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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KForm 10-K/A

(Mark One)

[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997,1999, or
[ ]

         Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________________________ to __________________________________

                        Commission file number 000-21615
                                               .------------

                             BOSTON BIOMEDICA, INC.
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             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





              MASSACHUSETTS- --------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

              Massachusetts
- ----------------------------------------                   04-2652826      
              -------------                                  ----------
    (State or other Jurisdiction of              (I.R.S. Employer-------------------------------
     Incorporation or Organization)                     (I.R.S. Employer
            375 West Street,                           Identification No.)
    375 WEST STREET,                                 
     WEST BRIDGEWATER, MASSACHUSETTSWest Bridgewater, Massachusetts                        02379-1040
- ----------------------------------------         -------------------------------                          ----------
(Address of Principal Executive Offices)                   (zip code)

Registrant's telephone number, including area code    (508) 580-1900
                                                     --------------
   
           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OFTHE ACT:---------------

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   [X]   No  [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated beby reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

         [ ]

         The aggregate market value of the voting common stock held by
non-affiliates of the Registrantregistrant at March 17, 1998February 29, 2000 was $27,754,339.  The aggregate  market
value was  computed  by  reference  to$49,248,992, based on
the closing price as of that date on
NASDAQ.

         The  number of shares  outstanding  of the  Registrant's  only class of common stock as quoted on the Nasdaq National Market on
that date.

         As of March 17, 1998 was 4,643,172.

                       DOCUMENTS INCORPORATED BY REFERENCE24, 2000 there were 5,441,960 shares of the registrant's
common stock outstanding.

                       Documents Incorporated by Reference
                       -----------------------------------
         Portions of the Registrant'sregistrant's definitive Proxy Statement forproxy statement involving the
election of directors at its 19972000 annual meeting, which is expected to be filed
within 120 days after the end of the registrant's fiscal year, are incorporated
by reference into Part III of this Report, and
portions of the Registrant's Registration Statement on Form S-1 (Registration
No. 333-10759) are incorporated by reference into Part IV of this Report.report.
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PART I

ITEM 1.  BUSINESS

         Boston Biomedica, Inc. and its wholly-owned subsidiaries (together,
"the Company"), provide products and services for the detection and treatment of
infectious diseases such as AIDS, Lyme Disease, and Viral Hepatitis. The Company
is a worldwide providerhas four business units, which are comparable to operating segments (the terms
"business units" and "operating segments" are used herein interchangeably):

(1)           BBI Diagnostics, an ISO 9001 certified manufacturer of proprietary quality
              control and other diagnostic products for use withused to increase the
              accuracy of in vitro diagnostic test kits ("test kits")tests;

(2)           BBI Clinical Laboratories, a leading infectious disease testing
              laboratory, specializing in nucleic acid based testing, tick borne
              diseases, and blood bank confirmatory testing;

(3)           BBI Biotech Research Laboratories, the research and development
              arm of the Company which supplements its support for the detection, analysisother BBI
              business units with research contracts and monitoringrepository services
              primarily for agencies of the United States government; and

(4)           BBI Source Scientific, an ISO 9001 and EN 46001 certified
              manufacturer of laboratory and medical instruments.

  In addition, the Company is pursuing research and development programs in the
areas of Pressure Cycling Technology ("PCT") and drug discovery, with the goals
of introducing new solutions for improving blood plasma safety, specimen
preparation in nucleic acid testing, and treatment 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.diseases.

         The Company believes its Quality Control Panel products are viewed aswas organized in Massachusetts in 1978, and commenced
significant operations in 1986.

         In July 1999, the current industry
standardCompany announced a major reorganization and the
formation of a corporate function. Pursuant to this reorganization a Senior
Vice President and General Manager was appointed for each business unit,
reporting to the independent assessmentPresident & Chief Operating Officer. The responsibility of
the performanceGeneral Manager is to achieve the agreed upon goals and plan of HIVthe
business unit. The primary focus of corporate is to oversee the business
units and Hepatitis
test kits. Theguide them according to the strategic direction of the Company.

         In September 1999, the Company also manufactures diagnostic test kit components,moved its research and development
activities in PCT from leased laboratory instruments,space in Woburn, Massachusetts to its
BBI Biotech facility in Gaithersburg, Maryland. This was done to allow the
scientific team working on PCT to have easy and provides specialty laboratory services,open access to the molecular and
cellular biology capabilities at BBI Biotech, as well as to reduce operating
costs and promote efficiencies.

         In October 1999, the Company formed a new, wholly-owned subsidiary,
Panacos Pharmaceuticals, Inc., ("Panacos"), a Delaware corporation. All of the
Company's technology related to its drug discovery and vaccine programs,
consisting primarily of patents and related sponsored research agreements, were
transferred to Panacos effective January 2000. Management intends to sell a
substantial portion of Panacos to third party investors in order to obtain the
substantial amount of capital required to progress to more advanced stages of
drug development including human clinical trials. It also provides contract instrument developmentIf successful in raising
capital, the Company plans to become a less than 50% shareholder in Panacos,
give up operational control, and related
repairs atswitch to the equity method of accounting for
its service center in Garden Grove, CA. The Company's customers
include test kit manufacturers, regulatory agencies and end-users of test kits
suchinvestment, 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.opposed to consolidation accounting.

         The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (i)(1) capitalize on
both the emerging end-user market (ii)for quality control products, and the
molecular testing market, (2) develop new products and services, (iii)(3) enhance
technical leadership, (iv)(4) capitalize on complementary business operations, and
(v)(5) pursue strategic acquisitions and alliances.


                                      -2-


Industry Overview

         Infectious Disease Test Kits and Testing Methods. Test kits contain in
one compact package all of the materials necessary to run a test for an
infectious disease. These materials include the disposable diagnostic components,
instructions, and reaction mixing vessels (generally 96-well plates or test
tubes) whichthat are coated with the relevant infectious disease antigens, antibodies
or other materials. To perform the test typically, 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 andor radioactive
count) which, that 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) whichthat are specific
to a particular pathogen.

         Most infectious disease tests currently use microbiological or
immunological methods. However, molecular diagnostic methods are increasingly
being used in research and clinical laboratories worldwide. The Company believes
that the advent of molecular diagnostic methods will complement rather than
diminish the need to test by microbiological and immunological procedures,
because different test methods reveal different information about a disease
state. The Company anticipates that as new test methods become more widespread,
they will account for a larger portion of the Company's business.

         Quality Control for In Vitro Diagnostic Test Kits. Customers employ
quality control products in order to develop and use test kits (both infectious
and non-infectious). Quality control products help ensure that test kits detect
the correct analyte (specificity)("specificity"), detect it the same way every time
-2-

(reproducibility("reproducibility" or precision)"precision"), and detect it at the appropriate levels
(sensitivity)("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:groups : (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the manufacture and use of test kits, and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.

Company Products and Services

Overview

         TheThrough its business unit BBI Diagnostics, the Company offers twoa broad
product classes used inarray of "Diagnostic Products," for in vitro diagnostics ("IVD"): "Diagnostic Products"diagnostic use, consisting of
Quality Control Panels, Accurun(Accurun(R) Run Controls and Diagnostic Components, all
used in connection with infectious disease testing, and new for 1997, "Laboratory Instruments".testing. Diagnostic Products are used
throughout the entire test kit life cycle, from initial research and
development, through the regulatory approval process and test kit production, to
training, troubleshooting and routine use by end-users. The Company's Quality
Control Panels, which combine human blood specimens with comprehensive
quantitative data useful for comparative analysis, help ensure that test kits
detect the correct analyte (specificity), detect it the same way
every time (reproducibility),are as specific, reproducible, and detect it at the appropriate levels
(sensitivity).sensitive as possible. The Company's
Accurun(Accurun(R) 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.


                                      -3-
Through its wholly ownedwholly-owned subsidiary, BBI Source Scientific, Inc., ("BBI
Source"), the Company designs, manufactures and markets Laboratory Instruments"Laboratory
Instruments", consisting of readers and washers and other small medical devices.
These instruments are used in hospitals and clinics, and in research,
environmental and food testing laboratories. Utilizing a common hardware
technology platform, these instruments are used in connection with the
performance of an IVDIN VITRO diagnostics test, including reading the test result.

         The Company'sThrough another wholly-owned subsidiary, BBI Clinical Laboratories,
Inc. ("BBICL") the Company provides specialty clinical laboratory services that
include both routine and sophisticated infectious disease testing in
microbiology, immunology and molecular biology. The CompanyBBICL seeks to focus its
specialty
laboratory services in those advanced areas of infectious disease testing
requiring special expertise.

         BBI Biotech Research Laboratories, Inc., ("BBI Biotech"), another
wholly-owned subsidiary, is the R&D "arm" of the Company, helping to develop new
products and services for the other business units. BBI Biotech seeks to obtain
government grants and other research support wherever possible to help fund the
cost of this R&D. In addition, BBI Biotech provides contract research and clinical trialsrepository services for the
United States government, and other commercial services for domesticlaboratories and foreign
test kit manufacturers.

         During each of the last three fiscal years, each of the Company's
operating segments contributed at least 15% of the Company's consolidated
revenue, with the exception of BBI Source in fiscal 1997 and 1999 and the
"Other" segment in fiscal 1999. The Company's Consolidated Financial Statements
set forth in Item 8 of this report provide financial information relating to
each of the Company's operating segments.

Diagnostic Products

         The Company manufactures its Diagnostic Products from human plasma and
serum whichthat are obtained from nonprofit and commercial blood centers, primarily
in the United States. The Company has acquired and developed an inventory of
approximately 50,00030,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
Within the Diagnostic Products class are two groups: Quality Control Products,
(Panelsconsisting of QC Panels and Accurun(Accurun(R) Run Controls)Controls, and Diagnostic Components.

         Quality Control Panels

         Quality Control Panels consist of blood products characterized by the
presence or absence of specific disease markers and a Data Sheetdata sheet containing
comprehensive quantitative data useful for comparative analysis. These Quality
Control Panels are designed for measuring overall test kit -3-

performance and
laboratory proficiency, as well as for training laboratory professionals. The
Company's Data Sheets, containingdata sheets, which contain comprehensive quantitative data useful for
comparative analysis, are an integral part of its Quality Control Panels. These
Data Sheetsdata 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 laboratory 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 laboratory settings. In addition, the Company
provides information on its Data Sheetsdata 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
Sheetsdata 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
Sheetsdata sheets require significant time and scientific
expertise to prepare. The following table describes the types of Quality Control
Panel products currently offered by the Company.Company:


