended (the "Registration Agreement") with G &
G Diagnostics Limited Partnership I and G & G Diagnostics Limited Partnership II
(together, "G & G") pursuant to which G & G has certain rights to have its
shares of Common Stock registered by the Company under the Securities Act." A
total of 366,670 shares of Common Stock (the "Registrable Shares") held by G & G
or subject to warrants held by G & G may be registered under the Registration
Agreement. If the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other
securityholders, G & G is entitled to notice of the registration and is entitled
to include, at the Company's expense, the Registrable Shares therein, provided,
among other conditions, that the underwriters have the right to limit the number
of such shares included in the registration. In addition, G & G may require the
Company at its expense on no more than two occasions, to file a registration
statement under the Securities Act with respect to its Registrable Shares, and
the Company is required to use its best efforts to effect a registration,
subject to certain conditions and limitations. Further, G & G may require the
Company at its expense to register the Registrable Shares on Form S-3 when such
form becomes available to the Company, subject to certain conditions and
limitations. G & G waived its respective registration rights for this Offering.
See "Principal Stockholders."
Warrant Exercise. In May 1995, G & G Diagnostics Limited Partnership II
exercised warrants to purchase 40,000 shares of the Company's Common Stock for
an exercise price of $2.50 per share or an aggregate amount of $100,000.
Indemnification Contracts. The Company intends to enter into indemnification
agreements with each of its directors and officers. See "Management --
Limitation of Officers' and Directors' Liability; Indemnification Agreements."
44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of August 1, 1996
concerning the beneficial ownership of Common Stock by each director, certain
executive officers, all executive officers and directors as a group, and each
person known by the Company to be the beneficial owner of 5% or more of the
Company's Common Stock. This information is based upon information received from
or on behalf of the named individuals. Unless otherwise noted, the beneficial
owners listed have sole voting and investment power over the shares listed.
PERCENTAGE OF OUTSTANDING SHARES
BENEFICIALLY OWNED<F1>
----------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------------------ ------------------ -------- --------
5% Stockholders
Irwin J. Gruverman<F2> .............................. 412,920 14.71% %
c/o G & G Diagnostics Limited Partnership I
30 Ossipee Road
Newton, MA 02164
G & G Diagnostics Limited Partnership II<F3> 153,333 5.69%
Directors and Senior Executives
Richard T. Schumacher<F4><F5> 1,013,957 35.89
Henry A. Malkasian<F4><F6> 311,510 11.54
Kevin W. Quinlan<F4> 93,100 3.37
Patricia E. Garrett<F4> 55,000 2.01
Richard C. Tilton<F4> 62,500 2.29
Mark M. Manak<F4> 55,500 2.03
Barry M. Warren<F4> 37,500 1.37
Ronald V. DiPaolo<F4> 28,000 1.03
Calvin A. Saravis<F4> 23,000 *
Francis E. Capitanio<F4> 8,750 *
All Executive Officers and Directors as a group
(10 Persons)<F4><F5><F6><F7> 1,688,817 54.04
<FN>
* Less than 1% of the outstanding Common Stock.
<F1> The number of shares of Common Stock outstanding used in calculating the
percentage for each listed person includes the shares of Common Stock
underlying options or warrants held by such person.
<F2> Includes 283,333 shares held of record by three limited partnerships
(including G & G Diagnostics Limited Partnership II), of which Mr.
Gruverman is the general partner, 10,000 shares subject to options held by
Mr. Gruverman and 106,670 shares subject to warrants held by one of three
limited partnerships.
<F3> The address for G & G Diagnostics Limited Partnership II is the same as
that for Mr. Gruverman. Mr. Gruverman is the beneficial owner of the shares
of Common Stock held of record by G & G Limited Partnership II.
<F4> Includes the following shares subject to options: Mr. Capitanio -- 8,750,
all of which are exercisable within 60 days after August 1, 1996; Dr.
DiPaolo -- 28,000, 25,000 of which are exercisable within 60 days after
August 1, 1996; Dr. Garrett -- 45,000, 41,250 of which are exercisable
within 60 days after August 1, 1996; Mr. Quinlan -- 73,000, 58,000 of which
are exercisable within 60 days after August 1, 1996; Mr. Malkasian --
10,000, all of which are exercisable within 60 days after August 1, 1996;
Dr. Manak -- 37,500, 26,250 of which are exercisable within 60 days after
August 1, 1996; Dr. Saravis -- 23,000, all of which are exercisable within
60 days after August 1, 1996; Mr. Schumacher --135,000, 127,500 of which
are exercisable within 60 days after August 1, 1996; Dr. Tilton -- 37,500,
26,250 of which are exercisable within 60 days after August 1, 1996; and
Mr. Warren -- 37,500, 7,500 of which are exercisable within 60 days after
August 1, 1996.
<F5> Includes 50,000 shares held of record by Mr. Schumacher's spouse and 20,000
shares held of record by Mr. Schumacher as custodian for his daughter.
Excludes an aggregate of 146,317 shares held by other relatives of Mr.
Schumacher as to which Mr. Schumacher disclaims beneficial ownership.
<F6> Includes 12,000 shares held of record by Mr. Malkasian's son, 5,000 shares
held by Mr. Malkasian's daughter, 53,850 shares held by Mr. Malkasian's
spouse and 30,000 shares held by Mr. Malkasian as trustee in trust for each
of his son and his daughter.
<F7> Includes 4,000 shares held of record by Mr. Manak as custodian for his
daughter.
</FN>
45
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $0.01 par value (referred to herein as "Common Stock") and
1,000,000 shares of Preferred Stock, $.01 par value (referred to herein as
"Preferred Stock").
COMMON STOCK
As of August 1, 1996, there were 2,690,064 shares of Common Stock
outstanding, held of record by approximately 130 stockholders.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. The holders of Common Stock do
not have cumulative voting rights in the election of directors. Upon liquidation
or dissolution of the Company, the holders of Common Stock are entitled to
receive all assets available for distribution to the stockholders. The Common
Stock has no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to such
shares. All of the shares of Common Stock are, and the shares to be sold in this
Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, none of which are outstanding. The Board of Directors may, without future
action of the stockholders of the Company, issue the Preferred Stock in one or
more classes or series and fix the rights and preferences thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any class or
series, or the designations of such class or series. The voting and other rights
of the holders of Common Stock may be subject to and adversely affected by, the
rights of holders of any Preferred Stock that may be issued in the future.
MASSACHUSETTS ANTI-TAKEOVER AND RELATED STATUTES
Control Share Acquisition Law. Under Chapter 110D of the Massachusetts
General Laws governing "control share acquisitions," any stockholder of certain
publicly-held Massachusetts corporations who acquires certain ranges of voting
power -- one-fifth or more but less than one-third of all voting power,
one-third or more but less than a majority of all voting power, or a majority or
more of all voting power -- may not (except in certain transactions) vote such
stock unless the stockholders (excluding the shares held by the interested
stockholders) of the corporation so authorize. As permitted by Chapter 110D, the
Company's Amended and Restated By-laws include a provision which excludes the
Company from the applicability of that statute upon completion of the Offering.
Business Combination Statute. Chapter 110F of the Massachusetts General
Laws, entitled "Business Combinations with Interested Shareholders," applies to
publicly-held Massachusetts corporations with 200 or more stockholders of
record. Generally, this statute prohibits such Massachusetts corporations from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date of the transaction in which the person
becomes an interested stockholder unless (a) the interested stockholder obtains
the approval of the corporation's board of directors prior to becoming an
interested stockholder; (b) the interested stockholder acquires at least 90% of
the voting stock of the corporation (excluding shares held by certain affiliates
of the corporation) outstanding at the time he becomes an interested
stockholder; or (c) the business combination is both approved by the board of
directors and authorized at an annual or special meeting of stockholders by the
holders of at least two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with
46
affiliates and associates, owns (or at any time within the prior three years did
own) 5% or more of the outstanding voting stock of the Corporation. A "business
combination" includes, among other transactions, a merger, stock or asset sale
and other transactions resulting in a financial benefit to the stockholder. The
Amended and Restated Articles of Organization and Restated By-laws of the
Company do not expressly provide for opting out of the provisions of Chapter
110F. As a result, the application of this statute to the Company after
completion of this Offering could discourage or make it more difficult for any
person or group of persons to attempt to obtain control of the Company. The
Company may at any time amend its Amended and Restated Articles of Organization
or Restated By-laws to elect not to be governed by Chapter 110F, by a vote of
the holders of a majority of its voting stock, but such an amendment would not
be effective for twelve months and would not apply to a business combination
with any person who became an interested stockholder prior to the date of the
amendment.
CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
ORGANIZATION AND AMENDED AND RESTATED BY-LAWS
The Company's Amended and Restated Articles of Organization include several
provisions which may render more difficult an unfriendly tender offer, proxy
contest, merger or other change in control of the Company. See "Risk Factors --
Possible Adverse Effect of Certain Anti-takeover Provisions."
Preferred Stock. The Amended and Restated Articles of Organization permit
the Board of Directors to issue preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, without further
vote or action by the stockholders. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of the Company
and may adversely affect the voting and other rights of the holders of Common
Stock. The Company currently has no plans to issue any preferred stock.
Classification of Board of Directors. The Amended and Restated Articles of
Organization provide for the classification of the Company's Board of Directors
into three classes, with the classes being elected for staggered three-year
terms. At each annual meeting of stockholders, directors will be elected to
succeed those in the class whose term then expires, and each elected director
shall serve for a term expiring at the third succeeding annual meeting of
stockholders after such director's election, and until the director's successor
is elected and qualified. Thus, directors stand for election only once in three
years. This provision also restricts the ability of stockholders to enlarge the
Board of Directors. Changes in the number of Directors may be effected by a vote
of a majority of the Continuing Directors (as defined in the Amended and
Restated Articles of Organization) or by the stockholders by vote of at least
80% of the shares of Company's voting stock outstanding, voting as a single
class. Under this provision, Directors may only be removed with or without cause
by the affirmative vote of the holders at least 80% of the combined voting power
of the outstanding shares of the Company's voting stock, voting together as a
single class, or upon the vote of a majority of the Continuing Directors.
Fair Price Provision. The Amended and Restated Articles of Organization
contain a "Fair Price Provision" that is intended to protect stockholders who do
not tender their shares in a takeover bid by guaranteeing them a minimum price
for their shares in any subsequent attempt to purchase such remaining shares at
a price lower than the acquiror's original acquisition price. The Fair Price
Provision requires the affirmative vote of the holders of at least 80% of the
Company's outstanding voting stock for certain business combinations with a
Related Person, unless specified price criteria and procedural requirements are
met or the business combination is approved by a majority of the Continuing
Directors.
Indemnification Provision. The Amended and Restated Articles of Organization
provide that the Company may, either in its By-laws or by contract, provide for
the indemnification of directors, officers, employees and agents, by whomever
elected or appointed, to the full extent permitted by applicable law, as it may
be amended from time to time. See "-- Limitation of Officers' and Directors'
Liability; Indemnification Agreements."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ___________.
47
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of this Offering, the Company will have _____ shares of
Common Stock outstanding ( _____ shares if the Underwriters' overallotment
option is exercised in full). Of those shares, the _____ shares sold in this
Offering ( _____ shares if the Underwriters' overallotment option is exercised
in full) will be freely tradeable without restriction (except as to affiliates
of the Company) or further registration under the Securities Act. The remaining
2,690,064 shares of Common Stock were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
The Company's directors, executive officers and certain other stockholders
holding in the aggregate _____ shares of Common Stock have agreed not to offer
to sell, sell or otherwise dispose of any shares of Common Stock prior to the
expiration of 180 days from the date of this Prospectus. Oscar Gruss & Son
Incorporated may, in its sole discretion and at any time without prior notice,
release all or any portion of the shares of Common Stock subject to the lockup
agreements.
Following the expiration of the 180-day lockup period, _____ shares of
Common Stock will be eligible for sale in the public market without
registration, subject to certain volume and other limitations, pursuant to Rule
144 or Rule 701 under the Securities Act. The remaining _____ shares of Common
Stock held by existing stockholders, including _____ shares issuable upon
exercise of options, will become eligible for sale under Rule 144 or otherwise
at various times thereafter. All shares of Common Stock outstanding on the date
of this Prospectus will be eligible for sale to certain qualified institutional
buyers in accordance with Rule 144A under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, may sell in
the open market within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of the Company's
Common Stock or (ii) the average weekly trading volume in the over-the-counter
market during the four calendar weeks preceding such sale, provided that a
minimum of two years has elapsed between the later of the date of acquisition of
the securities from the issuer or from an affiliate of the issuer. The holding
period of shares of a non-affiliate for this purpose includes the holding period
of all prior non-affiliate holders, provided that if an affiliate has held such
shares at any time, the holding period shall commence upon the sale to a
non-affiliate by the last affiliate to hold the shares. Sales under Rule 144 are
also subject to certain limitations on the manner of sale, notice requirement
and availability of current public information about the Company. Under Rule
144(k), a non-affiliate who holds restricted securities and who has not been
affiliated with the Company during the three-month period preceding the proposed
sale thereof may sell such securities without regard to conditions imposed by
Rule 144 if at least three years have elapsed from the sale of such securities
by the Company or any affiliate. The Securities and Exchange Commission has
proposed amendments to Rule 144, including an amendment which would reduce the
waiting period to one year.
Under Rule 701 of the Securities Act, persons who purchased shares pursuant
to an employee stock purchase program or upon exercise of options granted prior
to the effective date of this Offering are entitled, subject to certain
conditions and limitations of Rule 701, to sell such shares 90 days after the
effective date of this Offering in reliance upon Rule 144, without regard to the
holding period requirement of Rule 144 and, in the case of non-affiliates,
without compliance with the public information, volume limitation or notice
provisions of Rule 144.
The Company intends to register under the Securities Act shortly after the
consummation of the offering an aggregate of 1,629,600 shares of Common Stock
issued or issuable upon exercise of employee stock options granted under the
Non-Qualified Plan and the Employee Plan, including 934,387 shares issuable upon
exercise of such options outstanding on the date of this Prospectus. Two of the
Company's stockholders and the holder of a warrant to purchase Common Stock have
the right to cause the Company to register their shares under the Securities Act
and to include their shares in certain future registrations of securities
effected by the Company under the Securities Act. An aggregate of 604,317 shares
of Common Stock, including 226,670 shares of Common Stock issuable upon exercise
of outstanding warrants are covered by such registration rights. See "Risk
Factors -- Shares Eligible for Future Sale," "Certain Transactions --
Registration Rights" and "Principal Stockholders."
48
UNDERWRITING
The Underwriters named below, for whom Oscar Gruss & Son Incorporated and
Kaufman Bros., L.P. are acting as the Representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names below.
NUMBER OF
NAME SHARES
---- ------
Oscar Gruss & Son Incorporated
Kaufman Bros., L.P.
-------
TOTAL
=======
The Underwriting Agreement provides that the several Underwriters are
obligated to purchase all of the _____ shares of Common Stock offered by the
Underwriters hereby (other than shares which may be purchased under the
over-allotment option) if any are purchased. The Representatives have advised
the Company that the Underwriters propose to offer the shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ ___ per share and that such dealers may reallow a concession of $ ___ per
share to certain other dealers. After the initial public offering, the offering
price and the concessions may be changed by the Representatives. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of the Underwriting Agreement, to
purchase up to _____ additional shares of Common Stock at the public offering
price less underwriting discounts and commissions, all as set forth on the cover
page of this Prospectus. The Underwriters may exercise the option only to cover
over-allotments, if any, in the sale of shares of Common Stock in this Offering.
To the extent that the Underwriters exercise the option, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the _____ shares of Common Stock
offered hereby.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance of one percent of the gross proceeds of the Offering ($ ___ if
the Underwriters' over-allotment option is not exercised and $ ___ if the
Underwriters' overallotment option is exercised in full), of which $40,000 has
been paid to date. If the Offering is not consummated, the Representatives will
return to the Company any unused portion of the pre-paid expense allowance. The
Company has also agreed to pay all expenses in connection with registering or
qualifying the Common Stock offered hereby for sale under the laws of the states
in which the Common Stock is sold by the Underwriters (including expenses of
counsel retained for such purposes by the Underwriters) as well as certain
expenses associated with information meetings.
The Company has agreed to sell to the Representatives, or their designees,
warrants (the "Underwriters' Warrants") to purchase _____ shares of the
Company's Common Stock at an aggregate purchase price of $ ___. The exercise
price per Underwriters' Warrant, subject to anti-dilution adjustment, is equal
to 135% of the public offering price per share of Common Stock offered hereby.
The Underwriters' Warrants expire on the fifth anniversary of the closing date
of the Offering. The Underwriters' Warrants may not be transferred or exercised
for one year from the date of this Prospectus, except for transfers to officers
of the Representatives or members of the underwriting or selling group and/or
their officers or
49
partners, if any. The Underwriters' Warrants become exercisable during the
four-year period commencing one year from the date of this Prospectus (the
"Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the
Underwriters' Warrants are given, at nominal cost, the opportunity to profit
from an increase in the market price of the Company's Common Stock. The Company
has granted the Representatives certain registration rights with respect to the
Underwriters' Warrants. All registration rights will terminate seven years from
the closing date of the Offering.