                                      -4-


QUALITY CONTROL PANEL PRODUCTSQuality Control Panels - ---------------------------------------------------------------------------------------------------------------------------------- Product Line Description Use Customers - -------------------------------- ----------------------------------- --------------------------------- --------------------- PRODUCT LINE DESCRIPTION USE CUSTOMERS - - -------------------------------- ----------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------- Seroconversion Panels Plasma samples collected from a Compare the clinical Test kit manufacturers and single individual overraover a specific sensitivity of competing manufacturers andregulators. time period showing conversion from manufacturers' test kits, regulators. from negative to positive for markers of enabling the user to assess the markers of an infectious disease. the sensitivity of a test in disease.- detecting a developing antigen/antibody. - - -------------------------------- ----------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------- Performance Panels A set of 10 to 50 serum and plasma Determine test kit performance Test kit plasmamanufacturers and samples collected from many different against all expected levels of manufacturersregulators. individuals and many different individuals andcharacterized for the reactivities in the evaluation regulators. characterized for the presence or absence of a particular of new, modified and improved absence of a particular disease marker. test methods. marker. - - -------------------------------- ----------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------- Sensitivity Panels Precise dilutions of human plasma or Evaluate the low-end analytical Test kit ormanufacturers. serum human plasma or serum analytical sensitivity of a test kit. manufacturers containing a known amount of an test kit. infectious disease marker as calibrated against international standards. - - -------------------------------- ----------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------- Qualification Panels Dilutions of human plasma or serum Demonstrate the consistent Clinical reference serum manifesting a full range of lot-to-lot performance of test laboratories, blood banks, reactivities in test kits for a kits, troubleshoot problems, banks, and hospital laboratories. specific marker. evaluate proficiency, and train laboratories laboratory technicians. - - -------------------------------- ----------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------- OEM Panels Custom-designed Qualification Panels Train laboratory personnel on Custom designed Panelswith test kit for regulators and test kit new test kits or equipment. with test kit kitmanufacturers and regulators manufacturers for manufacturers and distribution to customers or for regulators as an internal use. end-user product or for customers or for internal use. internal use. - ---------------------------------------------------------------------------------------------------------------------------------- Verification Panels Verification Panels contain naturally Verify accuracy and ensure Clinical reference occurring undiluted samples at that reagents perform to laboratories, blood banks, varying titers. expectation: also used to hospital laboratories. troubleshoot system problems and to document problem resolution. - -------------------------------- ----------------------------------- --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------
-4- 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, OEM, and OEMverification panels generally range from $100 to $200 per panel. -5- Seroconversion and Performance Panelsperformance 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 from a different individual, 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 canHowever, the Company cannot be no assurancecertain that the Companyit will be able to continue to obtain such specimens. Quality Control Panels currently span the immunologic markers for AIDS (i.e., HIV), Hepatitis (A, B and C), Lyme Disease and ToRCH (Toxoplasma, rubella, cytomegalovirus and herpes simplex virus). New introductions this year include Performance Panels for HIV, EBV and HCV, Qualification Panels for HIV, HTLV, CMV and HCV, and additional Seroconversion Panels for HIV and HCV. Included in the Performance Panel category are the first "Worldwide" panels for HCV and HIV that include specimens from throughout the world reactive for variants and subtypes of these deadly viruses. Accurun(r)Accurun(R) Run Controls End-users of test kits utilize Run Controlsrun 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 Controlrun control will place the Run Controlrun control product in a testing well or test-tube,testtube, 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 for the run control, determined by the user, to measure whether the other, unknown specimens are being accurately tested. The Run Controlrun control result must be within the acceptable range to be considered valid. This is often tracked visually using what is known as 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 Controlrun control in a single run at the beginning and end of the day. In 1997, the Company introduced its AccuChartTMThe Company's AccuChart(TM) tracking and charting software. Usedsoftware, used as part of a laboratory's quality assurance program, AccuChartTM runs on a PCpersonal computer and is designed to provide the data tracking capability needed to document laboratory performance. The Company's Accurun(r)Accurun(R) family of products is targeted at the emerging market of end-users of infectious disease test kits. The Company believes that it offers the most comprehensive line of Run Controlsrun controls in the industry, and that its Accurun(r)Accurun(R) products, in combination with its Quality Control Panel products, provide an extensive line of products for quality assurance in infectious disease testing. The Company intends to continue to expand its line of Accurun(r)Accurun(R) products, thereby providing its customers with the convenience and cost effectiveness of a single supplier for independent run controls. The Company introduced its first four Accurun(r)Accurun(R) Run Control products in the fourth quarter of 1993 and has since developed and released for sale an additional 31 Accurun(r)46 Accurun(R) products. Two products have been discontinued, for a total of 35 -5-48 Run Controls.Controls available as of December 31, 1999. The majority of these products are available for diagnostic purposes; the others currently are limited to research use. Current Accurun(r)Accurun(R) Run Control products generally range in price from $5 to $45$60 per milliliter and are described in the following table. -6-
ACCURUN(r)ACCURUN(R) RUN CONTROLS - ---------------------------------------------------------------------------------------------------------------------------------- Product Description Number of Products Primary Customers - ------------------------------- -------------------------------- ---------------------- ------------------------------ PRODUCT LINE DESCRIPTION CURRENT NUMBER OF PRIMARY CUSTOMERS PRODUCTS - - ------------------------------- -------------------------------- ---------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Accurun(r)1-99Accurun 1(R) Multi Marker Multi-marker Run Control 6run controls for 12 Blood Banksbanks, plasma centers, Positive Controls diagnostic immunological tests hospitals and clinical labs - ---------------------------------------------------------------------------------------------------------------------------------- Accurun Immunological Positive Single marker run controls for 23 Hospitals and clinical labs Controls diagnostic immunological tests - - ------------------------------- -------------------------------- ---------------------- ------------------------------ Accurun(r)100-199 Single-marker Run Control 22 Hospitals and clinical---------------------------------------------------------------------------------------------------------------------------------- Accurun Nucleic Acid Positive Single Marker run controls for immunological tests reference laboratories - - ------------------------------- -------------------------------- ---------------------- ------------------------------ Accurun(r)200-299 Multi-marker Run Control 15 Research and specialty labs Controls amplified nucleic acid tests - ---------------------------------------------------------------------------------------------------------------------------------- Accurun Reference Nucleic Acid Run controls calibrated to the 2 International plasma manufacturers Controls World Health Organization and blood centers standard. - ---------------------------------------------------------------------------------------------------------------------------------- Accurun Negative Controls Negative run controls for molecular tests laboratories - - ------------------------------- -------------------------------- ---------------------- ------------------------------ Accurun(r)300-399 Single-marker Run Control 3 Research and specialty for immunological tests laboratories - - ------------------------------- -------------------------------- ---------------------- ------------------------------ Accurun(r)800-899 Negative Run Control for 36 All laboratorieslabs immunological and molecular testsnucleic acid testing - - ------------------------------- -------------------------------- ---------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------
All of the Company's Accurun(r)Accurun(R) Run Controls for diagnostic use require either FDA premarket clearance (a 510(k)) or validation studies (if the products are exempt from FDA submission requirements under the FDA Modernization Act of 1997), prior to being marketed for diagnostic use, under current FDA rules. The FDA Modernization Act of 1997 will likely produce new regulations exempting some of these products from FDA submission requirements, but the new rules are not yet in place.use. As of March 1, 1998,2000, a total of nine12 products in the Accurun 1(r)1(R) line and 1418 single analyte Accurun(Accurun(R) controls have either received 510(k) clearance from the FDA. An additional three Accurun(r) single analyte productsor have been submitted but have not yet received FDA approval.validated. 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 Serumnormal human serum and Plasmaplasma 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. -6--7- Laboratory Instruments In 1997, the Company acquired the business and net assets of Source Scientific, Inc., a laboratory instrument manufacturer in Garden Grove, California. As a result of this acquisition, the Company through its wholly owned subsidiary, BBI Source, Scientific, Inc. ("BBI Source"), now has expertise in IVD instruments, adding to its existing capability in IVD quality control products. This is significant since, in addition to the test kit and a well trained technician, the third element to an accurate test result is a properly calibrated instrument to read the test result. See also Note 2 to the Company's Notes to Consolidated Financial Statements in Item 8 hereunder regarding the Company's purchase of the business and net assets of Source Scientific, Inc. BBI SourceLaboratory Instrumentation operating segment, designs, manufactures and markets Laboratory Instrumentslaboratory instruments and other small medical devices used in hospitals and clinics and in research, environmental and food testing laboratories. TheyThese instruments are generally sold on a private-label or OEM basis for other companies utilizing a common hardware technology platform. The instruments manufactured by the Company use advanced optical detection methods (luminescence, fluorescence, reflectance, photometry), robotics, fluidics, and unique software, all of which isare desired by customer companiescustomers reselling theor supplying state-of-the-art instrumentation systems to clinical distributors and laboratories worldwide. Theworldwide in various applications. Most of the Laboratory Instrumentation products currently being offered by BBI Source have been commercialized since 1985.1985 and were primarily developed in conjunction with IN VITRO diagnostics test kit manufacturers. BBI Source expects that its newest products will be availablehopes to attract development partners for production in late 1998.new prototype products. Management believes that these products address important market segments in biomedical and clinical diagnostic testing and in environmental monitoring and food testing research. The BBI Source product line currently includes the following: MicroChem(r)MicroChem(R) Photometer. A compact, low-cost, photometer designed for immunoassay and general chemistry applications. ChemStat(r)ChemStat(R) Automated Photometer. A high-speed, automated photometer with a sample capacity of 95 tubes and a read rate of one sample per second. This product is suited for high-volume processing. ChemStat(r) Plus Automated Photometer. The ChemStat Plus is a second generation photometer compatible with the EXEC-WASH Washing System that features menu-driven software and optional on-board dispensers. E/LUMINA(r)LUMINA(R) II Luminescence Analyzer. A flexible luminometer for both "flash" and "glow" luminescence methods, this automated system reads up to 114 samples and reports final results. E/LUMINA(r) 2E Automated Luminescence Analyzer. This detection system is designed with the same features as the E/LUMINA Luminescence Analyzer that can be used to detect faster "flash" luminescence techniques and adapts to various formats, as well as to liquid phase assays. EXEC-WASH(r)EXECWASH(R) Washing System. An automated immunoassay washing system that can be quickly configured by the user to wash different solid-phase assay formats by a propriety manifold design. The EXEC-WASH is fully compatible with a variety of other Company products, such as the ChemStat the ChemStat Plus and the E/LUMINA II Luminescence Analyzer. PlateMate(r) Reader. The Company expects to have available in 1998 the PlateMate Reader, a microfluidics well-reading system combining robotics and fluidics. The current design of the PlateMate Reader performs photometric assays in the 400 to 700 nm range for 96 samples at a time and prints out results directly on a built-in printer. -7- Protocol Design Software System. A development tool for researchers and assay manufacturers, the program operates under Microsoft(r)Microsoft(R) Windows and serves as the master programingprogramming center for EXEC-WASH systems to create fluid handling protocols. FOCUS(r). Florescence Polarization System. Fluorescence polarization ("FP") is a technology that has dominated the clinical marketVerif-Eye(R) A reflectance reader for therapeuticrapid, reliable results for use in research and abuse drug level testing for many years. FluoroStat(r) Reader. The FluoroStat is a compact fluorometer that is highly sensitivedevelopment or process inspection and provides a broad dynamic range for tube-based fluorometric assays. The instrument was introduced in September 1995 and is currently available for OEM manufacture.verification. Services The Company seeks to focus its specialty laboratory services in both the clinical reference laboratory testing and advanced biomedical 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. Through its wholly owned subsidiary, BBITesting BBICL, the Clinical Laboratories, Inc. the CompanyLaboratory Services operating segment, operates an independent specialty clinical reference laboratory whichthat performs both routine and sophisticated infectious disease testing in microbiology, immunology and molecular biology, with special emphasis in AIDS, Viral Hepatitis, Lyme and Lyme Disease.other tick borne diseases, and comfirmatory testing for the blood bank industry. The Company's specialty clinical laboratory combines traditional microbiology, advanced immunology, and current molecular diagnostic techniques, such as PCR and bDNA, to detect and identify microorganisms, their antigens and related antibodies, and their nucleic acids (i.e., DNA and RNA). -8- Specimens are picked up daily from customers, primarily by BBICL's courier staff, and are brought to the laboratory in New Britain, Connecticut for testing. There, they are received, accessioned, scheduled, and then tested. Results are returned to customers by fax, remote printers, data transmission and hard copy. BBICL emphasizes accuracy and turnaround time along with competitive pricing as keys to customer satisfaction. Customers include blood banks, physicians, clinics, hospitals and other clinical/research laboratories. Contract Research.Research and Services The Company, through its wholly owned subsidiary, BBI Biotech Research Laboratories, Inc. ("BBI Biotech"),operating segment 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 extractions and sequencing, recombinant DNA support, probe labeling and custom PCRnucleic acid amplification assays. Cell biology and immunology services include sterility testing, virus infectivity assays, cultivations of virus or bacteria from clinical specimens, preparation of viral or bacterial antigens or nucleic acids, and production of antibodies.custom western blot assays. The Company is currently providingprovides contract research services under several contracts and grants. These services are primarily related to infectious diseases,disease diagnostics, in support of the products and services that the Company wishes to develop. Current contracts include the following: assessment of the efficiency ofclinical trials support for candidate HIV vaccines in a monkey model system; development of a multiplex RT PCR based test for HIV-1, HTLV I/II, HCV,vaccines; identification and HBV; DNA sequencing of human genes involved in neurological disorders;disorders, development of PCR based assays for Babesiosis and Transfusion Transmitted Virus, and microtiter plate assays for HIV-1 genotyping;genotyping. Blood Processing and eliciting neutralizing antibodies targeting HIV. In addition, sinceRepository Services Since 1983, BBI Biotech has provided blood processing and repository services for the National Cancer Institute ("NCI"), also a part of the National Institutes of Health ("NIH"). The repository stores over 2,000,0006,000,000 specimens and processes or ships up to several thousand specimens per week in support of various NIH cancer and virus research programs. A new one yearIn 1997, BBI Biotech was awarded a five-year (including renewal options) NCI repository contract was signedwith aggregate payments of up to $4.8 million. In 1998, BBI Biotech received a six-year $2.9 million repository contract (including five one-year extension options) with the National Heart, Lung and Blood Institute of the NIH, and in February 1997 which includes four one year1999, it received a seven-year, $9.6 million repository contract with the National Institute of Allergy and Infectious Disease. To date all renewal options exercisable by NCI. The total value of the contract in the first year is $916,000, and including all options, is $4.8 million. The initial renewal option hasunder these contracts have been approved, byalthough the NCI although there canCompany cannot be no assurancecertain that any subsequent options will be exercised. Other Services Clinical Trials. The Company conductsAll four business units conduct clinical trials for domestic and foreign test kit and device manufacturers. Test kit manufacturersManufacturers must conduct such trials to collect data for submission to the United States FDA and other countries' regulatory agencies.agencies, and these manufacturers contract with organizations such as the Company to perform this work. By providing this service, the Company is able to maintain close contact with test kit and device 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 -8- 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 and device manufacturers seeking to obtain FDA approval for their infectious disease test kits. Laboratory Instrumentation Services. BBI Source offers services to design, developmentdevelop, manufacture and manufacturing servicesdistribute laboratory instruments to companies seeking to market biomedical products manufactured under government-approved manufacturing practices. The OEMThese services range in complexity from contract manufacturingconsulting to full system development and distribution. After-sales Service. BBI Source also provides after-sales-service.after-sales service. Management believes that after-sales service is a major marketing advantage in many of the Company's markets, since many of the Company's customers do not maintain their own full service departments. Servi-Trak(r)Servi-Trak(R), a proprietary software program, is a key element of this after-sales service. The Company's service department is located at BBI Source's facility in Garden Grove, California. A fully functional service centerThe -9- Company utilizes an independent third party contractor located in Giessen, Germany, is contracted by the Company to provide a fully functional European service and support. On March 9, 1998, the Company announced plans to modify a previously announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent company, ABX Hematologie, SA (France). Under the contract, the Company provided technical, customer and field services for instruments sold by ABX in the United States. Under the modified agreement, individual customer service contracts will be assigned to ABX and ABX will assume responsibility for its United States instruments. The Company will provide certain consulting services through March 1999 to assist ABX in establishing a sales, customer service, technical support and field service operation in the United States for its hematology instrument and reagent business. In addition, the Company has agreed to allow ABX to occupy space at its California facility during the period of the agreement. The Company's personnel associated with this contract, included the nationwide field service organization and hotline technical support, will be offered employment by ABX.center. 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. The drug screening program and in vitro assays are now offered through the Company's newly formed subsidiary, Panacos Pharmaceuticals, Inc. Research and Development The Company's research and development effort is focused on (i) the development of (i) new and improved Quality Control Products (Panels and Accurun(r)Accurun(R)) for the emerging end-user market and the in vitro diagnostics market, (ii) new products for existing customers, (iii) Diagnostic Components for use with test kits for both new test methodologies and new diseases, (iv) new laboratory instruments and mechanical and optical detection techniques, and (v)the expansion of its infectious disease testing services using PCR and other amplification assays, (iii) the design and development of new laboratory instruments and mechanical and optical detection techniques, emphasizing its Verif-Eye reflectance reader, (iv) the development of pressure cycling technology ("PCT") for AIDS, Viral Hepatitis, Lyme Diseasenucleic acid purification and Chlamydia, among others.pathogen inactivation, and (v) the determination of the mechanism of action and performance of initial toxicity studies on its lead compounds in the Company's drug discovery program ("Panacos"). The Company has approximately 36 full or part-time employees involved in its research and development effort. For 1997As announced in 1998, at the time of its acquisition of BioSeq, Inc., the Company has significantly increased spending on research and development both in whole dollars and as a percentage of revenuesrevenue in 1999 as compared to 1996 and expects to continue to increase such expenditures as a percentage of revenues for the next several years.1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." The Company's research scientists work closely with sales, marketing, manufacturing, regulatory and finance personnel to identify and prioritize the development of new products and services. TheWhenever it can, the Company seeks to fund its research and development activities from grants provided by various agencies and departments of the United States government. See also "Contract Research and Services." Quality Control Products. In the area of Quality Control Products, the Company's product development activities center on the identification and characterization of materials for the manufacture of new Quality Control Productsproducts and the replacement of sold-out products. During 1997,1999, the Company introduced 3214 new Seroconversion, Performance, Sensitivity and Qualification Panel products, 43 OEM Panels, as well as 613 new Accurun(r)Accurun(R) Run Controls, and 34 OEM Panels.Controls. The -9- Company is developing new Quality Control Products for use with both immunological and molecular diagnostic tests for subtypes and variants of HIV, HCV and HBV, and a variety of controls targeted for leading instrument platforms. The Company has increased the number of off-the-shelf Quality Control Products it offers from approximately 20 products in 1990 to approximately 167more than 200 in 1997.1999. Infectious Disease Tests. The Company also develops new and improved infectious disease tests, which the Company believes offer potential for above average profit, for sale by the Clinical Laboratory Services operating segment. Current emphasis is on additional PCR and other amplification technology based tests for infectious disease diagnostics, beyond the Company's current offerings of assays for the pathogens of AIDS, Lyme Disease, Viral Hepatitis, and Herpes, and for the direct detection of other infectious agents in blood, tissues and other bodily fluids. Laboratory Instruments. The Company's product development activities related to Laboratory Instrumentslaboratory instruments are centered on additional configurations for its PlateMate(r) microtiter plate reader and the development of a "reflectance" reader to produce qualitativeobjective results from rapid IVD tests using dry chemistry (strip) technology.in vitro diagnostic tests. In addition, the Company continues to work on applications for existing products to broaden their utilization. The Company is also developing new and improved infectious disease tests which offer potential for above average profit for use in its specialty laboratory business. This includes emphasis on additional applicationsPressure Cycling Technology. BBI BioSeq, a wholly-owned subsidiary of PCR and other amplification technologies to infectious disease diagnostics, beyond its current assays for the pathogens of AIDS, Viral Hepatitis, Lyme Disease and Herpes, and for the direct detection of other infectious agents in blood, tissues and other body fluids. From time to time in the past, the Company, has fundedowns patent pending technology based on PCT. PCT research is primarily focused in two areas: (1) nucleic acid extraction and purification from target pathogens in connection with sample preparation for PCR or other molecular testing; and (2) pathogen inactivation of blood plasma intended for transfusion or for further fractionation into transfusion products. See Note 2 to the Company's Notes to Consolidated Financial Statements in Item 8 hereunder for further details related to the 1998 acquisition of BioSeq, Inc. -10- Drug Discovery. In August 1998, the Company hired a portion ofVice President, Biotheraputics to direct its researchdrug discovery and development activities from grants provided by various agencies and departmentsefforts. In collaboration with Dr. K.H. Lee of the United States government. See also "-Services-Contract Research." Strategic AlliancesSchool of Pharmacy, University of North Carolina at Chapel Hill ("UNC")., the Company conducts research relating to compounds, pharmaceutical compositions, therapeutic methods, and vaccine preparations, primarily in the HIV field. The Company isowns, jointly with UNC, five United States patents related to this drug discovery program. Two additional United States patent applications and foreign applications for all five of the joint patents are pending. In April 1999, the Company increased its commitment to directly supporting asupport the drug discovery program at UNC, in which a full-time, post-doctoral research scientist isand two of Dr. Lee's doctoral students are working to develop synthetic derivatives of anti-HIV compounds that have been discovered pursuant to the Company's joint collaboration with UNC. ThisThese research scientist isscientists are also working to introduce modifications to these derivatives that wouldin an effort to 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 bythe five patents awarded to the Company and UNC with respect to three classes of anti-HIV compounds.UNC. Two such compounds covered under these patents have exhibited therapeutic indices in in vitro test model systems in excess of those recorded for AZT under comparable test conditions. The Company is expending approximately $150,000 per year for research and development relating to these compounds. In addition, underUnder 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 also "-Services-Drug Screening program." Ajinomoto Co., Inc. The Company entered into an agreement with Ajinomoto Co., Inc. inIn October 1995 pursuant to which1999, the Company is performingformed a new, wholly-owned subsidiary, Panacos Pharmaceuticals, Inc., ("Panacos") a Delaware corporation. All of the technology, intellectual property, sponsored 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 Ajinomotoagreements, and has a three year budget of approximately $1,000,000. Discoveries and inventions arisingrelated rights from the research will be owned by Ajinomoto, butdrug discovery business unit were transferred to Panacos effective January 2000. Management intends to sell a substantial portion of Panacos to third party investors in 2000 in order to obtain the substantial amount of capital required to progress to more advanced stages of drug development including human clinical trials. If successful in raising capital, the Company has the right of first refusalplans to obtain certain exclusive licenses from Ajinomoto of any patented technology arising from the research. The Company is entitled to certain royalties based uponbecome a percentage of sales of products arising out of the research. This agreement expiresless than 50% shareholder in September 1998. The Company does not know if the contract will be renewed. BioSeq, Inc. In October 1996, the Company entered into a strategic alliance with BioSeq, Inc. an early stage biotechnology company that is developing a technology that may, through the use of pressure, be able to more preciselyPanacos, relinquish operational control, chemical reactions. The Company believes that this technology may be useful for sample preparation in connection with both molecular and immunological testing, process purification, sequencing, synthesizing and characterizing nucleic acids and proteins, which may then allow for the more precise identification of infectious disease agents. See also Note 5switch to the Company's -10- Notesequity method of accounting for its investment, as opposed to Consolidated Financial Statements in Item 8 hereunder regarding the Company's investment in BioSeq, Inc. The Company, in a seperate transaction, purchased a licensed technology from BioSeq, Inc. on March 20, 1998. See also Note 14 to the Company's Note to Consolidated Financial Statements and Item 8 hereunder regarding subsequent event.consolidation accounting. Sales and Marketing The Company's sales and marketing efforts are managed on a business unit basis. Such activities are directed by a Senior Vice PresidentDirector of Sales and Marketing and includes 25for each unit. Overall, the Company employees 35 people in the sales, people and 9 other full-time marketing, and customer services employees.service functions. The Company's marketing strategy is focused upon addressingto focus on the needs of its customers in the infectious disease testing market throughout the entire test kit life-cycle, from initial research and development, through the regulatory approval process and test kit production, to training, troubleshooting and routine use by end-users such as clinical laboratories, hospitals and blood banks. The Company recently has begunalso continues to focus its sales and marketing efforts on the emerging end-user market for quality control productsQuality Control Products for infectious disease test kits. To promote this objective, the Company has implemented a majoruses its marketing platform, known as "Total Quality System" ("TQS"). TQS is a package of Quality Control Products, including the Company's Accurun(r)Accurun(R) Run Controls whichand AccuChart Quality Control Software, that 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 instrumentequipment, 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(r)Accurun(R) line of run control products. In addition, the Company continues to expand the Accurun product line to support the high growth nucleic acid testing market, and to capitalize on the worldwide implementation of new technology to improve the safety of blood products. The Company's productsDiagnostic Products are currently sold through a combination of telephone, mail, third party distributors and direct sales efforts. Domestically, Diagnostic Products are sold through a direct sales force consistingled by a Sales and Marketing director. The sales force consists of atwo sales director, three regionalgroup managers and nine12 sales representatives. Internationally, the Company distributes its Diagnostic Products both directly and through 2122 independent distributors located in Japan, Australia, South America, Southeast Asia, Israel and Europe. The Company's international sales -11- manager oversees the Company's foreign distributors. The Company's Laboratory Instruments are sold through a direct domestic and international sales force consisting of twoone director and one sales managers. Export sales, including sales to distributors, for the years ended December 31, 1995, 1996, and 1997 were $3.4 million, $4.3 million, and $5.2 million, respectively. See also Note 6 to the Consolidated Financial Statements.representative. The Company's Specialty Clinical Laboratory Testing services are marketed primarily through a direct domestic sales force, consistingwhich consists of sevennine sales representatives managed by one regional manager, and a sales and marketing director. The sales representatives are located throughout the eastern, mid-western and mid-westernwestern United States. TheyStates and 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 occasional advertising campaigns in major industry publications, technical presentations, and exhibitions at local, national and international trade shows and expositions. -11-During 1999, the Company introduced a new product information library on the Company web site (www.bbii.com) allowing customers, field sales personnel and international distributors immediate access to detailed product information and marketing literature. Seasonality Historically, the Company's results of operations have been subject to quarterly fluctuations due to a variety of factors, primarily customer purchasing patterns, 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 off-the-shelf Diagnostic Products typically have been highest in the fourth quarter and lowest in the first quarter of each fiscal year, whereas OEM product sales may peak in any quarter of the year, depending on the customer's underlying production cycle for their product. Specialty Clinical Laboratory Services have 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 one to five-year periods, and upon completion, frequently do not have renewal phases. As a result, these contracts 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 performed. Customers The Company's customers for Diagnostic Products comprise threeconsist of four major groups: (i)(1) international diagnostics and pharmaceutical manufacturing companies, such as Abbott Diagnostics, Behring, Boehringer Mannheim,Biorad, Chiron, Dade-Behring, DiaSorin, Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson and& Johnson), and Sanofi Diagnostics and Sorin Biomedica; (ii)Diagnostics. (2) 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;Institute, (3) national and (iii)international proficiency providers such as the College of American Pathologists and the European Union Concerted Action for Quality Control and (4) end-users of diagnostic test kits, such as hospital and independent clinical laboratories, including LabCorp, Quest and Smith Klein Beecham,Diagnostics , public health laboratories and blood banks, including the American Red Cross, Swiss Red Cross, and United Blood Services and Kaiser Permanente.Services. The Company's customers for Laboratory Instruments consist of international diagnostic and pharmaceutical manufacturing companies and are generally sold on an OEM basis, for use by hospitals, and clinical and research laboratories. In addition, Laboratory Instruments are sold directly to environmental and food testing laboratories, and wineries. Customers include Mast Immuno Systems, ABX Hematology, Beckman/Hybritech Inc., Vicam, and Toray Fuji Bionics Inc. The Company's Specialty Clinical Laboratory Testingcustomers for specialty clinical testing services are sold toinclude hospital and clinical laboratories, physicians, blood banks, researchers and other health care providers. -12- The Company performs specialty testing services for a major state prison system in connection with a third party laboratory. The Company's Contract Research services are typically offered under contracts to governmentalcustomers for contract research include various agencies diagnostic test kit manufacturersof the National Institutes of Health (NIH) such as the National Institute of Allergies and biomedical researchers.Infectious Disease ("NIAIDS"), the National Cancer Institute ("NCI"), and the National Heart Lung and Blood Institute ("NHLBI"). The Company does not have long-term contracts with its customers for Quality ControlDiagnostic Products and Diagnostic Components. The Company's productsor its Specialty Clinical Testing Services, which are generally sold to its customers pursuant to purchase orders for discrete purchases. Laboratory Instruments are generally sold on an OEM basis are usually done so under a one year contractshort-term contracts with monthly delivery dates. Although theThe Company believes that its relationships with customers are satisfactory, terminationsatisfactory. The Company's Consolidated Financial Statements, including the Notes thereto, set forth in Item 8 of this report provide information relating to the Company's relationship with any one of its customers could have a material adverse effect on the Company.foreign and domestic sales. During the fiscal years 1995, 19961999, 1998 and 1997, sales to the Company's three largest customers accounted for an aggregate of approximately 16%, 18% and 20%, respectively, of the Company's net sales, although the customers were not identical in each period. During