Except as set forth below, the Company, its officers and directors, and
certain of its stockholders, who will hold an aggregate of ______ shares after
this Offering, have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, grant any option to purchase or otherwise
sell or dispose of any shares of Common Stock or other capital stock of the
Company or any securities convertible into, or exercisable or exchangeable for,
any shares of Common Stock or other capital stock of the Company for a period of
180 days after the date of this Prospectus without the prior written consent of
Oscar Gruss & Son Incorporated on behalf of the Underwriters. Oscar Gruss & Son
Incorporated may, in its sole discretion and at any time without prior notice,
release all or any portion of the shares of Common Stock subject to these
"lock-up" agreements.
Prior to this Offering, there has not been any public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock
offered hereby will be determined through negotiations between the Company and
the Representatives. Among the factors to be considered in making such
determination will be the prevailing market conditions, the Company's fiscal and
operating history and condition, the Company's prospects and the prospects of
its industry, the management of the Company, the market price for securities for
companies in businesses similar to that of the Company and the recent trading
activity and prices of shares of common stock on the Nasdaq National Market. The
estimated initial public offering price range set forth on the cover page of
this Prospectus is subject to change as a result of market conditions and other
factors. See "Risk Factors -- No Assurance of Public Market; Volatility of Stock
Price."
Kaufman Bros., L.P. became registered as a broker-dealer in July 1995.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with this Offering will be passed upon
for the Company by Brown, Rudnick, Freed & Gesmer, Boston, Massachusetts.
Certain legal matters in connection with the Common Stock offered hereby will be
passed upon for the Underwriters by Fulbright & Jaworski L.L.P., New York, New
York. A member of Brown, Rudnick, Freed & Gesmer, counsel to the Company, is
Clerk and is the owner of 12,000 shares of the Company's Common Stock.
EXPERTS
The consolidated balance sheets of Boston Biomedica, Inc. and Subsidiaries
as of December 31, 1994 and 1995 and the consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995, included in this prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock,
reference is made to the
50
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, in each instance where such contract
or document is filed as an exhibit to the Registration Statement, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the offices of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and at 500 West Madison
Street, Northwestern Atrium Center, Suite 1400, Chicago, Illinois 60661-2511.
Copies of materials can also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains registration statements, reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to distribute to its stockholders annual reports
containing consolidated financial statements audited by its independent
accountants and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited consolidated financial
information.
51
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of Coopers & Lybrand L.L.P., Independent Accountants .............. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
June 30, 1996 (unaudited) .............................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994, and 1995 and for the six months ended
June 30, 1995 (unaudited) and June 30, 1996 (unaudited) ............... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1993, 1994, and 1995 and for the six
months ended June 30, 1996 (unaudited) ................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994, and 1995 and for the six months
ended June 30, 1995 (unaudited) and June 30, 1996 (unaudited) .......... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
The accompanying consolidated financial statements of Boston Biomedica, Inc.
and Subsidiaries have been prepared to give effect to a Common Stock split prior
to the time the Registration Statement is declared effective as disclosed in the
first paragraph of Note 11 to financial statements. When the aforementioned
Common Stock split is approved by the stockholders of the Company, we will issue
the following report:
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
August 23, 1996
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, 1994 and 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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, 1994 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Boston, Massachusetts
March 12, 1996, except as to the information
in the first paragraph of Note 11, for which
the date is September____, 1996
F-2
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
-----------
1994 1995 1996
------- ------- -------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ..................................... $ 89,129 $ 11,463 $ 10,548
Accounts receivable, less
allowances of $94,723 in 1994,
$142,372 in 1995 and $133,579
in 1996 ................................ 2,259,842 3,075,870 2,866,401
Inventories (Notes 1 & 3) ................ 3,609,516 3,676,851 3,865,219
Prepaid expense and other ................ 156,117 254,199 294,646
Deferred income taxes (Note 7) ........... 101,880 110,766 213,538
----------- ----------- -----------
Total current assets ................... 6,216,484 7,129,149 7,250,352
----------- ----------- -----------
Property and equipment, net (Notes 1 & 4).... 1,724,420 2,614,982 2,625,117
OTHER ASSETS:
Notes receivable and other ............... 22,079 83,422 79,037
Goodwill and other intangibles,
net (Notes 1 & 2) ...................... 112,521 100,820 92,777
----------- ----------- -----------
134,600 184,242 171,814
----------- ----------- -----------
TOTAL ASSETS ........................... $8,075,504 $9,928,373 $10,047,283
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term
debt (Note 6) .......................... $ 242,006 $ 436,509 $ 490,126
Accounts payable ......................... 787,406 745,216 815,946
Accrued compensation ..................... 361,911 395,755 488,223
Other accrued expenses ................... 139,052 199,334 127,712
Deferred revenue ......................... -- 523,401 831,244
----------- ----------- -----------
Total current liabilities .............. 1,530,375 2,300,215 2,753,251
----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current
maturities (Note 6) .................... 3,179,526 4,215,501 2,797,581
Deferred rent ............................ 186,860 141,068 107,832
Deferred income taxes (Note 7) ........... 137,520 84,641 157,899
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE COMMON STOCK (Note 11)
$.01 par value; 117,647 shares
authorized, issued and
outstanding ............................ -- -- 898,503
STOCKHOLDERS' EQUITY (Note 10):
Common stock, $.01 par value; authorized
15,000,000 shares in 1994, 1995 and 1996;
issued and outstanding 2,578,865 in 1994;
issued 2,640,417 in 1995; issued and
outstanding 2,572,417 in 1996 .......... 25,789 26,404 25,724
Additional paid-in capital ............... 2,612,500 2,798,620 2,717,700
Retained earnings ........................ 402,934 505,924 588,793
----------- ----------- -----------
3,041,223 3,330,948 3,332,217
Less treasury stock, at cost --
80,000 shares .......................... -- (144,000) --
----------- ----------- -----------
Total stockholders' equity ............. 3,041,223 3,186,948 3,332,217
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................. $8,075,504 $9,928,373 $10,047,283
========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements
F-3
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
REVENUE:
Product sales ..................... $3,942,328 $ 5,981,378 $ 6,621,631 $ 3,024,629 $3,945,759
Services .......................... 5,214,688 4,741,376 5,649,099 2,539,851 2,982,624
----------- ----------- ----------- ----------- -----------
Total revenue ................... 9,157,016 10,722,754 12,270,730 5,564,480 6,928,383
COSTS AND EXPENSES:
Cost of product sales ............. 2,087,771 3,194,217 3,564,241 1,646,594 2,006,833
Cost of services .................. 3,965,154 3,415,777 4,167,625 1,960,315 2,249,610
Research and development .......... 278,859 469,358 375,712 159,035 361,619
Selling and marketing ............. 894,202 1,191,573 1,339,792 637,567 915,289
General and administrative ........ 1,619,331 2,047,256 2,315,814 1,056,590 1,088,448
----------- ----------- ----------- ----------- -----------
Total operating costs and
expenses ..................... 8,845,317 10,318,181 11,763,184 5,460,101 6,621,799
----------- ----------- ----------- ----------- -----------
Income from operations ........ 311,699 404,573 507,546 104,379 306,584
Interest expense, net ................ 178,640 243,694 335,899 164,569 168,469
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary
item ......................... 133,059 160,879 171,647 (60,190) 138,115
(Provision) benefit (for) from
income taxes (Notes 1 & 7) ......... (40,473) (64,351) (68,657) 24,034 (55,246)
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item ........... 92,586 96,528 102,990 (36,156) 82,869
----------- ----------- ----------- ----------- -----------
Extraordinary item-gain on
elimination of debt (Notes 6 & 7),
net of income taxes of $33,157 ..... 49,736 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............. $ 142,322 $ 96,528 $ 102,990 $ (36,156) $ 82,869
=========== =========== =========== =========== ===========
Income (loss) per share:
Before extraordinary gain ..... $ 0.04 $ 0.04 $ 0.04 $ (0.01) $ 0.03
Extraordinary gain ............ 0.02 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............. $ 0.06 $ 0.04 $ 0.04 $ (0.01) $ 0.03
Weighted average common and common
equivalent shares outstanding ...... 2,479,651 2,629,063 3,192,196 2,639,515 3,266,111
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-4
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
----------------------
ADDITIONAL TOTAL
$.01 PAR PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS STOCK EQUITY
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1992 ... 2,280,040 $22,800 $1,635,830 $164,084 -- $1,822,714