the fiscal years 1995, 19961999, 1998 and 1997, the combined revenues to all branches of the National Institutes of Health, a United States Government agency, accounted for approximately 15%, 13% and 13%, respectively, of total consolidated revenues of the Company. While the Company believes that the loss of any one customerof these customers would have an adverse effect on itsthe Company's results, this risk is partially mitigated by the diversity of its customer base within the IVDin vitro diagnostics industry and the different diseases and instrument platforms on which they focus. Manufacturing and Operations The Company manufactures and assembles Diagnostic Products at its facility in West Bridgewater, Massachusetts. Raw materials (primarily plasma and serum) are acquired from a variety of vendors and through a program of donor recruitment, screening, management, and plasma/serum collection and characterization. All important materials have multiple sources of supply. Laboratory Instrumentsinstruments are manufactured and assembled at the Company's facility in Garden Grove, California. RawAll important raw materials and subassembliessub-assemblies are acquired from a variety of vendors with multiple sources of supply. The Company also operates aits specialty clinical laboratory in New Britain, Connecticut, and aits research and development laboratory (including PCT and Panacos activities) in Gaithersburg, Maryland and a repository facility in Frederick, Maryland. See "Item 2 -- 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 -12- quality, price, ease of use, customer service and reputation. In a broader sense, industry competition is based upon scientific and technical capability, proprietary know-how, access to adequate capital, the ability to develop and market products and processes, the ability to attract and retain qualified personnel, and the availability of patent protection. To the extent that the Company's products and services do not reflect technological advances, the Company's ability to compete in those productsits current and servicesfuture markets could be adversely affected. In the area of Quality Control Products, the Company competes in the United States with NABI (formerly North American Biologicals, Inc.) in run controls and quality control panel products.products, with Dade International, Bio-Rad Laboratories, Inc., and Blackhawk Biosystems Inc. in run controls, and with a number of smaller, privately heldprivately-held companies in quality control panels. In Europe, in addition to the above, the NetherlandsDutch Red Cross has recently begun offeringoffers several run control and panel products. The Company believes that all of these competitors currently offer a more limitedless diverse line of panel and run control products than the Company, although there canthe Company cannot be no assurancecertain that these companies will not expand their product lines. -13- In the Diagnostic Components area, the Company competes againstwith integrated plasma collection and processing companies such as Serologicals, Inc. and NABI, as well as smaller, independent plasma collection centers and brokers of plasma products. In the Diagnostic Components area, the Company competes on the basis of quality, breadth of product line, technical expertise and reputation. The laboratory instrument manufacturing industry is diverse and highly competitive. The Company believes its technology base, reputation for reliability, systems integration and service capabilities provide it with a competitive advantage over its competitors which include: Dynatech Corp, Kollsman Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part of Colorado Medtech, Inc.), and SeaMed, as well as numerous, smaller companies, such as Awareness Technology Inc. In the SpecialtyThe Clinical Laboratory Testing services portion of the Company's business, itServices segment competes with large national reference laboratories, such as LabCorp of America Quest Laboratories and SmithKline Beecham ClinicalQuest 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 testing market, it is able to offer its customers a higher value-added service onfor the more complex diagnostic tests than the larger national reference laboratories. BBI Biotech competes primarily with BioReliance Corporation and several universities for research and development contracts and with McKesson Bioservices, Inc., for repository services. Intellectual Property The Company holds as trade secrets current technology used to prepare Basematrix and other blood-based products. None of the Company's Quality Control Products or Diagnostic Components has been patented. The Company relies primarily on a combination of trade secrets and non-disclosure and confidentiality agreements to establish and protect its proprietary rights in its technologythese products and products. There canrelated technology. The Company cannot be no assurancecertain that others will not independently develop or otherwise acquire the same, similar or more advanced trade secrets and know-how. BBI Source has also relied on trade secrets and proprietary know-how for its Laboratory Instruments which it protects in part by entering into confidentiality agreements with persons or parties deemed appropriate by management. In addition, the Company currently has fivesix issued United States patents, and one United States patent application on file, covering significant aspects of the Company's core instrument technology and techniques, as well as several electronic and mechanical designs employed in the Company's existing products. The Company ownshas two United States patents related to its contracts and services work, and, jointlywork. Jointly with UNC,the Uiversity of North Carolina, at Chapel Hill, the Company has fourfive additional United States patents relating to compounds, pharmaceutical compositions, and therapeutic methods, and vaccine preparation in connection with the Company's drug discovery program at -13- UNC. Oneprogram. Two additional United States applicationpatents and foreign applications for all five of the joint patents are pending. The Company intends to continue to seek patent protection for innovations and discoveries arising out of the drug discovery programs. The Company has fifteen pending patent applications for its Pressure Cycling Technology. Several of these have been followed up with foreign applications, and the Company expects to file additional foreign applications in 2000 relating to Pressure Cycling Technology. On March 14, 2000 the Company received notice from the United States Patent Office that one of its applications had been approved and the patent related to pressure cycling control of chemical reactions was issued to the Company. The Company has no reason to believe that its products and proprietary methods infringe the proprietary rights of any other party. There canHowever, the Company cannot be no assurance, however,certain that other parties will not assert infringement claims in the future. BBI(R), Accurun(R), Microchem(R), Chemstat(R), E/LUMINA(R), EXECWASH(R) and Verif-Eye(R) are registered trademarks of the Company. Government Regulation -14- The manufacture and distribution of medical devices, including products manufactured by the Company that are intended for in vitro diagnostic use, are subject to extensive government regulation in the United States and in other countries. In the United States, the Food, Drug, and Cosmetic Act ("FDCA") prohibits the marketing of most in vitro diagnostic products until they have been cleared or approved by the FDA, a process that is time-consuming, expensive, and uncertain. In vitro diagnostic products must be the subject of either a premarket notification clearance (a "510(k)") or an approved premarket approval application ("PMA"). With respect to devices reviewed through the 510(k) process, a company may not market a device for diagnostic use until an order is issued by the FDA finding the product to be substantially equivalent to a legallyan existing FDA cleared, and 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 the 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(r)Accurun(R) Run Controls, when marketed for blood donor screening or diagnostic use, have been classified by the FDA as medical devices.devices that until 1998 required clearance under the 510(k) process. In 1998, new rules took effect that exempted unassayed controls intended for use in diagnostic testing from the requirement for a 510(k) submission. BBI may now label these products "For In Vitro Diagnostic Use" if they are validated according to the Company's protocols and manufactured according to cGMP (current Good Manufacturing Practices, which is FDA guidance for manufacturing processes for medical devices). The FDA still requires 510(k) clearance for assayed controls, and controls intended for use in blood screening. The FDA could, however,in addition, 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 canThe Company cannot be no assurancecertain that the Companyit 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. As of March 1, 1998,2000, a total of nine13 products in the Accurun 1(r)1(R) line and fourteen Accurun(r)18 single analyte Accurun(R) controls have either received 510(k) clearance from the FDA. An additional three Accurun(r) single analyte controlsor have been submitted but have not yet received FDA clearance. Somevalidated according to the Company's protocols and are manufactured according to cGMP. Certain of the Company's Accurun(r) run controlsAccurun(R) Run Controls are currently marketed "for research use only." Such products do not currently 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, or validated prior to marketing, and initiate enforcement action against the Company, which could have a material adverse effect on the Company. The FDA has recently issued a Draft Policy Compliance Guideline, which, if it takes effect as written,currently issued, will strictly limit the sale of products labeled "for research use only." The Company is monitoring this situation, and will adapt its policies as required. BBI Source generally obtains 510(k) and CE approval for all laboratory instrumentation designed and manufactured in its Garden Grove facility. The Company'sCompany is registered as a medical device manufacturer with the FDA for its Diagnostic Products and Laboratory Instruments product groups are both registered as medical device manufacturers with the FDA, and filefiles listings of theirits products semi-annually. The Company's facilities in West Bridgewater, Massachusetts for Diagnostic Products and Garden Grove, California for Laboratory Instruments are FDA Good Manufacturing Practices -14- (FDA/GMP) facilities, and, as such,facilities. The Company must maintain high standards of quality in manufacturing, testing and documentation, and implement strict GMPcGMP guidelines governing reagent and instrument manufacturing. Once cleared or approved, medical devices are subject to pervasive and continuing regulation by the FDA, including, but not limited to good manufacturing practices ("GMP")cGMP regulations governing testing, control, and documentation; and reporting of adverse experiences with the use of the device. OngoingThe FDA monitors ongoing compliance with GMPcGMP and other applicable regulatory requirements is monitored throughby conducting periodic inspections. FDA regulations require agencyFDA 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 -15- labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. Products may be promoted by the Company only for their approved use. Failure to comply with these and other regulatory requirements can result, among other consequences, in failure to obtain premarket approvals, withdrawal of approvals, total or partial suspension of product distribution, injunctions, civil penalties, recall or seizures of products and criminal prosecution. The Company believes that its Quality Control Panels are not regulated by the FDA because they are not intended for diagnostic purposes. The Company believes that its Diagnostic Components, which are components of in vitro diagnostic products, may be subject to certain regulatory requirements under the FDCA and other laws administered by the FDA, but do not require that the Company obtain a premarket approval or clearance. There canThe Company cannot be no assurance,certain, however, that the FDA would agree or that the FDA will not adopt a different interpretation of the FDCA or other laws it administers, which could have a material adverse effect on the Company. The Company's Diagnostic Products and Laboratory Instruments groupsbusiness units are both ISO9001 certified, with registration by TUV Rheinland.Rheinland for the Diagnostic Products unit and British Standard Institute for the Laboratory Instruments unit. The Laboratory Instrument group is also certified to EN46001, a set of supplementary requirements applicable to their products. Laws and regulations affecting some of the Company's products are in effect in many of the countries in which the Company markets or intends to market its products. These requirements vary from country to country. Member states of the European Economic Area (which is composed of members of the European Union members and the European Free Trade Association members)Association) are in the process of adopting various product and service "Directives" to address essential health, safety, and environmental requirements associated with the subject products and services. TheThese "Directives" cover both quality system requirements (ISO Series 9000 Standards and the EN46001 Requirements) and product and marketing related requirements. In addition, some jurisdictions have requirements related to marketing of the Company's products. There canThe Company cannot be no assurancecertain that the Companyit 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(such as the College of American Pathologists), and other national regulatory agencies (Health(such as the Health Care Financing Administration). Studies to evaluate the safety or effectiveness of FDA regulated products (primarily human and animal drugs or biologics) must also be conducted in conformance with relevant FDA requirements, including Good Laboratory Practice ("GLP") regulations, investigational new drug or device regulations, Institutional Review Board ("IRB") regulations and informed consent regulations. -15- The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") prohibits laboratories from performing in vitro tests for the purpose of providing information for the diagnosis, prevention or treatment of any disease, or impairment of, or the assessment of, the health of human beings unless there is in effect for such laboratories a certificate issued by the US Department of Health and Human Services ("HHS") applicable to the category of examination or procedure performed. The Company currently holds permits issued by HHS (CLIA license), Centers for Disease Control and Prevention (Importation of Etiological Agents or Vectors of Human Diseases), the US Department of Agriculture (Importation and Transportation of Controlled Materials and Organisms and Vectors) and the US Nuclear Regulatory Commission (in vitro testing with byproductby-product 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 -16- an exempt small quantity generator of hazardous waste and has a US Environmental Protection Agency identification number. The Company is also registered with the US Nuclear Regulatory Commission for use of certain radioactive materials. The Company is also subject to various state regulatory requirements governing the handling of and disposal of biohazardous, radioactive and hazardous wastes. The Company has never been a party to any environmental proceeding. Internationally, some of the Company's products are subject to additional regulatory requirements, which vary significantly from country to country. Each country in which the Company's products and services are offered must be evaluated independently to determine the country's particular requirements. In foreign countries, the Company's distributors are generally responsible for obtaining any required government consents. Employees As of December 31, 19971999 the Company employed 282288 persons, all of whom were located in the United States. Of these, 102107 persons were employed by the West Bridgewater, Massachusetts company, 6578 by the New Britain, Connecticut company, 4870 by the three Gaithersburg, Maryland company,companies, and 6733 by the Garden Grove, California company. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that it has a satisfactory relationship with its employees. -16--17- Executive Officers of the Registrant The following table sets forth the names, ages and positions of the current executive officers of the Registrant as of December 31, 1997: Name Age Position - ---- --- -------- Richard T. Schumacher 47 President; Chief Executive Officer and Chairman of the Board Kevin W. Quinlan 47 Senior Vice President, Finance; Chief Financial Officer; Treasurer and Director Patricia E. Garrett, Ph.D. 54 Senior Vice President, Regulatory Affairs & Strategic Programs Mark M. Manak, Ph.D. 46 Senior Vice President, Research and Development Richard A Sullivan 57 Senior Vice President, Laboratory Instrumentation Richard C. Tilton, Ph.D. 61 Senior Vice President, Specialty Laboratory Services Barry M. Warren 50 Senior Vice President, Sales & Marketing Ronald V. DiPaolo,1999:
Name Age Position - ---- --- -------- Richard T. Schumacher 49 Chief Executive Officer and Chairman of the Board Kevin W. Quinlan 49 President and Chief Operating Officer; and Director William R. Prather, R.Ph, M.D. 52 Senior Vice President, Finance and Business Development, Treasurer and Director Graham P. Allaway, Ph.D. 44 Senior Vice President, Drug Discovery Patricia E. Garrett, Ph.D. 56 Senior Vice President and General Manager of BBI Clinical Laboratories Mark M. Manak, Ph.D. 48 Senior Vice President and General Manager of BBI Biotech David F. Petersen 53 Senior Vice President and General Manager of BBI Source Richard C. Tilton, Ph.D. 63 Senior Vice President, Science and Technology Barry M. Warren 52 Senior Vice President and General Manager of BBI Diagnostics Kathleen W. Benjamin 43 Vice President, Human Resources Richard D'Allessandro 53 Vice President, Information Technology Ronald V. DiPaolo, Ph.D. 55 Vice President, Manufacturing Richard H. Newhouse, Ph.D. 54 Vice President, Materials Management
Mr. Schumacher, the founderFounder of the Company, has been the President and a Director since 1986, and Chief Executive Officer and Chairman since 1992.1992 and served as President from 1986 to August 1999. Mr. Schumacher served as the Director of Infectious Disease Services for Clinical Science Laboratory, a New England-based medical reference laboratory, from 1986 to 1988. From 1972 to 1985, Mr. Schumacher was employed by the Center for Blood Research, a nonprofit medical research institute associated with Harvard Medical School. Mr. Schumacher received a B.S. in zoology from the University of New Hampshire. Mr. Quinlan, a Director of the Company since 1986, has beenserved as President and Chief Operating Officer since August 1999. From January 1993 to August 1999, he served as Senior Vice President, Finance, Chief Financial Officer and Treasurer since January 1993.Treasurer. 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. Prather, a Director of the Company since 1999, has been Senior Vice President, Finance and Business Development since July 1999. From January 1999 to August 1999, Dr. Prather served as Senior Vice President, Business Development. Prior to joining the Company, Dr. Prather was the Senior Health Care Analyst for the investment banking firm, Cruttenden Roth, Inc., from 1995 to 1998. From 1992 to 1995 he was the Senior Analyst in Health Care for Manning and Napier Advisors. Dr. Prather earned a B.S. in Pharmacy and an MD at the University of Missouri - Kansas City and completed a Clinical Research Geriatric Fellowship at Harvard Medical School. Dr. Prather is a Director of Primed International, a medical device company and a member of the Advisory Board of the Canadian Medical Discovery Fund, Inc., a fund of MDS Capital Corp. Dr Allaway, has served as Vice President and Senior Vice President, Drug Discovery since joining the Company in 1998. Prior to that, from 1997 to 1998, he was CEO of Manchester Biotech (UK). From 1990 to 1997, Dr. Allaway served in various senior management positions including Associate Scientific Director and Head, Therapeutic Development Group at Progenics Pharmaceuticals, Inc., in Tarrytown, New York. From 1984 to 1990 Dr. Allaway was a Visiting Fellow and Visiting Associate at the NIH. Dr. Allaway received an M.A. in zoology from Oxford University and a Ph.D in virology from the University of London. -18- Dr. Garrett has beenserved as Senior Vice President and General Manager of BBI Clinical Laboratories since August 1999. From 1988 to August 1999, she served as Senior Vice President, Regulatory Affairs & Strategic Programs since 1988.Programs. 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 and General Manager of BBI Biotech since August 1999. From 1992 to 1999 he served as Senior Vice President, Research and Development since 1992.Development. From 1980 to 1992, he served as Senior Research Scientist,Director of Molecular Biology and Director of Contracts and Services of Biotech Research Laboratories. Dr. Manak received his Ph.D. in biochemistry from the University of Connecticut and completed postdoctoral research work in biochemistry/virology at Johns Hopkins University. Mr. SullivanPetersen has served as Senior Vice President Laboratory Instrumentation since the Company's acquisition of the business of Source Scientific, Inc. ("Source") in July 1997. Prior to that from 1994 to 1997, Mr. Sullivan was Chairman, President and Chief Executive Officer of Source. He held the position of Executive Vice President and General Manager of BBI Source from 1993since August 1999. From May 1998 to 1994, andAugust 1999, he was Vice President, Sales & Marketing for MicroProbe Corporation from 1989 to 1993. Previously,BBI Source Scientific. Mr. Peterson has 25 years of experience in operations management and materials planning. Before joining the Company in 1988, he was Presidentthe Manager of LAB2000Manufacturing for Matrix Instruments from 1985 to 1988 and previously was Manager of Production and Inventory Control for Farr Company, Inc. from 1977 to 1985. He is certified in Florida, a company specializedproduction and inventory management (CPIM) by the American Production and Inventory Control Society (APICS). He is also an Assistant Professor at California State University Dominguez Hills, where he instructs upper division courses in importmanufacturing techniques and export of clinical and industrial products worldwide. Mr. Sullivanmaterial resource planning. He holds a BSB.S. in Medical Technologybusiness management from the University of Buffalo, New York and a MBA from Pace University, New York.LaVerne in LaVerne, California. Dr. Tilton has served as Senior Vice President, Science and Technology since August 1999. Prior to this time he served as Senior Vice President, Specialty Laboratory Services since the Company's acquisition of BBI Clinical Laboratories, Inc. ("BBICL") in 1993 and was one of the -17- founders of BBICL, where he servedserving as its 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 and General Manager of BBI Diagnostics since August 1999. From 1993 to 1999, he served as Senior Vice President, Sales & Marketing since 1993.Marketing. 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. Ms. Benjamin has served as Vice President, Human Resources since January 1999. Prior to her promotion to Vice President, Ms. Benjamin served as Director of Human Resources and Investor Relations from 1997 to 1999. Prior to joining the Company in 1997 she was employed by Shields Health Care Group, a provider of Magnetic Resonance Imaging and radiation oncology, serving as their Director of Operations from 1992 to 1997. Prior to this time she was an educator. Ms. Benjamin received her B.S., from the College of Life Sciences and Agriculture at the University of New Hampshire. Mr. D'Allessandro has served as Vice President, Information Technology since January 1999. Mr. D'Allessandro joined the Company in 1993 as Director, Management Information Systems and served in that capacity until his promotion to Vice President. Mr. D'Allessandro has 30 years of experience in data processing/information systems technology, with a focus on manufacturing and biotechnology organizations. Mr. D'Allessandro is APICS certified and received his B.S. in Management Information Systems from Northeastern University. Dr. DiPaolo has recently been appointedserved as Vice President, Manufacturing. PriorManufacturing since 1997. From 1993 to that1997, he served as Vice President of Operations since 1993.Operations. Prior to joining the Company, from 1986 to 1989, Dr. DiPaolo served as Vice President and General Manager of the Biomedical Products Division of Collaborative Research, a medical research products company from 1986 to 1989.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. Dr. Newhouse has been Vice President of Materials Management since 1997. Prior to joining the Company, Dr. Newhouse served as Vice President of Laboratory Services for Serologicals Corporation, an Atlanta, Georgia based biopharmaceutical company from 1989 to 1997. Prior to that he was employed for 20 years in several medical diagnostics companies holding titles such as Vice President Operations, Laboratory Director, and Director of Manufacturing. Dr. Newhouse received his Ph.D. in clinical pathology from the University of Maryland.-19- Officers are nominated by the Chief Executive Officer and elected by and serve at the pleasure of, the Board of Directors. ITEM 2. PROPERTIES. The Company owns its corporate offices and Diagnostic Productsdiagnostic products manufacturing facility for its BBI Diagnostics operating segment, which is located in a two story,two-story, 32,000 square foot building in West Bridgewater, Massachusetts. The Company has been renovating and expanding this facility during the past year,three years, and believes that upon completion of renovations, in mid 1998, its facility in West Bridgewater will be sufficient to meet its foreseeable needs.needs for several years. The Company leases 41,000 square feet of space in Garden Grove, California where itits BBI Source business unit manufactures Laboratorylaboratory Instruments. The lease continues until February 1, 2002 and the Company has an option to renew at market rates. The Company leases its laboratory facilities in Gaithersburg and Frederick, Maryland and New Britain, Connecticut. The BBI Biotech segment's Gaithersburg facility contains 36,500 square feet of custom built laboratory and office space, and is occupied under a ten-year lease that is due to expire on October 31, 2007. The Frederick facility contains 36,000 square feet of primarily repository space and is also occupied by the BBI Biotech segment, under a seven-year lease that is due to expire on November 30, 2006. The BBICL business unit occupies the New Britain facility which has 15,000 square feet of usable area, most of which is dedicated to laboratory space. TheThis lease is for five years and is due to expire on July 30, 2000; the Company has anexercised its option to renew the lease for an additional five years. The Company leased approximately 2,500 square feet of laboratory space in Woburn, Massachusetts through August 1999. ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings pending against the Company or its subsidiaries. -18- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter of fiscal 19971999 to a vote of security holders of the Company. -20- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCKEQUITY AND RELATED STOCKHOLDER MATTERS. The Company completed an initial public offering of its Common Stock, $.01 par value, (the "Common Stock") on October 31, 1996. The Common Stock is listed on the NASDAQNasdaq National Market under the symbol "BBII". The following table sets forth the high and low closing price, by quarter, sinceduring the Company's initial public offering. Q1 Q2 Q3 Q4 ------------- ------------- ------------- ------------- High Low High Low High Lowtwo most recent fiscal years:
Common Stock Price ------------------ Fiscal Year Ended December 31, 1999 High Low ----------------------------------- ---- --- First Quarter $3.375 $2.625 ------------- ------ ------ Second Quarter $5.313 $2.750 -------------- ------ ------ Third Quarter $4.562 $3.375 ------------- ------ ------ Fourth Quarter $4.438 $2.750 -------------- ------ ------ Fiscal Year Ended December 31, 1998 ----------------------------------- First Quarter $8.063 $5.125 ------------- ------ ------ Second Quarter $7.313 $4.500 -------------- ------ ------ Third Quarter $5.125 $2.500 ------------- ------ ------ Fourth Quarter $4.375 $2.000 -------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- 1997 10.250 6.063 11.375 7.750 8.875 6.000 8.000 4.875 1996 --- --- --- --- --- --- 8.500 6.750
As of December 31, 1997,March 24, 2000, there were 20,000,000 shares of Common Stock authorized of which 4,622,566approximately 5,441,960 shares were outstanding, held of record by approximately 1,500 stockholders. The Company has not declared or paid any dividends on its Common Stock. In accordance with the terms of the Company's loan agreement with its bank, payment of dividends on Common Stock requires bank approval. The Company does not expect to recommend the payment of a dividend as it plans to continue to reinvest profits to expand its business. -19-In October 1999, MdBio, Inc., an accredited investor, received 29,153 stock units in connection with its award of $175,000 to the Company under a manufacturing incentive program that MdBio instituted. Each stock unit consists of one share of our common stock and a warrant to purchase on additional share of our common stock at an exercise price of $10.00 per share. MdBio's warrants expire on September 29, 2003. MdBio's warrants were not registered under the Securities Act of 1933, as amended, in reliance upon the exemptions from registration set forth in Sections 3(b) and 4(2) of that act, relating to sales by an issuer not involving any public offering. The MdBio transaction did not involve a public offering. -21- ITEM 6. SELECTED FINANCIAL DATA The statement of income data for each of the fiscal years in the five year period ended December 31, 1997,1999, and the balance sheet data as of December 31, 1993, 1994, 1995,1999, 1998, 1997, 1996, and 1997,1995, have been derived from the consolidated financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. ThisCompany. These data should be read in conjunction with Item 8--"Consolidated8--Consolidated Financial Statements and Supplementary Data",Data, and Item 7--"Management's7--Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations appearing elsewhere herein.
Year Ended December 31, ----------------------------------------------------------------- 1999 1998(1) 1997(2) 1996 1995 -------- -------- -------- -------- -------- Consolidated Statement of Income Data: (In thousands, except per share data) REVENUE: Products $11,711$ 14,057 $ 13,075 $ 11,711 $ 8,470 $ 6,622 $ 5,982 $3,942 Services 15,214 13,006 10,588 7,039 5,649 4,741 5,215 --------- --------- --------- ----------------- -------- -------- -------- -------- Total revenue 29,271 26,081 22,299 15,509 12,271 10,723 9,157 --------- --------- --------- ----------------- -------- -------- -------- -------- COSTS AND EXPENSES: Cost of product salesproducts 7,267 7,180 5,773 4,252 3,564 3,194 2,088 Cost of services 11,168 8,897 7,239 4,856 4,168 3,416 3,965 Research and development 3,259 2,461 1,311 797 375 469 279Acquired research and development (3) -- 4,231 -- -- -- Selling and marketing 4,024 3,939 3,241 2,188 1,340 1,192 894 General and administrative 4,442 4,275 3,343 2,401 2,316 2,047 1,619 --------- --------- --------- ----------------- -------- -------- -------- -------- Total operating costs and expenses 30,160 30,983 20,907 14,494 11,763 10,318 8,845 --------- --------- --------- --------- -------- Income-------- -------- -------- -------- (Loss) income from operations (889) (4,902) 1,392 1,015 508 405 312 Interest expense,(expense) income, net (424) (51) 283 (213) (336) (244) (179) --------- --------- --------- --------- -------- Income-------- -------- -------- -------- (Loss) income before income taxes and extraordinary item (1,313) (4,953) 1,675 802 172 161 133 Provision forBenefit from (provision for) income taxes 499 564 (670) (321) (69) (64) (41) --------- --------- --------- --------- -------- Income before extraordinary item 1,005 481 103 97 92 Extraordinary item-gain on elimination of debt, net of income taxes -- -- -- -- 50 --------- --------- --------- ----------------- -------- -------- -------- Net (loss) income $ (814) $ (4,389) $ 1,005 $ 481 $ 103 $ 97 $ 142 --------- --------- --------- ----------------- -------- -------- -------- -------- Net (loss) income per share, basic $ (0.17) $ (0.94) $ 0.23 $ 0.17 $ 0.04 $ 0.04 $ 0.06 Net (loss) income per share, diluted $ (0.17) $ (0.94) $ 0.21 $ 0.14 $ 0.03 $ 0.03 $ 0.05 Number of shares used to calculate net income per share Basic 4,670 4,655 4,438 2,916 2,570 2,552 2,403 Diluted 4,670 4,655 4,780 3,340 3,040 3,019 2,794
December 31, -------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 1993 --------- --------- ----------------- -------- -------- -------- -------- Consolidated Balance Sheet Data: (In thousands, except per share data) Working capital(3)capital $ 9,576 $12,836 $4,688 $4,686 $3,61210,053 $ 9,095 $ 9,633 $ 12,836 $ 4,688 Total assets 23,63026,162 24,082 23,650 19,798 9,928 8,076 6,870 Long term debt, less current maturities(3) 216maturities 7,146 3,989 26 41 4,216 3,180 2,381 Total stockholders' equity 13,646 14,069 18,067 16,290 3,187 3,041 2,762 Dividends -- -- -- -- --
- --------------- (1) Effective September 30, 1998, the Company acquired all classes of stock of BioSeq, Inc., a development stage company with no revenue, for a total purchase price of $4,226,000. (2) Effective July 1, 1997, the Company acquired the business and net assets of Source Scientific, Inc. for $1,994,000 which increased 1997 revenuesrevenue by $2,608,000. (2) On June 30, 1993,(3) Consists of $3,381,000 of in-process research and development related to the Company exercised its optionBioSeq acquisition, and a charge of $850,000 related to pre-pay the acquisition note in connection with the 1992 purchase of BBI Biotech at a substantial discount fromlicense technology in the balance due, resulting in an extraordinary gainfirst quarter of $50,000 net taxes of $33,000. The 1993 net income per share before such extraordinary gain was $0.04. (3) Due to a modification of its maturity date, the Company's demand line of credit with an outstanding amount of $1,895,000 as of December 31, 1993, has been presented as part of long-term debt (and excluded from current liabilities in calculating working capital) for 1993. This change was made to be consistent with its reclassification to long-term debt in 1994 and 1995. -20-1998. -22- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OverviewOVERVIEW The Company generates revenue from products and services provided primarily to the in vitroIN VITRO diagnostic infectious disease industry. ThereAs discussed in Note 6 to the Consolidated Financial Statements, the Company has five operating segments: "Diagnostics," "BBI Biotech," "Clinical Laboratory Services," "Laboratory Instrumentation" and "Other.". Two of these, "Diagnostics" and "Laboratory Instrumentation" manufacture products, although the Laboratory Instrumentation segment also generates service revenue. Within Diagnostics there are two broad product classes: Diagnostic Products and Laboratory Instruments. Diagnostic Products consist of three groups: Quality Control Panels, Accurun(r)Accurun(R) Run Controls, and Diagnostic Components. ServicesThe remaining three segments generate service revenue and consist of Specialty"BBI Biotech", "Clinical Laboratory Services", and "Other" (Two development stage operations focused on research and development). Within BBI Biotech there are three groups: Contract Research, Blood Processing and Repository Services, and research services. Revenue in the "Other" segment consists of both private and NIH funded support for the research activities associated with our pressure cycling technology and drug discovery operations. See Note 6 for a further discussion of the activities of these segments. PRODUCTS The economics and cost structures of the segments have certain differences. The Diagnostics segment has historically been the largest and most profitable segment, both in whole dollars and in operating profit margin, as it operates primarily in a commercial environment with fewer competitors and relatively short product development cycles. The Laboratory Instrumentation segment has been in decline for several years prior to its acquisition in mid 1997, and management is working to turn around this business. It also operates in a highly competitive, low margin business: contract manufacturing of instruments and devices. At the current low sales level of less than $3 million in revenue, it operates significantly under capacity with high overhead, and should significantly benefit from relatively small revenue increases. SERVICES BBI Biotech has been project oriented with a high proportion of its revenue generated from government contracts (for both research and service activities) and assisting the other segments in their new product and service development. It has the highest level of inter-segment activity, and is structured around project tracking of direct costs plus overhead and a low percentage fee. Its financial goal has been to breakeven while contributing to the development of future products and services for the Company. The Clinical Laboratory Testing, Contract Research, Clinical Trials, Laboratory Instrumentation Services segment offers specialty infectious disease testing for hospital, doctors, blood banks and Drug Screening. Inother reference laboratories on a fee per test basis. It operates in a segment of the five full years sincehealthcare field that continues to experience cost containment pressures, and has many competitors. The combination has resulted in operating margin pressures. The "Other" segment's two R&D operations do not currently have any product or service revenue, and none is expected in the near future. Their revenue to date consists of both private and public (NIH) funding of segment research. Most of the expenditures by this segment are for R&D expenses, and general management expenses including patent costs. The Company continues to seek funding from both -23- private and public sources to minimize the impact of their development costs on the Company's acquisition of BBI Biotech Research Laboratories ("BBI Biotech") and BBI Clinical Laboratories, Inc. ("BBICL"), the Company has experienced a shift in revenue mix towards increased product sales, as product revenue as a percentage of total revenue increased