Issuance of common
stock ..................... 201,298 2,013 711,318 713,331
Stock options and
warrants exercised ........ 33,000 330 65,420 65,750
Conversion of note
payable ................... 10,690 107 17,532 17,639
Net income 142,322 142,322
--------- --------- --------- --------- --------- ---------
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)
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
Stock options and
warrants exercised
(unaudited) ............... 12,000 120 62,280 62,400
Issuance of treasury
stock -- 80,000
shares (unaudited) ........ (80,000) (800) (143,200) 144,000 --
Net income
(unaudited) ............... 82,869 82,869
--------- --------- --------- --------- --------- ---------
BALANCE, June 30, 1996
(unaudited) ................ 2,572,417 $25,724 $2,717,700 $588,793 -- $3,332,217
========= ======= ========== ======== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-5
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................. $ 142,322 $ 96,528 $ 102,990 $ (36,156) $ 82,869
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization .. 301,004 360,512 441,356 202,693 280,426
Provision for doubtful accounts. 22,956 102,099 181,084 53,643 77,145
Deferred rent .................. 99,708 5,908 (45,792) (12,556) (33,236)
Deferred income taxes .......... 42,323 (42,798) (61,765) (74,809) (29,514)
Tax benefit of stock options
exercised .................... -- 12,800 1,350 -- --
Extraordinary item-gain on
elimination of debt .......... (49,736) -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable ............ (215,270) (529,157) (997,112) 11,403 132,324
Note receivable and other assets (17,002) (3,720) (61,343) (12,962) 4,385
Inventories .................... (950,715) (567,420) (67,335) 77,857 (188,368)
Prepaid expenses ............... 25,410 (3,500) (98,082) (79,496) (40,447)
Accounts payable ............... 11,875 (86,130) (42,190) 35,834 70,730
Accrued expenses ............... 160,021 100,767 94,126 (60,639) 20,846
Deferred revenue ............... -- -- 523,401 -- 307,843
--------- --------- --------- --------- ---------
Net cash (used in) provided
by operating activities ... (427,104) (554,111) (29,312) 104,812 685,003
--------- --------- --------- --------- ---------
CASH FLOWS FOR INVESTING ACTIVITIES:
Additions to property and
equipment .................... (460,591) (404,639) (1,316,217) (215,542) (282,518)
Purchase of intangible assets .. -- -- (4,000) -- --
Net assets of acquisitions (net
of cash acquired) ............ (389,703) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities ................ (850,294) (404,639) (1,320,217) (215,542) (282,518)
--------- --------- --------- --------- ---------
CASH FLOWS FOR FINANCING ACTIVITIES:
Proceeds from notes payable .... 1,107,392 1,734,425 1,517,867 191,990 226,300
Proceeds from redeemable common
stock, net ................... -- -- -- -- 898,503
Proceeds of common stock issued,
net .......................... 765,081 170,139 175,785 103,126 62,400
Repayments of long-term debt ... (613,199) (887,989) (277,789) -- (1,590,603)
Purchase of treasury stock ..... -- -- (144,000) (144,000) --
--------- --------- --------- --------- ---------
Net cash (used in) provided
by financing activities ... 1,259,274 1,016,575 1,271,863 151,116 (403,400)
--------- --------- --------- --------- ---------
(DECREASE) INCREASE IN CASH: ...... (18,124) 57,825 (77,666) 40,386 (915)
Cash, beginning of period ...... 49,428 31,304 89,129 89,129 11,463
--------- --------- --------- --------- ---------
Cash, end of period ............ $ 31,304 $ 89,129 $ 11,463 $ 129,515 $ 10,548
=========== =========== ============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Conversion of note payable to
common stock ................ $ 17,639 -- $ 9,600 $ 9,600 --
SUPPLEMENTAL INFORMATION:
Income taxes paid ............. $ 10,689 $ 33,718 $ 168,994 $ 129,100 $ 85,000
Interest paid ................. $ 163,831 $ 254,133 $ 331,495 $ 163,735 $ 178,328
The accompanying notes are an integral part of these
consolidated financial statements
F-6
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Boston Biomedica, Inc. ("BBI") and Subsidiaries (together, the "Company")
provide infectious disease diagnostic products, 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.
Significant accounting policies followed in the preparation of these
consolidated financial statements are as follows:
(i) Principles of Consolidation
The consolidated financial statements include the accounts of BBI and its
wholly-owned subsidiaries, Biotech Research Laboratories, Inc. ("BTRL") and
BBI-North American Clinical Laboratories, Inc. ("BBI-NACL"). All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
(ii) Reclassification
Certain amounts included in the prior year's financial statements have been
reclassified to conform to the current presentation.
(iii) Use of Significant 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. Actual results could differ from the
estimates and assumptions used by management.
(iv) 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, 1995 and June 30, 1996 include bill and
hold receivables of $179,000 and $85,000, respectively. There were no such
receivables as of December 31, 1993 and 1994.
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, 1993, 1994 and 1995 and for the
six months ended June 30, 1995 and 1996 was $30,000, $192,000, $213,000,
$126,000 and $191,000, respectively.
Services are recognized as revenue upon completion of tests for specialty
laboratory services, and under the percentage-of-completion method of accounting
as costs are incurred for contract research.
(v) Research and Development Costs
Research and development costs are expensed as incurred.
(vi) Inventories
Inventories are stated at the lower of average cost or net realizable value
and include material, labor and manufacturing overhead.
F-7
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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, 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
Goodwill results from excess of the purchase prices over the net assets of
BTRL and BBI-NACL acquired and is amortized on a straight line basis over ten
years. Other intangibles primarily consist of patents, licenses, and
intellectual property rights and are amortized over five to ten years.
(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
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally cash 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. Concentration of
credit risk with respect to accounts receivable is limited to certain customers
to whom the Company makes substantial sales. 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.
(xi) Interim Consolidated Financial Statements
The consolidated financial statements as of June 30, 1996 and for the six
months ended June 30, 1995 and 1996 and related footnote information are
unaudited and have been prepared on a basis substantially consistent with the
audited consolidated financial statements, and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary for fair presentation of the results of these interim periods. The
results of the six months ended June 30, 1996 are not necessarily indicative of
the results to be expected for the entire year.
(xii) Deferred Revenue
Deferred revenue consists of payments received from customers in advance of
services performed.
(xiii) Computation of Income (Loss) Per Share
Net income (loss) per common share is computed based upon the weighted
average number 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, redeemable common, and common equivalent shares issued during
the twelve month period prior to the proposed date of the initial filing of the
Registration Statement have been included
F-8
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
in the calculation as if they were outstanding for all periods using the
treasury stock method and assuming an initial public offering price of $11.00
per share. Fully diluted net income (loss) per common share is not presented as
it does not differ from primary earnings per share.
(2) ACQUISITION
Effective January 1, 1993, North American Laboratory, Inc., a Massachusetts
corporation and wholly-owned subsidiary of BBI, acquired the net assets of North
American Laboratory Group, Ltd., Inc. from its founder and chief scientific
officer, who remains in this same capacity. During 1995, the name was changed to
BBI-North American Clinical Laboratories, Inc. BBI-NACL is a specialty
infectious disease testing laboratory providing testing services to hospitals
and other health care providers. The purchase price was $425,000 in cash
representing $375,038 of net tangible assets (including cash of $35,297) and
$49,962 of goodwill and other intangibles.
(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, 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.
Inventories consist of the following:
DECEMBER 31,
-------------------------
1994 1995 JUNE 30, 1996
--------- --------- -------------
(UNAUDITED)
Raw materials $1,548,560 $1,298,131 $ 1,272,687
Work-in-process 551,280 565,667 597,922
Finished goods 1,509,676 1,813,053 1,994,610
--------- --------- -------------
$3,609,516 $3,676,851 $ 3,865,219
========== ========== ===========
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 consist of the following:
1994 1995
--------- ---------
Laboratory equipment $1,442,349 $1,630,872
Management information systems 609,923 834,768
Office equipment 249,544 332,496
Automobiles 176,315 178,465
Leasehold improvements 300,341 108,892
Land, building and improvements -- 941,175
--------- ---------
2,778,472 4,026,668
Less accumulated depreciation 1,054,052 1,411,686
--------- ---------
Net book value $1,724,420 $2,614,982
========== ==========
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996 was $286,456, $345,228,
$425,655, $194,236 and $272,383, respectively.
F-9
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(5) REVENUE FROM SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company performs contract research and certain 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 $2,707,000 in 1993, $1,677,000 in 1994, and
$1,628,000 in 1995.
Export sales accounted for approximately $1,411,000, or 15% of consolidated
revenue in 1993; $2,279,000, or 21% in 1994; $3,104,000, or 25% in 1995; and
$1,523,000, or 27%, and $1,877,000, or 27% for the six months ended June 30,
1995 and 1996, respectively.