from 43.1% in 1993 to 52.5% in 1997, with a corresponding decrease in the percentage of total revenue provided by services. The Company's gross profit margin increased from 33.9% in 1993 to 41.6% in 1997 principally as a result of the increased percentage of higher margin product revenues. Within products, the Company's Quality Control Products (Accurun(r) Run Controls and Quality Control Panels) have higher margins than the Company's Laboratory Instruments and Diagnostic Components. Within services, Contract Research gross margins are lower than other services. However, such contracts enable the Company to maintain certain scientific staff and capability that it might otherwise not be able to afford. The Company intends to continue to concentrate on the growth in sales of its Quality Control Products.overall operating results. QUARTERLY FLUCTUATIONS Historically, the Company's results of operations have been subject to quarterly fluctuations due to a variety of factors, includingprimarily customer purchasing patterns, primarily driven by end-of-year expenditures, and seasonal demand during the summer months for certain laboratory testing services. In particular, in the Diagnostics segment, the Company's sales of its off-the-shelf 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 SpecialtyOEM product sales may peak in any quarter of the year, depending on the production cycle of a given project. Clinical Laboratory Testing hastesting services have generally reached a seasonal peak during the third quarter, coinciding with the peak incidence of Lyme Disease. Research ContractsIn the Company's BBI Biotech segment, research contracts are generally for large dollar amounts spread over a one or twoto five year period,periods, and upon completion, frequently do not have renewal phases. As a result theythese contracts 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 Researchcontract research for customers and Company sponsored research and development. The allocation of certain technical staff to such projects depends on the volume of Contract Research. As a result, research and development expenditures fluctuate due to increases or decreases in Contract Research. To developcontract research performed. Neither the Laboratory Instrumentation segment nor the Other segment are subject to material seasonal variations. RESEARCH AND DEVELOPMENT With the acquisition of BioSeq, Inc and its pressure cycling technology in September 1998 as well as the hiring of a Vice President for the Drug Discovery and Development program and its subsequent formation of a new subsidiary ("Panacos Pharmaceuticals, Inc."), the Company has significantly increased its rate of research and development spending on new technologies in the Other operating segment. In addition, it has continued to focus on the development of new Quality Control Products and support increased sales, the Company hired additional research and development staff in the second half of 1995 andnew tests for its clinical laboratory. Additional sales and marketing staff in 1996 and 1997. The Company intends to continue to add staff to these departments but at a reduced rate. General and administrative expenses are not expected to increase atsupport will be added as needed with the same rate, as the Company has already incurred significant infrastructure expenses.expectation of continued future revenue growth. EXPORT SALES The Company does not have any foreign operations. However, the Company does have significant export sales in Europe, the Pacific Rim countries and Canada to agents under distribution agreements, as well as directly to test kit manufacturers. All sales are denominated in US dollars. Export sales for the years ended December 31, 1995, 1996,1999, 1998, and 1997 were $3.4$4.0 million, $4.3$4.1 million, and $5.2$4.6 million, respectively. The Company expects that export sales will continue to be a significant source of revenue and operating income. -21- Results of Operationsgross profit. -24- 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 December 31 ----------------------
Year Ended December 31, ------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ Revenue: Products 52.5% 54.6% 54.0% Services 47.5 45.4 46.0 ------ ------ ------ Revenue: Products 48.0% 50.1% 52.5% Services 52.0 49.9 47.5 ------ ------ ------ Total revenue 100.0 100.0 100.0 Gross profit 37.0 38.4 41.6 Operating expenses: Research and Development 11.1 9.4 5.9 Acquired research and development - 16.2 - Selling and marketing 13.7 15.1 14.5 General and administrative 15.2 16.4 15.0 ------ ------ ------ Total operating expenses 40.0 57.1 35.4 ------ ------ ------ (Loss) income from operations (3.0) (18.8) 6.2 Interest income (expense) (1.5) (0.2) 1.3 ------ ------ ------ (Loss) income before income taxes (4.5) (19.0) 7.5 Net (loss) income (2.8) (16.8) 4.5 ====== ====== ====== Product gross profit 48.3% 45.1% 50.7% Services gross profit 26.6% 31.6% 31.6%
YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUE Total revenue 100.0 100.0 100.0 Grossincreased 12.2%, or $3,190,000, to $29,271,000 in 1999 from $26,081,000 in 1998. The increase in revenue was the result of an increase in product revenue of 7.5% or $982,000 to $14,057,000 from $13,075,000, and an increase in service revenue of 17.0% or $2,208,000 to $15,214,000 from $13,006,000 in 1998. PRODUCT REVENUE. The product revenue increase was primarily attributable to a $700,000 increase by the Diagnostics segment and a $287,000 increase by the Laboratory Instrumentation segment. The Diagnostics increase was a result of a 15.0% increase in Accurun(R) sales as the Company continued to successfully penetrate the emerging end-user market, and a 57.8% increase in Basematrix sales due to increased outsourcing occurring in the IN VITRO diagnostics industry. These increases were partially offset by a 22.7% decrease in Seroconversion Panel sales, as the consolidation within the IN VITRO diagnostic industry has negatively affected demand for these products. The Laboratory Instrumentation segment achieved a $287,000 or 12.6% increase in instrument sales as it refocused its efforts in OEM contract manufacturing. Management feels that the end-user market will continue to be an area of growth for its Quality Control Products while the outsourcing within the IN VITRO diagnostics market will continue to benefit sales of Diagnostic Components and Laboratory Instrumentation. -25- SERVICE REVENUE. The increase in service revenue was primarily attributable to a $942,000 increase in BBI Biotech, a $2,655,000 increase in Clinical Laboratory Services, and a $434,000 increase in the Other segment revenue. Looking at the individual segments, BBI Biotech's growth was driven by a 43.9% increase in repository services and the start of new contracts in the AIDS Vaccine Support arena. The Clinical Laboratory Services' growth was led by a 55.1% increase in molecular testing. And the Other segment's growth was a result of funding received from both the NIH and the Consortium for Plasma Science, which partially defrayed the cost of pressure cycling technology development. These increases were partially offset by a $1,293,000 decrease in Laboratory Instrumentation services as the Company completed its work on the ABX, Inc., contract in the first quarter of 1999. The Company anticipates that new contracts at the BBI Biotech segment and molecular testing at the Clinical Laboratory segment will also contribute to revenue growth. GROSS PROFIT Overall gross profit 41.6 41.3 37.0 Operating expenses:increased 8.3%, or $831,000, to $10,835,000 in 1999 from $10,004,000 in 1998. Product gross profit increased 15.2%, or $894,000, to $6,789,000 in 1999 from $5,895,000 in 1998 and product gross margin increased to 48.3% in 1999, from 45.1% in 1998. Services gross profit decreased $63,000 to $4,046,000 in 1999 from $4,109,000 in 1998 and service gross margin declined to 26.6% in 1999 from 31.6% in 1998. PRODUCT GROSS MARGIN. The increase in product gross margin was due entirely to the gross margins realized in the Laboratory Instrumentation operating segment, which increased from 17.8% in 1998 to 28.1% in 1999 as the business unit operated at a higher volume, thus realizing better economies of scale compared with 1998 as overhead costs were spread over a greater number of units. Product gross margins at the Diagnostics segment remained relatively steady. Management anticipates that further utilization increases for the Laboratory Instrumentation segment will continue to benefit gross margins. SERVICE GROSS MARGIN. The decrease in service gross margins was realized at all operating segments. The BBI Biotech segment's service gross margin decreased from 26.8% to 19.8%. BBI Biotech margins were adversely affected by startup costs associated with new repository contracts in 1999, primarily the acquisition of freezers, which under the terms of the contract become government property and thus are charged directly to cost of sales. Also, the Clinical Laboratory Services segment realized service gross margins of 30.3% in 1999 versus 32.4% in 1998. This decrease is due to increased competition in the molecular testing arena, which created pricing pressure, negatively affecting margins. Finally, in early 1999 the Laboratory Instruments segment realized a decrease in service gross margins from 52.7% to 46.3%, as it completed the high-margin ABX, Inc. contract in early 1999. The Company feels that service margins will continue to feel pressure from increased competition in the clinical testing market. Furthermore as BBI Biotech expands its repository services, low-margin contracts will account for a greater portion of its total revenue if the Company is not continually successful in obtaining higher margin commercial services work. The other remaining Company segments do not generate service revenues that would significantly impact segment results. -26- RESEARCH AND DEVELOPMENT Research and development 5.9 5.1 3.1costs, exclusive of acquired in-process research and development, increased 32.4% or $797,000 to $3,259,000 in 1999 from $2,461,000 in 1998. A significant portion of the increase is attributable to the operating segment referred to as "Other", which consists of the pressure cycling technology ("PCT") and Drug Discovery activities. The Company increased its PCT expenditures by approximately $893,000 as it completed the design, development, and manufacture of 8 prototype PCT instruments known as "barocyclers". The Company also made significant progress during 1999 with its patents in the nucleic acid extraction and pathogen inactivation areas. The Company's increased expenditures in Drug Discovery by approximately $361,000 resulted in expanded rights under its agreement with the University of North Carolina, at Chapel Hill, and significant progress in the prosecution of patents for the compounds. In addition, the BBI Biotech segment increased its spending to continue its support of the Diagnostics and Clinical Laboratory Services segments. There were two accounting charges in 1998, which were classified on the income statement as acquired in-process research and development. In the first quarter there was an accounting charge of $850,000 related to the acquisition of the worldwide exclusive rights to BioSeq, Inc.'s immunodiagnostic research and development technology. In the third quarter, the Company recorded a charge of $3,381,000 related to in-process technology as a result of the Company's acquisition of BioSeq, Inc. This allocation of the purchase price was based on an independent valuation and was expensed, as no alternative future uses exist. There were no such charges during 1999. SELLING AND MARKETING Selling and marketing 14.5 14.1 10.9expenditures remained relatively flat during 1999 as compared to 1998, across all operating segments. Costs increased only 2.2% or $85,000 to $4,024,000 in 1999 from $3,939,000 in 1998 as the Company effectively managed costs in this area. GENERAL AND ADMINISTRATIVE General and administrative 15.0 15.5 18.9 ------ ------ ------ Totalcosts increased 3.9% or $166,000 to $4,442,000 in 1999 from $4,276,000 in 1998. This increase is attributable to the corporate reorganization that was announced in July of 1999. The reorganization created operating segments, which are directed by a senior vice president and general manager. The reorganization resulted in the classification of the salaries, and other related costs, of two executives in the general and administrative line of the income statement from other income statement lines, to more accurately reflect their new responsibilities. General and administrative costs are expected to increase in 2000, as the reorganization impact will be felt for the entire fiscal year 2000. In addition, 1999 benefited as certain general and administrative personnel costs were capitalized as property and equipment in connection with the implementation of enterprise resource planning systems at the Diagnostics and Laboratory Instruments segments. General and administrative costs at the other segments were flat. OPERATING LOSS As a result of all of the above, the Company experienced an operating loss of $889,000 versus $4,902,000 in 1998. Excluding the $4,231,000 of acquired in-process research and development charges realized in 1998, the Company's operating loss increased by 32.3% or $217,000 to $889,000 in 1999 from $672,000 in 1998. The Diagnostics operating segment realized an increase in operating income of approximately $225,000 or 40.3%, as a result of ed a a 15% increase in sales coupled with a relatively steady -27- product gross margin. Clinical Laboratory Services operating segment realized a significant increase in operating income of approximately $522,000 or 389.6%. as a result of a 37% increase in segment revenues which more than offset a slight decline in that segment's service gross margin. The Laboratory Instrumentation segment only realized a slight reduction, 8.1%, in its operating loss as the improved product gross margin was more than offset by lower service profitability due to the completion of the previously discussed ABX contract. These operational improvements were more than offset by the planned increases in research and development expenditures, which resulted in significant operating losses in the "Other" operating segment of $1,345,000. In addition, the BBI Biotech segment also increased its research and development expenses 35.4 34.7 32.9 ------ ------ ------ Incomeresulting in a loss of $152,000 in 1999 versus income of $67,000 in the prior year. Management anticipates continued strength from operations 6.2 6.5 4.1 Interest income (expense) 1.3 (1.4) (2.7) ------ ------ ------ Income before income taxes 7.5 5.1 1.4 Net income 4.5 3.1 0.8 ====== ====== ====== Product gross profit 50.7% 49.8% 46.2%its Diagnostics and Clinical Laboratory Services gross profit 31.6% 31.0% 26.2% Years Ended December 31,segments. Although the Laboratory Instrumentation segment has realized operating losses since it was acquired in July 1997, and 1996 The most significant eventthe Company believes that the goodwill created in 1997 effecting comparability of resultsconnection with 1996 was the acquisition is realizable as management believes that the segment will begin to generate operating income by the end of 2001. The Company will continue to increase its spending in the Other segment, however, it expects that the impact from this increased spending on the Company's bottom line will be mitigated by the planned sale of the common stock of Panacos and the continued funding support in the area of PCT. The Company had net interest expense of $424,000 in 1999 versus $51,000 in 1998. The Company had used its proceeds from its initial public offering and, at the end of the second quarter of 1998, began to borrow funds from its revolving line of credit to continue its infrastructure and research and development investments. In addition to a higher average borrowing balance in 1999, the Company realized the effects of rising interest rates. The Company recorded tax benefits at its combined federal and state statutory rate of 38% for 1999. Although the Company realized consolidated operating losses for 1999 and 1998 management believes that its valuation allowance is adequate as the Company plans to return to profitability within six to twelve months, at which point it will begin to realize benefit from its federal and state tax assets. The tax benefit rate recognized in 1998 was adversely affected by the in-process research and development charges discussed above. The March 1998 technology license transaction resulted in a temporary difference as the technology license is deductible for tax purposes over a 15-year period, while the September 1998 common stock acquisition resulted in a permanent difference that is never deductible. See Note 10 to Consolidated Financial Statements in Item 8 hereunder for further detail. The Company had a net loss of $814,000 in 1999 versus $4,389,000 in 1998 as a result of the operating loss, the interest expense, and the effective tax rate described above. YEARS ENDED DECEMBER 31, 1998 AND 1997 In July 1997 the Company acquired the business of Source Scientific, Inc. effective July 1, 1997. The acquisition was completed by a wholly ownedwholly-owned subsidiary of the Company, BBI Source Scientific, Inc., ("BBI Source") and was accounted for as an asset purchase. This effected every lineThe income statement for 1997 includes the results of BBI Source for the last six months of the income statement.year, effecting comparability of results with 1998. Total revenue increased 43.8%17.0%, or $6,790,000,$3,782,000, to $26,081,000 in 1998 from $22,299,000 in 1997 from $15,509,000 in 1996.1997. The increase in revenue was the result of a 38.3%an 11.6% increase in product revenue of $3,241,000$1,364,000 to $11,711,000$13,075,000 from $8,470,000,$11,711,000, and a 50.4%22.8% increase in service revenue of $3,549,000-28- $2,418,000 to $13,006,000 from $10,588,000 from $7,039,000 in 1996. Approximately $1,416,0001997. Most of the product increase was attributable to increased sales of Quality Control Products achieved by the Diagnostics segment. The increase in such products was led by Accurun(R) which doubled in sales over the prior year. Also contributing to the increase in product sales was the inclusion of BBI Source (the Laboratory Instruments segment) for the first time, and the balance of the increase was a result of a 34.0% increase in sales of Quality Control Products, particularly Accurun(r) from a higher volume of both new and existing products, offset in part by price decreases. Service revenue included $1,192,000 from inclusion of BBI Source, a 49.1% increase in contract research revenue as a result of new contracts, and a 32.6% increase in specialty clinical laboratory testing revenue as the Company's HIV PCR test introduced in September 1996, was offered for a full year in 1998 versus a half-year in 1997. Overall for both products and services, prices declined slightlyThe decrease in 1997 versus 1996. In summary, even after excludingQuality Control Panel sales at the Diagnostics segment partially offset the product sales increases, as sales fell short of expectations due to consolidation in the IN VITRO diagnostic test kit industry. The BBI Source,Biotech segment led the Company's total revenue increased 27.0% in 1997 compared to 1996 with a 21.5% increase in product revenue, and a 33.5% increase in service revenue on strong volume performance by Quality Control Products,with a 49.8% increase in contract research, and specialty clinical laboratory testing. Grossresearch. Also contributing to the increase in service revenue was the Clinical Laboratory Testing segment, realizing a 19.5% increase in revenue. Overall gross profit increased 45.1%7.7%, or $2,886,000,$717,000, to $10,004,000 in 1998 from $9,287,000 for 1997 from $6,401,000 in 1996.1997. Product gross profit increased 40.8%decreased 0.7%, or $1,720,000,$43,000, to $5,895,000 in 1998 from $5,938,000 in 1997 from $4,218,000 in 1996 and product gross profit margin increaseddecreased to 50.7%45.1% in 1998 from 50.7%. In 1997 from 49.8%. The productsthe Diagnostics segment's product gross margin increasebenefited from significant one-time sale of two "World-Wide Panels," which have unusually high gross margins due to their unique characteristics. These panels sold out in the first quarter of 1998, with minimal impact on 1998. The remaining product gross margin decrease was athe result of a favorable shift in product mix towards Accurun sales and overall volume increase, thereby spreading fixed costs over a larger base, and despite a lower gross profit margin in BBI Source's instrument sales.capacity utilization at the Laboratory Instrumentation segment. Services gross profit increased 53.5%22.7%, or $1,167,000,$759,000, to $4,109,000 in 1998 from $3,350,000 in 1997 from $2,183,000 in 1996 as the testing volume increasedand gross margin remained steady at a faster rate than laboratory headcount, thereby -22- causing the services gross profit margin to increase to 31.6% in 1997 from 31.0%1998 and 1997. Higher margins generated by the Contract Services and Laboratory Instrumentation segments offset the decrease in 1996. BBI Source's service gross profit margin was slightly higher thanmargins realized by the Company average, which is expected to continue.increased pricing pressure facing the Clinical Laboratory Testing segment Research and development expenditures increased 64.6%87.7%, or $514,000,$1,150,000, to $2,461,000 in 1998 from $1,311,000 in 1997 from $797,000 in 1996.1997. The increase resulted primarily fromwas realized across all of the segments. The Laboratory Instrumentation segment invested in new Laboratory Instrument development activities at BBI Source, as well asreflectance technology for its Verif-Eye product line. The Diagnostics segments also increased its development expenditures, specifically for Accurun(r),development of Accurun(R) molecular and immunological Run Controls, andControls. The Company invested in development of new specialized molecular assays.assays for use by the Clinical Laboratory Testing segment. Finally, the Company began the development of PCT as it acquired BioSeq, Inc (one component of the Other segment) in September 1998. There were two accounting charges during the twelve months ended December 31, 1998, which were classified on the income statement as acquired in-process research and development. In the first quarter there was an accounting charge of $850,000 related to the acquisition of the worldwide exclusive rights to BioSeq Inc.'s immunodiagnostic research and development technology. In the third quarter, the Company recorded a charge of $3,381,000 related to in-process technology as a result of the Company's $4,226,000 acquisition of BioSeq, Inc. Selling and marketing expenses increased 48.1%21.5%, or $1,053,000,$698,000, to $3,939,000 in 1998 from $3,241,000 in 1997 from $2,188,000 in 1996.1997. The increase was attributable primarily to an eleven person expansioninclusion for a full year in 1998 of the expanded TQS sales, marketing, and technical support staff and related increased trade show and travel expenses. In addition,added to the inclusionDiagnostics segment in the spring of BBI Source added $167,000 of expense to1997. The Company also expanded its presence at tradeshows, resulting in higher expenditures in this category. General and administrative costs increased 39.2%27.9%, or $942,000,$933,000, to $4,276,000 in 1998 from $3,343,000 in 1997 from $2,401,000 in 1996. This increase was attributable primarily to: the addition of a Director of Human Resources and wide area network systems analyst; higher expenditures for accounting and legal professionals and investor relations activities in our first full year as a public company; increased travel associated with the BBI Source acquisition; and non-recurring moving costs of $40,000 associated with moving BBI Biotech Research Laboratories to a new facility in Gaithersburg Maryland. These increases were partially offset by a lower provision for doubtful accounts as a result of improved accounts receivable collections from patients at the Company's clinical reference testing laboratory. In addition, the inclusion of BBI Source added $442,000 of expense to this category. Operating income increased 37.1%, or $377,000, to $1,392,000 in 1997 from $1,015,000 in 1996. This increase was primarily a result of continued strong performance in the Company's Quality Control Products business and clinic reference testing laboratory, partially offset by a loss at BBI Source of $189,000. The Company had net interest income of $283,000 in 1997 versus net interest expense of ($213,000) in 1996 as substantially all of the Company's debt was repaid in November 1996 with a portion of the proceeds from its IPO. The Company had positive cash balances to invest for all of 1997. Net income increased 108.9%, or $524,000, to $1,005,000 in 1997 from $481,000 in 1996. Of this increase, 43% was attributable to higher operating income, and the balance was due to the shift from net interest expense in 1996 to net interest income in 1997. Diluted earnings per share increased 50% to $0.21 for 1997 versus $0.14 in 1996. This increase was achieved even though weighted average diluted shares outstanding increased 43%. Basic earnings per share increased 35% to $0.23 for 1997 versus $0.17 in 1996. Years Ended December 31, 1996 and 1995 Total revenue increased 26.4%, or $3,239,000, to $15,509,000 in 1996 from $12,271,000 in 1995. The increase in revenue was the result of a 27.9% increase in product revenue of $1,848,000 to $8,470,000 from $6,622,000, and a 24.6% increase in service revenue of $1,390,000 to $7,039,000 from $5,649,000 in 1995. The increase in product revenue was attributable to an increase in the volume of sales of Quality Control Products, particularly Accurun. The increase in service revenue was primarily the result of increased volume of specialty clinical laboratory testing and a favorable mix shift towards higher priced molecular testing, and the impact of two new research contracts. This was partially offset by lower volume of clinical trial services. Gross profit increased 41.0%, or $1,862,000, to $6,400,599 for 1996 from $4,539,000 in 1995. Products gross profit increased 38.0%, or $1,160,000, to $4,217,000 in 1996 from $3,057,000 in 1995 and products gross profit margin increased to 49.8% in 1996 from 46.2%. The products gross margin increase was a result of a favorable mix shift towards Accurun sales. Services gross profit increased 47.3%, or $701,000, to $2,183,000 in 1996 from $1,481,000 in 1995 as the testing volume increased at a -23- faster rate than laboratory headcount increased, and thereby caused the services gross profit margin to increase to 31.0% in 1996 from 26.2% in 1995. Research and development expenditures increased 112.1%, or $421,000, to $797,000 in 1996 from $376,000 in 1995. The increase resulted from increased costs of personnel hired in the second half of 1995 to step-up the rate of new product introductions, and increased research project expenditures. Development projects included Accurun(r), molecular and immunological Run Controls, specialized molecular assays, and expenditures related to the Company's drug discovery program. Selling and marketing expenses increased 63.3%, or $848,000, to $2,188,000 in 1996 from $1,340,000 in 1995. The increase was attributable primarily to additional sales and marketing staff and overhead; increased advertising, promotion, trade show and travel expenses due to the commencement of the Company's "Total Quality System" (TQS) marketing campaign; and costs associated with participation by the Company's Specialty Clinical Laboratory in the Roche Diagnostics' Amplicor( Access program in connection with Roche's launch of their new FDA approved HIV PCR test kit. The Amplicor( kit is primarily used to monitor the HIV viral load (level) in patients prior to and during drug therapy. General and administrative costs increased 3.7%, or $85,000, to $2,401,000 in 1996 from $2,316,000 in 1995. This increase was attributable primarily to additional staffing in support staff, and increased information systems consulting and investor relations activities at the Diagnostics segment, which includes the majority of Company growththe corporate functions and higher reserve provisionsofficers for doubtful accounts associated withboth periods. In addition, the increased volumeinclusion of revenue relatedthe Laboratory Instrumentation segment for a full year added $412,000 of expense to testing in situations in which payment tothis category. -29- As a result of all of the above, the Company depends on collecting from the patient rather than a healthcare institution. Operatingexperienced an operating loss of $4,902,000 versus income increased 100.0%, or $507,000, to $1,015,000of $1,392,000 in 1996 from $508,000 in 1995.1997. This increasedecrease was primarily a result of the acquired in-process research and development expense, a very strong performance inhigher operating loss at the Company's Quality Control Products businessLaboratory Instrumentation segment, increased research and clinic reference testing laboratory. Netdevelopment expenditures at all segments, and lower profitability at its Diagnostics and Clinical Laboratory Testing operating segments. The Company had net interest expense decreased 36.6%, or $123,000, to $213,000of $51,000 in 1996 from $336,0001998 versus interest income of $283,000 in 1995, as1997. The Company had used the proceeds from the Company'sits initial public offering were usedand, at the end of the second quarter of 1998, began to pay down almost all debtborrow funds from its revolving line of credit to continue its infrastructure and research and development investments. The Company provided taxes at the combined federal and state rate of 38% for 1998 versus 40% in early November, and the remaining amount invested in short term, investment grade securities. Netprior year. The rate decrease was the result of offsetting the Massachusetts taxable income increased 367.2%of the Diagnostics operating segment with the Massachusetts losses of BBI BioSeq, Inc., or $378,000, to $481,000 in 1996This benefit was adversely impacted by the tax treatment of the acquired in-process technology from $103,000 in 1995. Diluted earnings per share increased 325% to $0.14 for 1996 versus $0.03 in 1995. Weighted average diluted shares outstanding only increased 10% in 1996 over 1995BioSeq, Inc. as the Company's shares issuedacquisition was structured as a stock purchase. Therefore, the effective benefit rate for 1998 was approximately 11%. The Company had a net loss of $4,389,000 in connection with its IPO were outstanding for only two months1998 versus net income of $1,005,000 in 1996. Basic earnings per share increased 312%1997 as a result of the operating loss described above and a shift to $0.17 for 1996interest expense in 1998 versus $0.04interest income in 1995. Liquidity and Capital Resources1997. -30- LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997,1999, the Company had cash and cash equivalents of approximately $2,772,000$315,000 and working capital of $9,633,000. Trade$10,053,000. Gross trade accounts receivable increased $2,143,000$483,000 or 62.7%, primarily from the inclusion of BBI Source in the year end balance sheet for the first time, and significant growth in fourth quarter revenue in 1997. Inventory increased $1,723,000 or 41.2%, again primarily due to the inclusion of BBI Source for the first time, and the addition of 39 new products to inventory. On October 31, 1996, the Company's Common Stock commenced trading on the NASDAQ7.2% as a result of completinga 7.8% increase in revenues in the initial public offeringfourth quarter of its common stock ("IPO")1999 versus the same period in 1998. Inventory increased $228,000 or 3.4%, selling 1,600,000 shares at $8.50 per share. Net proceeds received after underwriting discounts, commissions and offering costs was approximately $11,633,000. On November 5, 1996,related primarily to work-in-process for upcoming projects within the Company repaid substantially all of its outstanding bank debt which totaled approximately $3.9 million.Diagnostics segment. The Company has financed its operations to date through cash flow from operations, borrowings from banks and salesthe sale of equity.its common stock. The Company expects its cash flow, working capital, and cash positionavailable borrowings under its revolving line of credit to meet existing operational needs althoughin 2000. In mid 1999 the Company and its revolvingbank agreed to a modified borrowing agreement with revised financial covenants, which the Company expects will meet existing operational needs for the foreseeable future. At December 31, 1999 the Company was in compliance with its financial covenants. In addition, in March 2000 the Company received a signed term sheet from a bank for a mortgage of the Company's West Bridgewater, MA facility. The Company anticipates that it will complete the transaction in the beginning of the second quarter of 2000. The Company intends to use the $2,500,000 of cash generated to pay down its existing line of credit will be available as needed for working capital. -24-credit. Net cash provided byused in operations for 19971999 was $727,000$657,000 as compared to $1,460,000$1,215,000 in 1996. As discussed above, this1998. This decrease in operational use of cash flow was primarily attributableis due to carrying additionalimproved management of working capital, including better utilization of inventory and more effective management of payables and receivables. The $123,000 increase in reserve for doubtful accounts receivable and inventory as of year end. This was partially offset by anthis improvement of operational cash flow. The Company increased its reserve because there has been a gradual shift in the Company's customer mix from large, well known, IN VITRO diagnostics manufacturers to a more diversified customer matrix, which includes smaller, less established companies. While the Company has not yet experienced a significant increase in deferred revenue from a payment of $331,000 under a research contract for future clinical trial services, and a net increase in accounts payable and accrued expenses of $696,000. Also benefiting net cash from operations for 1997 was a $290,000 reduction in current federal tax liabilitywrite-off's as a result of non-qualified stock option exercises. Cash flow used in operations in 1995 was $29,000 as working capital needs due to sales growth exceeded cash generated from net income adjusted by non cash expenses.this shift, management feels that establishing the current level of reserve is prudent. Cash used in investing activities for 1997, 19961999, 1998 and 19951997 amounted to $2,731,000, $5,462,000, and $5,396,000, $1,412,000,respectively. Substantially all of the investing activities in 1999 related to additions of property and $1,320,000, respectively.equipment. These expenditures included approximately $1,138,000 of computer hardware and software, including approximately $807,000 invested in new enterprise resource planning systems for the Diagnostics and Laboratory Instrumentation segments. The BBI Biotech segment spent approximately $522,000 on leasehold improvements as it prepared a new facility in Frederick, Maryland for the repository contract with the National Institute of Allergy and Infectious Disease, Division of AIDS. In addition, to normal capital expenditures,the Company continued construction at its BBI Diagnostics facility in West Bridgewater, Massachusetts as it spent approximately $352,000 improving this manufacturing facility. In 1998, three major items accounted for most of the Company's investing activities. First, effective September 30, 1998, the Company completed the acquisition of the remaining common stock of BioSeq, Inc., for a cash expenditure of $2,557,000. Second, $1,460,000 was expended for additional improvements at the Company's Massachusetts and Maryland facilities. Finally, $437,000 was spent on software, hardware and implementation costs for the enterprise resource planning system. In 1997, four items accounted for most of the 1997 investing activities. First, the Company exercised its option to purchase an additional 165,000 shares of BioSeq, Inc. stock at an aggregate cost of $750,000, thereby increasing its ownership of BioSeq to 19.9%. Second, in May 1997, the Company's BBI Biotech subsidiary signed a ten year lease for new laboratory space in Gaithersburg, Maryland and spent $566,000 on leasehold improvements for new laboratory space for its contract research and product development activities. Third, the expansion and renovation of its Diagnostic ProductsBBI Diagnostics manufacturing facility in West Bridgewater, Massachusetts, commenced -31- construction and approximately $920,000 was expended as the project is now over two-thirds complete.expended. Finally, effective on July 1, 1997, the Company completed the acquisition of the business and net assets of Source Scientific, Inc. at a purchase price of $1,994,000 including acquisition costs. TheDuring 1999, net cash provided by financing activities was approximately $3,555,000 from a combination of net borrowings of $3,164,000 under the revolving line of credit, and proceeds of $206,000 from the sale of stock and stock warrants to third party investors. In addition, the Company has accounted forrealized proceeds of $148,000 and $37,000 from the acquisition as an asset purchase,sale of stock and is amortizing goodwillthe exercise of approximately $2.2 million over 15 years. See Note 2 tostock options, respectively. During 1998, net cash provided by financing activities was $4,052,000 from a combination of net borrowings of $3,963,000 under the Company's Notes to Consolidated Financial Statements in Item 8 hereunder. The cash used in investing activities in 1996 includedrevolving line of credit, and proceeds of $89,000 from the initial investment in BioSeq, Inc.exercise of $732,500, while 1995 included the purchase of the Company's West Bridgewater facility for $806,000.stock options. During 1997, net cash generated from financing activities included $300,000 from the exercise of warrants, and $182,000 from exercising stock options. Also in 1997, $1,124,000 was used to pay down debt acquired in connection with the Source acquisition. In 1996, net cash generated from common stock issued, including the IPO, approximated $12,600,000. This was used to pay down net debt of $4,577,000. Net cash provided by borrowings for 1995 amounted to $1,240,000, and net proceeds from the sale of Common Stock for the same period was approximately $176,000. The proceeds of such debt were used for working capital, to acquire the West Bridgewater property and to purchase capital equipment. In 1997, 1996 and 1995 capital expenditures amounted to $2,613,000, $669,000, and $1,316,000, respectively. The 1997 expenditures included both the Massachusetts and Maryland facility improvement, and the 1995 expenditures related to the purchase of the West Bridgewater facility, all as discussed above. On April 26, 1996 the Company entered into a new five year distribution agreement with Kyowa Medex, Co., Ltd., a foreign