(6) LONG TERM DEBT
In August 1995, the Company's revolving line of credit ("Revolver") was
increased to $3,500,000 and the due date extended to June 30, 1997. In July
1996, the due date of the Company's Revolver was extended to June 30, 1998, and
the interest rate reduced to prime plus 1/2 %. In addition, the Company borrowed
$200,000 under a five-year term loan approved in 1994 ($170,370 outstanding at
December 31, 1995), $100,000 under a five-year term loan, and $123,700 under a
$350,000 five year term loan facility for equipment acquisitions approved in
1995 ("New Term"). As of December 31, 1995, the Company had additional borrowing
capacity available under the New Term facility equal to $226,300. The Company
borrowed this amount prior to the facility expiration date of May 2, 1996. In
July 1996, the Company received approval for a $250,000, five year equipment
facility loan from its bank due July 31, 2001 at a rate of prime plus 1%.
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
approximately $657,000 and $2,028,000 available under it's Revolver as of
December 31, 1995 and June 30, 1996, respectively. Amounts outstanding under the
Revolver bear interest at the lender's base rate plus 1% (9.75% at December 31,
1995 and 9.25% at June 30, 1996) and 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. See also Note 4.
On June 30, 1993, the Company exercised its option to pre-pay the
acquisition note in connection with the 1992 purchase of BTRL at a substantial
discount from the balance due, resulting in an extraordinary gain of $49,736
($82,893 minus taxes of $33,157).
During 1993, convertible debt in the amount of $17,639 was converted into
10,690 shares of common stock at a price of $1.65 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.
F-10
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(6) LONG TERM DEBT -- (CONTINUED)
At December 31, 1994 and 1995, and June 30, 1996, the Company had the following
debt outstanding:
JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
Revolving Line of Credit Agreement due
June 30, 1998 ........................... $2,533,860 $2,784,307 $ 1,397,884
Note payable to a bank, due in monthly
principal payments of $17,687
through October 1998 with interest
fixed at 9.01%. Collateralized by all
of the assets of the Company ............ 813,625 601,375 495,250
Note payable to a bank, due in monthly
principal payments of $3,704
through October 1999 with interest at
prime rate plus 1.0%. Collateralized
by all of the assets of the Company ..... -- 170,370 148,148
Note payable to a bank, due in monthly
principal payments of $1,667 through
December 2000 with interest at 8.22%.
Collateralized by all of the assets
of the Company .......................... -- 100,000 91,667
Note payable to a bank, with interest
only due until May 2, 1996, and
thereafter 54 consecutive equal monthly
principal payments of $6,863
commencing June 18, 1996. Interest is
at prime rate plus 1.0%. Collateralized
by all of the assets of the Company .... -- 123,700 343,137
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 ......................... -- 750,000 705,580
Subordinated convertible note payable,
at 12.5% interest rate, due December 31,
1996, interest payable monthly.
Convertible into common stock at $1.50
per share at the option of the holder .. 31,100 21,500 21,500
Other installment notes payable with
interest rates ranging from 7.25% to
10.99% at December 31, 1995,
collateralized by office equipment
and vehicles due at various maturity
dates from April 1996 to August 2001 ... 42,947 100,758 84,541
------------ ------------ ------------
Total long term debt ................. 3,421,532 4,652,010 3,287,707
Less: current maturities ................. (242,006) (436,509) (490,126)
------------ ------------ ------------
$3,179,526 $4,215,501 $ 2,797,581
========== ========== ===========
F-11
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(6) LONG TERM DEBT -- (CONTINUED)
At December 31, 1995, debt maturities are as follows:
YEAR ENDED AMOUNT
- ----------- -----------
1996 ...................................................... $ 436,509
1997 ...................................................... 3,199,875
1998 ...................................................... 386,723
1999 ...................................................... 207,300
2000 ...................................................... 161,382
Thereafter ................................................ 260,221
------------
$ 4,652,010
=============
(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:
1993 1994 1995
-------- -------- -------
Current expense: federal and state ............ $23,700 $ 91,242 $130,422
Deferred (benefit) expense: federal and state . 49,930 (26,891) (61,765)
-------- -------- --------
Total ....................................... $73,630 $ 64,351 $ 68,657
======== ======== ========
The provision for 1993 includes $33,157 of income taxes which was offset
against the extraordinary gain on elimination of debt of $82,893 and presented
net in the Statement of Operations. See also Notes 2 and 6.
Significant items making up deferred tax liabilities and deferred tax assets
are as follows:
1994 1995
-------- --------
Current deferred taxes:
Inventory ........................................ $ 47,318 --
Allowances and other accruals .................... 54,562 $ 110,766
-------- --------
Total deferred tax assets ...................... 101,880 110,766
Long term deferred taxes:
Accelerated tax depreciation ..................... (163,139) (207,361)
Cash basis benefit of subsidiary ................. (47,818) --
Goodwill ......................................... (26,859) (22,795)
Tax credits ...................................... 100,296 106,710
State net operating loss carryforwards ........... -- 38,805
-------- --------
Total deferred tax liabilities ................. (137,520) (84,641)
-------- --------
Total net deferred tax (liabilities) assets .... $ (35,640) $ 26,125
========= ==========
As of December 31, 1995, the net operating loss carryforwards expire at
various dates beginning in 1998 through 2000. Tax credits expire at various
dates beginning in 2006 through 2009.
F-12
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(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.
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, 1995,
the Company has recorded a $141,068 noncurrent liability 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.
Rent expense for the years ended December 31, 1993, 1994 and 1995 and six
months ended June 30, 1995 and 1996 was $479,697, $549,713, $477,580, $225,109
and $181,816, respectively. At December 31, 1995, the remaining fixed lease
commitment was as follows:
YEAR ENDED AMOUNT
- ---------- ---------
1996 ........................................................ $ 371,200
1997 ........................................................ 254,600
1998 ........................................................ 117,300
1999 ........................................................ 124,800
2000 ........................................................ 79,700
---------
$ 947,600
===========
(9) 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 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. To date, the Company has made no contributions to the plan.
(10) COMMON STOCK
The Company has two stock option plans 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. 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
or affiliation.
At December 31, 1995, 897,600 shares have been reserved for non-qualified
stock options, of which 97,125 are available for future grants. At December 31,
1995, 750,000 shares have been reserved for incentive stock options, of which
696,812 are available for future grants.
The Company has issued warrants in connection with certain equity and debt
financings. As of June 30, 1996, 226,670 shares of Common Stock have been
reserved for issuance pursuant to the exercise of such warrants at a weighted
average exercise price of $2.50 per share.
F-13
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(10) COMMON STOCK -- (CONTINUED)
The Company has reserved shares of its authorized but unissued common stock
for the following:
STOCK OPTIONS WARRANTS
-------------------- --------------------
PRICE PRICE TOTAL
SHARES PER SHARE SHARES PER SHARE SHARES
------ --------- ------ --------- -------
Balance outstanding,
December 31, 1992 .... 747,600 $.25-$4.50 266,670 $2.00-$2.50 1,014,270
Granted ............. 166,250 4.50 59,468 3.75-5.20 225,718
Exercised ........... (13,000) .25-1.50 (20,000) 2.50 (33,000)
Expired ............. (19,000) 2.50 -- (19,000)
------- ------- ----------
Balance outstanding,
December 31, 1993 .... 881,850 .25-4.50 306,138 2.00-5.20 1,187,988
Granted ............. -- -- -- -- --
Exercised ........... (19,375) .25-4.50 (4,600) 3.75 (23,975)
Expired ............. (81,525) .25-4.50 -- -- (81,525)
------- ------- ----------
Balance outstanding,
December 31, 1994 .... 780,950 .25-4.50 301,538 2.00-5.20 1,082,488
Granted ............. 73,187 6.00 -- -- 73,187
Exercised ........... (6,000) 1.50-2.50 (41,200) 2.50-5.20 (47,200)
Expired ............. (47,850) 1.50-4.50 -- -- (47,850)
------- ------- ----------
Balance outstanding,
December 31, 1995 .... 800,287 .25-6.00 260,338 2.00-5.20 1,060,625
Granted (unaudited) . 140,600 7.00-8.50 -- -- 140,600
Exercised
(unaudited) ....... -- -- (12,000) 5.20 (12,000)
Expired (unaudited) . (6,500) 6.00-7.00 (21,668) 5.20 (28,168)
------- ------- ----------
Balance outstanding,
June 30, 1996
(unaudited) .......... 934,387 .25-8.50 226,670 2.00-5.00 1,161,057
======= ======= ==========
Exercisable at June 30,
1996 (unaudited) .... 359,500 .25-1.65 -- -- 359,500
262,200 2.50-4.50 206,670 2.00-2.50 468,870
31,984 6.00 20,000 5.00 51,984
------- ------- ----------
Total exercisable at
June 30, 1996
(unaudited) ......... 653,684 $.25-$6.00 226,670 $2.00-$5.00 880,354
======= ======= ==========
Proceeds of exercisable
at June 30, 1996
(unaudited) ......... $1,356,655 $566,675 $1,923,330
========== ======== ===========
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which becomes
effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. However, entities are allowed to elect whether to measure
compensation expense for stock-based compensation under SFAS 123 or APB No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to continue
to account under APB No. 25 and will make the required pro forma disclosures of
net income and earnings per share as if the provisions of SFAS 123 had been
applied in its December 31, 1996 financial statements. The potential impact of
adopting this standard on the Company's pro forma disclosures of net income and
earnings per share has not been quantified at this time.
F-14
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED.)
(11) SUBSEQUENT EVENT
Stock Split
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), each subject to
stockholder approval. The stock split has been retroactively reflected in the
accompanying financial statements and notes for all periods presented.
STOCK PURCHASE AGREEMENT
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. Furthermore, the agreement
may require the Company to repurchase the stock at the issuance price
($1,000,000 in total) in three equal installments in the event that the
Distribution Agreement is terminated by the Company prior to the completion of a
public offering. Completion of a public offering will terminate the redemption
feature and cause the reclassification of these shares into stockholders'
equity. In addition, the distributor is restricted from selling these securities
for a one-year period after completion of such Offering. The Company utilized
the 80,000 shares of Treasury Stock in connection with this transaction.
INITIAL PUBLIC OFFERING
The Company is preparing to file a registration statement in August 1996 for
the sale of shares of common stock. There can be no assurances that the initial
public offering of common stock will be successfully completed.
F-15
GLOSSARY
AIDS...................... Acquired Immune Deficiency Syndrome. AIDS is caused
by infection with the Human Immunodeficiency Virus,
HIV.
Antibodies................ Binding proteins naturally produced by the body in
response to exposure to non-self agents (e.g.,
bacteria, viruses, cancer cells). Antibodies form
part of the immunological defense system.
Antigens.................. Foreign non-self agents (such as the proteins or the
nucleic acids of infectious agents) that stimulate
an immune response, including the production of
antibodies.
Assay..................... Synonym for test: qualitative or quantitative
measurement of some component of a material.
Chlamydia................. A sexually transmitted pathogen that can cause
Trachoma (an eye disease which culminates in
blindness), chronic infection of genitals (which can
result in infertility), and pneumonia, especially in
the newborn.
CLIA...................... The Clinical Laboratory Improvement Amendments,
passed by Congress in October 1988, and formulated
into regulations and implemented by the Health Care
Financing Administration beginning in 1992. CLIA
refers to a set of regulations which govern the
staffing and function of all U.S. laboratories that
perform in vitro diagnostic tests for clinical use,
except for blood bank laboratories and Veterans'
Administration hospital laboratories, which are
regulated separately using similar rules.
Cytomegalovirus........... A virus responsible for several diseases that are
especially prevalent in immunocompromised patients
such as those infected with HIV, receiving organ
transplants or receiving cancer chemotherapy.
Diagnostic Components..... The solutions and materials that are combined,
sometimes after further manufacture, to make an in
vitro diagnostic test kit.
DNA....................... Deoxyribonucleic Acid, together with RNA, a class of
molecules called "nucleic acids." DNA carries the
genetic information in most living organisms. The
DNA of each cell contains the information for
"building" a whole organism (e.g., a virus, a plant,
or a whole human being). DNA testing can identify
microscopic amounts of the genetic material of a
virus or bacterium, thus indicating its presence in
quantities undetectable in the bloodstream by
immunoassay techniques.
ELISA..................... Enzyme-Linked Immunosorbent Assay, a biochemical
procedure in which interactions among antibodies,
antigens and enzymes are used to detect and quantify
various diseases and other materials of interest
through the measurement of color released at the end
of the assay.
End-User.................. The purchaser and consumer of an in vitro diagnostic
test kit; usually clinical laboratories, but may
also be other health care providers or members of
the general public.
G-1
Hepatitis................. A disease that causes inflammation of and damage to
the liver, often caused by a virus. In advanced
stages, hepatitis can result in life threatening
liver dysfunction, liver cirrhosis or liver cancer.
The most common causes of viral hepatitis are the
Hepatitis A, B and C viruses (HAV, HBV and HCV).
HIV....................... Human Immunodeficiency Virus. HIV, a retrovirus,
causes AIDS. HIV infection leads to the destruction
of the immune system.
Immunology................ Narrowly defined as the study of the immune system,
but often used to describe tests for infectious
diseases which rely on the principle of the binding
of antigens and antibodies.
Immunoassay............... A test that relies on the specificity of the
reaction between antibodies and antigens to detect
and measure the concentration of biological
molecules.
In Vitro.................. Laboratory procedures that occur "in the test tube,"
or outside the body. In vitro diagnostic testing is
the process of analyzing blood, urine, saliva and
other specimens outside the body to screen for,
monitor or diagnose diseases and other medical
conditions.
Infectious Agent.......... Any microorganism, such as bacteria, viruses, fungi
or other parasites, capable of invading another
organism, with or without pathological
manifestations.
Levey-Jennings Chart...... A chart on which the test results for a Run Control
are plotted over time, so that the reproducibility
of a test method can be monitored. The acceptable
range for the Run Control, as determined by each
individual test kit end-user, is also indicated on
the chart.
Lyme Disease.............. A bacterial infection caused by a spirochete called
Borrelia burgdorferi (B. burgdorferi). This
spirochete usually infects the deer tick which then
bites a person or animal, thus transmitting the
infection.
Marker.................... A substance which, when detected in blood or other
study sample by an in vitro diagnostic test, is
indicative of the presence of disease or other
medical condition.
Microbiology.............. The clinical laboratory testing segment that
specializes in the detection of organisms that cause
infectious disease. Often used to refer to
traditional tests that use a growth medium which
enables an organism, if present, to replicate and be
detected visually. Newer methods for detection and
monitoring of infectious diseases such as immunology
and molecular biology methods are sometimes
performed in separate laboratories and sometimes
incorporated into microbiology laboratories.
Molecular Biology......... The clinical laboratory testing segment which uses
newer methods such as PCR to detect nucleic acids
(i.e., DNA and RNA) for infectious disease diagnosis
and other purposes.
G-2
Multi-Marker Run
Control................. A run control designed to be used with several tests
for different analytes or markers. These controls
are designed to cover groups of markers that are
tested in the same laboratory section, e.g., Accurun
1(R) is a multi-marker run control for blood bank
tests.
Nucleic Acids............. Two families of compounds called deoxyribonucleic
acid (DNA) and ribonucleic acid (RNA) that carry the
coded information from which all living organisms
are made.
Pathogen.................. An organism that causes disease in the study
subjects (e.g., a virus which causes disease in
humans is human pathogen; an insect that causes
disease in a plant is a plant pathogen).
PCR....................... Polymerase Chain Reaction, a sequence of chemical
steps using DNA primers (short pieces of nucleic
acids) to locate and copy (amplify) specific
sequences of DNA, if present, to a concentration
high enough for chemical detection.
Performance Panels........ A set of serum and plasma samples collected from
many different individuals and characterized for the
presence or absence of a particular disease marker.
Plasma.................... The clear liquid portion of blood which contains
clotting factors, proteins, antibodies, hormones,
electrolytes and other components dissolved in
water. Plasma differs from serum only in that plasma
contains clotting factors in addition to its other
components, and serum does not.
Qualification Panels...... Dilutions of human plasma or serum manifesting a
full range of reactivities in test kits for a
specific marker.
Qualitative Test.......... An assay for which the reportable results are
positive, negative or indeterminate. An alternative
set of terms sometimes used to express qualitative
test results is reactive, non-reactive or gray zone.
Quality Control
Products................ Materials including characterized samples of various
kinds, data sheets and software, all designed for
use in the performance evaluation of in vitro
diagnostic tests during their development,
manufacture or use.
Quantitative Test......... An assay for which the reportable results are
numeric.
Reactivity................ Test result for a qualitative test; can take one of
three forms: positive, negative or indeterminate.
Reagent................... A substance, usually a chemical solution, used as a
component of an in vitro diagnostic test.
G-3
Retrovirus................ A virus with its genetic information encoded in RNA
rather than DNA. HIV is a retrovirus.
RNA....................... Ribonucleic acid, with DNA, a class of molecules
called nucleic acids. RNA functions with DNA in most
organisms to translate the coded genetic information
into the organism itself. In some viruses, RNA
substitutes for DNA in carrying the coded
information from which the organism is made. HIV and
HCV are RNA viruses.
Run Controls.............. Well-characterized samples designed to resemble the
donor and patient samples routinely tested with a
given method, manufactured to specific levels of
reactivity and provided in quantities sufficient to
be used each time the test is run, over a period of
time, so that test performance can be continuously
monitored.
Sensitivity............... The ability of a test to detect accurately small
quantities of a substance of interest. The greater
the sensitivity, the smaller the quantity of the
substance the test can detect, and the fewer false
negatives will be reported. Sensitivity and
specificity are two important measures of the
quality of a test.
Sensitivity Panels........ Precise dilutions of human plasma or serum
containing a known amount of an infectious disease
marker as calibrated against international
standards.
Seroconversion Panels..... Plasma samples collected from a single individual
over a specific time period showing conversion from
negative to positive for markers of an infectious
disease.
Serum..................... The clear liquid portion of blood which contains
proteins, antibodies, hormones, electrolytes and
other components dissolved in water. Serum differs
from plasma only in that serum does not contain
clotting factors.
Single Analyte Run
Control................. A run control designed to be used with tests for a
single analyte or marker, e.g., Accurun 106 is a
positive control for HIV antigen tests from several
manufacturers.
Specificity............... The ability of a test to distinguish between similar
materials. The greater the specificity, the better a
test is at identifying a substance in the presence
of substances of similar makeup, and the fewer false
positives will be reported. Sensitivity and
specificity are two important measures of the
quality of a test.
Therapeutic Index......... A mathematical description of the potential
usefulness of a candidate drug, based on its
toxicity to the host system versus its effectiveness
against the pathogen. The Therapeutic Index of a
candidate drug is compared to the Therapeutic Index
in the same test system of a drug already in use for
the disease being studied.
G-4
Titer..................... An approximation of the quantity of a marker in a
qualitative test, arrived at by diluting the sample
repeatedly and testing the dilutions until the
marker is no longer detected by the test method.
Toxoplasma................ A protozoan parasite, ubiquitous in the environment,
and which causes Toxoplasmosis. Toxoplasmosis is
commonly acquired by eating food contaminated by
cysts. Pregnant women may be at risk of acquiring
Toxoplasmosis from cats, with subsequent infection
of the baby.
Virus..................... A microorganism dependent on host cells in order to
grow and reproduce.
Western Blot Method....... The standard diagnostic method for confirmation of
the presence of an infectious disease marker (e.g.
HIV, Borrelia burgdorferi), in which lysate (a
mixture of proteins) is separated on a gel by
electrochemical means and then transferred to a
nitrocellulose filter. The filter is then tested
against a blood sample to identify antibodies to the
proteins.
G-5
Photograph showing certain of the Company's Quality Control Panel Products,
including Seroconversion and Performance Panels.
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE UNDERWRITERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
--------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY 3
RISK FACTORS 6
USE OF PROCEEDS 13
DIVIDEND POLICY 13
CAPITALIZATION 14
DILUTION 15
SELECTED CONSOLIDATED FINANCIAL DATA 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 18
BUSINESS 24
MANAGEMENT 39
CERTAIN TRANSACTIONS 44
PRINCIPAL STOCKHOLDERS 45
DESCRIPTION OF CAPITAL STOCK 46
SHARES ELIGIBLE FOR FUTURE SALE 48
UNDERWRITING 49
LEGAL MATTERS 50
EXPERTS 50
ADDITIONAL INFORMATION 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
GLOSSARY G-1
UNTIL ____________ , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
SHARES
[LOGO]
BOSTON BIOMEDICA, INC.
COMMON STOCK
--------------
PROSPECTUS
--------------
OSCAR GRUSS & SON INCORPORATED
KAUFMAN BROS., L.P.
, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
TOTAL
EXPENSES
--------
SEC Registration Fee $ 8,508
NASD Filing Fee 2,708
Nasdaq National Market Listing Fee 30,000*
Blue Sky Fees and Expenses 15,000*
Underwriters' Non-Accountable Expense Allowance 176,000*
Transfer Agent and Registrar Fees 2,500*
Accounting Fees and Expenses 60,000*
Legal Fees and Expenses 300,000*
Printing and Engraving 60,000*
Miscellaneous 95,284*
------
TOTAL $750,000*
========
- --------------
<FN>
* Estimate
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
</FN>
The Company's Amended and Restated By-Laws include provisions to permit the
indemnification of officers and directors of the Company for damages arising out
of the performance of their duties unless such damages arise out of the
officer's or director's failure to exercise his duties and to discharge the
duties of his office in good faith and in the reasonable belief that his action
was in, or not opposed to, the best interest of the Company, and with respect to
any criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. The Company intends to enter into indemnification
contracts with each of its directors and officers. Reference is hereby made to
the caption "Management -- Limitation of Officers' and Directors' Liability;
Indemnification Agreements."
Reference is hereby made to the caption "Description of Capital Stock --
Limitation of Directors' Liability" in the Prospectus, which is a part of this
Registration Statement.
Reference is hereby made to Section____ of the Underwriting Agreement
between the Company and the Underwriter, filed as Exhibit 1.1 to this
Registration Statement, for a description of indemnification arrangements
between the Company and the Underwriter.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities issued
by the Registrant within the past three years which were not registered under
the Securities Act.
In August 1996, the stockholders of the Registrant voted to approve an
amendment to the Registrant's Articles of Organization to effect a one-for-two
reverse stock split of the Registrant's Common Stock, $.01 par value per share.
All references to number of shares of Common Stock give effect to this stock
split.
II-1
(1) In August 1993, the Registrant sold to eight individual investors an
aggregate of 45,000 shares of Common Stock for total cash consideration of
$202,500, at a price per share of $4.50, and to another investor 1,958 shares of
Common Stock in exchange for services rendered valued at $8,811, which
securities were not registered under the Securities Act.
(2) In April 1994, the Registrant sold to eight individual investors an
aggregate of 21,200 shares of Common Stock, for total consideration of $127,200
at a price per share of $6.00, which securities were not registered under the
Securities Act.
(3) From June through December 1994, the Registrant sold the following at
$6.00 per share: to one investor 5,000 shares of Common Stock for cash
consideration of $30,000, to a second investor 1,167 shares of Common Stock for
cash consideration of $3,501 and in exchange for services rendered valued at
$3,501, and to a third investor 2,494 shares in exchange for services rendered
valued at $14,964, which securities were not registered under the Securities
Act.
(4) In November and December 1995, the Registrant sold to two investors an
aggregate of 7,800 shares of Common Stock for total cash consideration of
$54,600 at a price of $7.00, and to another investor 734 shares of Common Stock
in exchange for services rendered valued at $5,138, which securities were not
registered under the Securities Act.
(5) On April 26, 1996, the Registrant sold 117,647 shares of Common Stock to
Kyowa Medex, Co., Ltd. for total cash consideration of $1,000,000, which
securities were not registered under the Securities Act.
(6) For the period August 1, 1993 to date, the Registrant granted to
directors, officers, employees and consultants, 15,000 ($6.00 per share), 63,000
($4.50 to $7.00 per share), 244,037 ($4.50 to $8.50 per share), and 8,000 ($6.00
per share) , respectively, options to purchase shares of Common Stock under the
Registrant's 1987 Non-Qualified Stock Option Plan or Employee Stock Option Plan,
which securities were not registered under the Securities Act.
(7) During the period from March 1994 through June 1996, the Registrant
issued an aggregate of 88,993 shares to fifteen persons pursuant to the exercise
of options, warrants or convertible notes of the Registrant for exercise prices
ranging from $0.25 to $5.20 per share (an aggregate exercise price of
$219,977.50), which securities were not registered under the Securities Act.
To the extent that the foregoing transactions constituted "sales" within the
meaning of the Securities Act, the securities issued in such transactions were
not registered under the Securities Act, as amended, in reliance upon the
exemptions from registration set forth in Section 3(b) and 4(2) of the
Securities Act, relating to sales by an issuer not involving any public
offering, or in reliance upon Regulation S of the Securities Act relating to
sales by an issuer of securities outside the United States. None of the
foregoing transactions, either individually or in the aggregate, involved a
public offering.
ITEM 16. FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
SCHEDULE
NO.
---
II -- Valuation and Qualifying Accounts
EXHIBIT
NO.
---
1.1 -- Form of Underwriting Agreement*
3.1 -- Amended and Restated Articles of Organization of the Registrant*
3.2 -- Amended and Restated By-Laws of the Registrant*
4.1 -- Specimen Certificate for Shares of the Registrant's Common Stock*
II-2
4.2 -- Description of Capital Stock (contained in the Restated Articles
of Organization of the Registrant filed as Exhibit 3.1)
5.1 -- Legal Opinion of Brown, Rudnick, Freed & Gesmer*
10.1 -- Agreement, dated January 17, 1994, between Roche Molecular
Systems, Inc. and the Registrant
10.2 -- Exclusive License Agreement, dated December 6, 1994, between the
University of North Carolina at Chapel Hill and the Registrant**
10.3 -- Contract, dated September 30, 1995, between the National
Institutes of Health and the Registrant (No. 1-AI-55273)**
10.4 -- Contract, dated September 30, 1995, between the National
Institutes of Health and the Registrant (No. 1-AI-55277)**
10.5 -- Contract, dated March 1, 1993, between the National Cancer
Institute and the Registrant**
10.6 -- Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and
the Registrant**
10.7 -- Lease Agreement, dated June 30, 1992, for Rockville, Maryland
Facility between Cambridge Biotech Corporation and the Registrant**
10.8 -- Lease Agreement, dated July 28, 1995, for New Britain,
Connecticut Facility between MB Associates and the Registrant**
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 Registrant, as amended
10.12 -- Purchase and Sale Agreement, dated December 11, 1995, for 375
West Street Property between James Leonard, Trustee, C.W.B. Trust
and the Registrant
10.13 -- Purchase and Sale Agreement, dated December 20, 1995, for 80
Manley Street Property between the Registrant 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 Registrant
10.15 -- 1987 Non-Qualified Stock Option Plan
10.16 -- Employee Stock Option Plan
10.17 -- Form of Underwriters Warrant*
10.18.1 -- Second Amended and Restated Loan and Security Agreement, dated
August 2, 1995, between the First National Bank of Boston and the
Registrant, as amended
10.18.2 -- Note Payable to The First National Bank of Boston, dated October
1994, in the amount of $200,000*
10.18.3 -- Note Payable to The First National Bank of Boston, dated October
1994, in the amount of $849,000*
10.18.4 -- Note Payable to The First National Bank of Boston, dated August
1995, in the amount of $350,000*
10.18.5 -- Note Payable to The First National Bank of Boston, dated December
1995, in the amount of $100,000*
10.18.6 -- Mortgage Note to The First National Bank of Boston, dated
December 1995, in the amount of $750,000*
10.18.7 -- Note Payable to The First National Bank of Boston, dated July
1996, in the amount of $250,000*
II-3
10.19 -- Form of Indemnification Agreement with Officers and Directors
11 -- Statement re Computation of Per Share Earnings
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Brown, Rudnick, Freed & Gesmer (contained in Exhibit
5.1)
23.2 -- Consent of Coopers & Lybrand L.L.P., independent accountants
24 -- Power of Attorney (included on signature page hereof)
27 -- Financial Data Schedule
- --------------
* To be filed by amendment.
** Confidential Treatment requested for certain portions of this document.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's By-Laws, the Underwriting Agreement
relating to this Offering, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred
II-4
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of West Bridgewater,
Commonwealth of Massachusetts, on August 23, 1996.
BOSTON BIOMEDICA, INC.
By: /s/ RICHARD T. SCHUMACHER
-------------------------------
RICHARD T. SCHUMACHER
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard T. Schumacher and Kevin W. Quinlan, and
each of them (with full power to each of them to act alone), his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, and, in connection with any
registration of additional securities pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, to sign any abbreviated registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, in each case, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD T. SCHUMACHER PRINCIPAL EXECUTIVE OFFICER AUGUST 23, 1996
-------------------------- AND DIRECTOR
RICHARD T. SCHUMACHER
/S/ KEVIN W. QUINLAN PRINCIPAL FINANCIAL AND ACCOUNTING AUGUST 23, 1996
-------------------------- OFFICER AND DIRECTOR
KEVIN W. QUINLAN
/S/ HENRY A. MALKASIAN DIRECTOR AUGUST 23, 1996
--------------------------
HENRY A. MALKASIAN
/S/ FRANCIS E. CAPITANIO DIRECTOR AUGUST 23, 1996
--------------------------
FRANCIS E. CAPITANIO
/S/ CALVIN A. SARAVIS DIRECTOR AUGUST 23, 1996
--------------------------
CALVIN A. SARAVIS
II-6
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, 1994 and 1995, and
for each of the three years in the period ended December 31, 1995, which
financial statements are included in this Registration Statement, we have also
audited the consolidated financial statement schedule listed in Item 16 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 12, 1996
S-1
SCHEDULE II
BOSTON BIOMEDICA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
RECOVERIES
BALANCE AT FOR ACCOUNTS UNCOLLECTIBLE BALANCE AT
BEGINNING PROVISION FOR PREVIOUSLY ACCOUNTS END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD BAD DEBT WRITTEN OFF WRITTEN OFF PERIOD
------------------------------- --------- -------- ----------- ----------- ------
Six months ended June 20, 1996 $142,372 $ 77,145 -- $ (85,938) $133,579
1995 94,723 181,084 -- (133,435) 142,372
1994 43,956 102,099 -- (51,332) 94,723
1993 21,000 22,956 -- -- 43,956
S-2
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
1.1 -- Form of Underwriting Agreement*
3.1 -- Amended and Restated Articles of Organization of the Registrant*
3.2 -- Amended and Restated By-Laws of the Registrant*
4.1 -- Specimen Certificate for Shares of the Registrant's Common Stock*
4.2 -- Description of Capital Stock (contained in the Restated Articles
of Organization of the Registrant filed as Exhibit 3.1)
5.1 -- Legal Opinion of Brown, Rudnick, Freed & Gesmer*
10.1 -- Agreement, dated January 17, 1994, between Roche Molecular
Systems, Inc. and the Registrant
10.2 -- Exclusive License Agreement, dated December 6, 1994, between the
University of North Carolina at Chapel Hill and the Registrant**
10.3 -- Contract, dated September 30, 1995, between the National
Institutes of Health and the Registrant (No. 1-AI-55273)**
10.4 -- Contract, dated September 30, 1995, between the National
Institutes of Health and the Registrant (No. 1-AI-55277)**
10.5 -- Contract, dated March 1, 1993, between the National Cancer
Institute and the Registrant**
10.6 -- Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and
the Registrant**
10.7 -- Lease Agreement, dated June 30, 1992, for Rockville, Maryland
Facility between Cambridge Biotech Corporation and the Registrant**
10.8 -- Lease Agreement, dated July 28, 1995, for New Britain,
Connecticut Facility between MB Associates and the Registrant**
10.9 -- Worcester County Institution for Savings Warrant (No. 1) dated
December 1, 1995
10.10 -- Worcester County Institution for Savings Warrant (No. 2) dated
July 26, 1993
10.11 -- Stock Purchase Agreement, dated June 5, 1990, between G&G
Diagnostics Limited Partnership I and the Registrant, as amended
10.12 -- Purchase and Sale Agreement, dated December 11, 1995, for 375
West Street Property between James Leonard, Trustee, C.W.B. Trust
and the Registrant
10.13 -- Purchase and Sale Agreement, dated December 20, 1995, for 80
Manley Street Property between the Registrant 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 Registrant
10.15 -- 1987 Non-Qualified Stock Option Plan
10.16 -- Employee Stock Option Plan
10.17 -- Form of Underwriters Warrant*
10.18.1 -- Second Amended and Restated Loan and Security Agreement, dated
August 2, 1995, between the First National Bank of Boston and the
Registrant, as amended
10.18.2 -- Note Payable to The First National Bank of Boston, dated October
1994, in the amount of $200,000*
10.18.3 -- Note Payable to The First National Bank of Boston, dated October
1994, in the amount of $849,000*
INDEX TO EXHIBITS (CONTINUED)
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.18.4 -- Note Payable to The First National Bank of Boston, dated August
1995, the in amount of $350,000*
10.18.5 -- Note Payable to The First National Bank of Boston, dated
December 1995, in the amount of $100,000*
10.18.6 -- Mortgage Note to The First National Bank of Boston, dated
December 1995, in the the amount of $750,000*
10.18.7 -- Note Payable to The First National Bank of Boston, dated July
1996, in the amount of $250,000.
10.19 -- Form of Indemnification Agreement with Officers and Directors
11 -- Statement re Computation of Per Share Earnings
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Brown, Rudnick, Freed & Gesmer (contained in Exhibit
5.1)
23.2 -- Consent of Coopers & Lybrand L.L.P., independent accountants
24 -- Power of Attorney (included on signature page hereof)
27 -- Financial Data Schedule
- --------------
* To be filed by amendment.
** Confidential Treatment requested for certain portions of this document.