distributor, extending a six year old relationship. Simultaneously, Kyowa purchased 117,647 shares of the Company's Common Stock at a price of $8.50 per share. Under the distribution agreement, Kyowa has been granted an exclusive right to sell and distribute the Company's products in Japan and to continue to purchase product from the Company at a discount. In return, Kyowa is obligated to achieve certain minimum sales levels, provide market, sales and regulatory information, and has agreed not to compete with the Company. On March 9, 1998, the Company announced plans to modify a previously announced 3-year contract with ABX Hematology, Inc. ("ABX") and its parent company, ABX Hematologie, SA (France). Under the contract, the Company provided technical, customer and field services for instruments sold by ABX in the United States. Under the modified agreement, individual customer service contracts will be assigned to ABX and ABX will assume responsibility for its United States instruments. The Company will provide certain consulting services through March 1999 to assist ABX in establishing a sales, customer service, technical support, and field service operation in the United States for its hematology -25- instrument and reagent business. In addition, the Company has agreed to allow ABX to occupy space at its California facility during the period of the agreement. The Company's personnel associated with this contract, included the nationwide field service organization and hotline technical support, will be offered employment by ABX. The Company is accounting for its investment in BioSeq on the cost-basis in accordance with the provisions of APB 18 since its cumulative investment is less than 20% of the equity of BioSeq and the Company does not exert significant influence or control. BioSeq needs to obtain additional financing in 1998 to continue operations and there can be no assurances that any such financing will be available upon acceptable terms. Due to the uncertainty of technology based development stage enterprises, the Company performs a periodic analysis of the investment to determine whether the carrying value of its investment in BioSeq has been other than temporarily impaired. In performing the analysis of its investment in BioSeq for the current year, management considered BioSeq's positive factors including its technology, patent positions, business prospects, and the possibility of raising capital and achieving financial success; as well as its negative cash flow and net worth, and limited cash and other resources, and failure to date to raise significant capital independent of the Company. Management has concluded that its investment has not been other than temporarily impaired, if at all. If it is subsequently determined to be impaired, the Company will adjust the carrying value of its investment by taking a charge to earnings which could amount to the full value of its $1,482,500 investment as of December 31, 1997. See also Note 14 relating to the Company's $600,000 purchase of certain technology rights from BioSeq. The Company anticipates significant capital expenditures in 2000 to begin slowing downcontinue as it plans to compete renovations to its manufacturing facility in 1998Massachusetts and its repository facility in Frederick, Maryland. In addition to the renovations, the Company intends to continue its enterprise resource planning system implementation, as most of the Marylandit installs new systems at BBICL and approximately two-thirds of the Massachusetts projects have been completed.BBI Biotech. The Company believes that existing cash balances, the borrowing capacity available under the revolving line of credit, and cash generated from operations and proceeds from the issuance of its common stock are sufficient to fund operations and anticipated capital expenditures for the foreseeable future.in 2000. Except for purchase orders in connection with the manufacturing expansion, there were no material financial commitments for capital expenditures as of December 31, 1997.1999. In February of 2000, the Company received notice that certain warrant holders exercised 500,000 warrants. This exercise will result in proceeds to the Company of approximately $2,100,000, net of transaction costs, when the transaction closes, pursuant to completing the registration of the underlying shares. YEAR 2000 READINESS DISCLOSURE Our Year 2000 Computer Systems Compliance Concerns have been widely expressed regarding("Y2K") program was designed to minimize the inabilitypossibility of certain computer programs to process date information beyond year 1999. These concerns focus on the impact of theserious Year 2000 problem oninterruption. In 1997 the Company decided to significantly upgrade its "business system" (all computer hardware and software used to run its business operations and the potential costs associated with identifying and addressing the problem. The Company is in the process of evaluating and taking steps to deal with the potential impact of this problem in areas under its control, including its products and sources of supply, as well as its operations management, administration and financial systems. Basedsystems). Specifications were developed for desired capabilities, including Year 2000 compliance and the Company began to assess various enterprise resource planning systems ("ERP System") in 1998. Additionally, the Company organized a task force at each operating segment to review other infrastructure areas including communications systems, building security systems and embedded technologies in areas such as laboratory instruments and manufacturing equipment. The Company also began to survey mayor suppliers, distributors, and customers to determine the status and schedule for their Year 2000 compliance. During the fourth quarter of 1999 the Company completed the ERP implementation at the two of the Company's subsidiaries. The other subsidiaries received upgraded, Year 2000 compliant versions of existing software. The Company spent less than $200,000 to prepare for Y2K. This amount includes the cost to upgrade existing software packages to compliant versions, use of existing resources to execute surveys and measure results, and incremental costs associated with other infrastructure areas. This amount excludes all costs associated with the implementation of the ERP Systems which was completed for reasons beyond Y2K compliance. Possible Year 2000 worst case scenarios include the interruption of significant parts of our business as a result of internal business system failure or the failure of the business systems of the Company's suppliers, distributors or customers. Any such interruption may have a material adverse impact on its reviewour future results. Although no significant problems have been noted to date, the Company believesacknowledges that its products are "Year 2000 compliant." The Company plans to correct or replace its administrative and business systems in time to avoid material problems. The Company has confirmed with existing software vendorsthere is still risk that Year 2000 compliant versions either exist or will be available to upgrade or replace its operations management, administrative and financial systems. Where it believes that a particular supplier's situation poses unacceptable risks, the Company plans to identify an alternative source. Based upon its review, the Company does not believe that the Year 2000 problem willsuch problems may occur. Any such interruption could have a material adverse affectimpact on the Company. However, there can be no assurances that failure to comply with Year 2000 by parties outside its control will not have a material adverse affect onfuture results of the Company. -26- Recent Accounting Pronouncements Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 130)133) is effective, as amended for quarters of fiscal years beginning after DecemberJune 15, 1997. SFAS 1302000. The new standard requires thatcompanies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in comprehensive incomethe values of those derivatives would be shownaccounted for depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in a financial statement that is displayed withachieving offsetting changes in fair value or cash flows. The Company does not currently engage in derivative trading or hedging activity. -32- In December 1999, the same prominence as otherStaff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). This SAB summarizes certain of the Staff's views in applying generally accepted accounting principles, in the United States, to revenue recognition in financial statements. The Company will adopt SFAS 130 in fiscal year ended December 31, 1998. Adoption of this statement is not expected to have an impact on the Company's consolidated financial position and results of operations. Segment Reporting Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131)SAB 101 is effective for financial statements for periods beginning after December 15, 1997. This statement will change the way companies report annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers.Company's quarter ended June 30, 2000. The Company will adopt SFAS 131 indoes not expect the fiscal year ended December 31, 1998. Adoptionprovisions of this statement is not expectedSAB 101 to have ana material impact on the Company's consolidatedits financial position and results of operations.statements. Forward - Looking Information The Annual Report on Form 10-K contains forward-looking statements concerning the Company's financial performance and business operations. The Company wishes to caution readers of this Annual Report on Form 10-K that actual results might differ materially from those projected in the forward-looking statements contained herein. Factors which might cause actual results to differ materially from those projected in the forward-looking statements contained herein include the following: finalization of SEC guidelines for valuation of in-process research and development as it relates to purchase accounting; inability of the Company to develop the end userend-user market for quality control products; inability of the Company to integrate the business of Source Scientific, Inc. into the Company's business; inability of the Company to grow the sales of Source Scientific, Inc. to the extent anticipated; failurethe renewal and full funding of contracts with National Institutes of Health (NIH), National Heart, Lung and Blood Institute (NHLBI) and other government agencies; the inability of the Company to execute a definitive agreement with ABX Hematologie fordevelop the transfer to themtechnology recently acquired as part of certain service activities in connection with the letter of intent to modify the existing contract; a material adverse change in the business, financial condition or prospectsits purchase of BioSeq, Inc., an early stage biotechnology company in which the Company has made a significant investment, including inability to develop its technology to the level of commercial utilization; the inability of Panacos to obtain sufficient funding to progress to more advanced stages of development, the failure of Panacos to identify and successfully commercialize any new drugs or vaccines, the inability of the Company to obtain an adequate supply of the unique and rare specimens of plasma and serum necessary for certain of its products; significant reductions in purchases by any of the Company's major customers; the interruption of significant parts of the Company's business as a result of internal business system failure or the failure of the business systems of its suppliers, distributors or customers due to the inability of such systems to properly interpret dates subsequent to December 31, 1999; and the potential insufficiency of Company resources, including human resources, plant and equipment and management systems, to accommodate any future growth. Certain of these and other factors which might cause actual results to differ materially from those projected are more fully set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-1 (SEC File No. 333-10759). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable -27-The Company is subject to interest rate risk in connection with its long-term debt. The aggregate hypothetical loss in earnings for one year of those financial instruments held by the Company at December 31, 1999 that are subject to interest rate risk resulting from a hypothetical increase in interest rates of 10 percent is less than $100,000, after-tax. The hypothetical loss was determined by calculating the aggregate impact of a 10 percent increase in the interest rate of each variable rate financial instrument held by the Company at December 31, 1999, that is subject to interest rate risk. Fixed rate financial instruments were not evaluated, as the Company believes the risk exposure is not material. The Company is exposed to concentrations of credit risk in cash and cash equivalents and trade receivables. Cash and cash equivalents are placed with major financial institutions with high quality credit ratings. Trade receivables credit risk exposure is significant as the Company derives a significant portion of its revenues from a small number of customers however this risk is mitigated by the dispersion across different industries and geographies in which the customers operate; in addition to this, the largest customer (approximately 15% of 1999 consolidated revenue) was the NIH, a U.S. Government agency. The Company is exposed to credit-related risks associated with its trade accounts receivable denominated in U.S. Dollars but receivable from foreign customers. -33- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 1997 1996 ------------- -------------- ASSETS ------ CURRENT ASSETS:-------------------------------- 1999 1998 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $2,772,360 $8,082,642$ 314,923 $ 146,978 Accounts receivable, less allowances of $446,517$746,797 in 19971999 and $352,058$623,710 in 1996 5,558,710 3,415,9941998 6,446,318 6,086,693 Inventories 5,902,821 4,180,3346,917,916 6,689,768 Prepaid expense and other 288,481 239,950expenses 344,353 479,983 Deferred income taxes 328,562 283,200 ------------- ------------934,790 847,268 ----------- ----------- Total current assets 14,850,934 16,202,120 ------------- ------------14,958,300 14,250,690 ----------- ----------- Property and equipment, net 4,980,164 2,699,1588,295,024 6,925,423 OTHER ASSETS: Long term investment 1,482,500 732,500 Goodwill and other intangibles, net 2,212,220 95,3022,589,310 2,809,825 Deferred income taxes 220,535 -- Notes receivable and other 124,178 69,234 ------------ ------------ 3,818,898 897,036 ------------ ------------99,171 96,447 ----------- ----------- 2,909,016 2,906,272 ----------- ----------- TOTAL ASSETS $23,649,996 $19,798,314 ============ ============$26,162,340 $24,082,385 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 2,552,268 $ 2,369,495 Accrued compensation 1,189,140 1,284,162 Accrued income taxes 112,487 -- Other accrued expenses 1,028,667 795,642 Current maturities of long term debt $ 14,878 $ 12,820 Accounts payable 2,218,685 991,839 Accrued compensation 1,103,837 840,666 Accrued income taxes 132,802 427,140 Other accrued expenses 498,247 264,26222,414 15,569 Deferred revenue 1,249,024 829,477 -------------- 690,760 ----------- ----------- Total current liabilities 5,217,473 3,366,204 ------------4,904,976 5,155,628 ----------- ----------- LONG-TERM LIABILITIES: Deferred rent and otherLong term debt, less current maturities 7,145,651 3,988,602 Other liabilities 215,937 40,948465,590 730,138 Deferred income taxes 149,333 101,580-- 139,363 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 20,000,000 shares in 19971999 and 1996;1998; issued and outstanding 4,622,5664,773,365 in 19971999 and 4,378,1574,667,816 in 1996 46,226 43,7821998 47,734 46,679 Additional paid-in capital 16,029,049 15,258,656 Retained earnings 1,991,978 987,144 ------------ ------------16,809,242 16,418,716 Accumulated deficit (3,210,853) (2,396,741) ----------- ----------- Total stockholders' equity 18,067,253 16,289,582 ------------ ------------13,646,123 14,068,654 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $23,649,996 $19,798,314 ============ ============$ 26,162,340 $ 24,082,385 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements -28--34- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------------- ------------ ------------ REVENUE: Products $11,711,026 $ 8,469,89014,056,657 $ 6,621,63113,075,085 $ 11,711,026 Services 15,214,431 13,005,991 10,588,311 7,039,406 5,649,099 ------------------------- ------------ ------------ Total revenue 29,271,088 26,081,076 22,299,337 15,509,296 12,270,730 COSTS AND EXPENSES: Cost of product salesproducts 7,267,273 7,179,920 5,773,417 4,252,068 3,564,241 Cost of services 11,168,595 8,897,046 7,238,527 4,856,630 4,167,625 Research and development 3,258,542 2,461,316 1,311,190 796,805 375,712Acquired research and development -- 4,230,812 -- Selling and marketing 4,023,791 3,938,753 3,241,422 2,188,152 1,339,792 General and administrative 4,441,524 4,275,627 3,342,829 2,400,681 2,315,814 ------------------------- ------------ ------------ Total operating costs and expenses 30,159,725 30,983,474 20,907,385 14,494,336 11,763,184 Income(Loss) income from operations (888,637) (4,902,398) 1,391,952 1,014,960 507,546 Interest income (expense), net 282,771 (212,969) (335,899) -------------6,146 27,901 295,998 Interest expense (430,593) (78,621) (13,227) ------------ ------------ Income------------ (Loss) income before income taxes (1,313,084) (4,953,118) 1,674,723 801,991 171,647 Provision forBenefit from (provision for) income taxes 498,972 564,399 (669,889) (320,771) (68,657) ------------------------- ------------ ------------ Net (loss) income $ (814,112) $ (4,388,719) $ 1,004,834 $ 481,220 $ 102,990 ========================= ============ ============ Net (loss) income per share, basic $ (0.17) $ (0.94) $ 0.23 $ 0.17 $ 0.04 Net (loss) income per share, diluted $ 0.21(0.17) $ 0.14(0.94) $ 0.030.21 Number of shares used to calculate net (loss) income per share Basic 4,669,717 4,654,609 4,437,801 2,915,522 2,569,641 Diluted 4,669,717 4,654,609 4,780,070 3,340,236 3,040,188
The accompanying notes are an integral part of these consolidated financial statements -29--35- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 19961999, 1998 AND 19951997
Common Stock --------------------------------------------- Additional Retained Total $.01 Par Paid-In Retained TreasuryEarnings Stockholders' Shares Value Capital Earnings Stock(Deficit) Equity ---------- ---------- ----------- --------- --------- ------------------------ ----------- ----------- 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 Issuance of common stock, net of issuance costs 1,637,647 16,377 12,371,469 144,000 12,531,846 Stock options and warrants exercised 85,760 858 67,210 68,068 Conversion of note payable 14,333 143 21,357 21,500 Net income 481,220 481,220 ---------- ---------- ----------- --------- --------- ------------- BALANCE, December 31, 1996 4,378,157 $ 43,782 15,258,656$15,258,656 $ 987,144 - 16,289,582$16,289,582 Stock options and warrants exercised 244,409 2,444 480,032 482,476 Tax benefit of stock options exercised 290,361 290,361 Net income 1,004,834 1,004,834 ---------- ---------- ----------- ---------- -------- ------------------------ ----------- ----------- BALANCE, December 31, 1997 4,622,566 46,226 16,029,049 1,991,978 18,067,253 Stock options and warrants issued with acquisition 236,327 236,327 Stock options exercised 45,250 453 88,696 89,149 Tax benefit of stock options exercised 64,644 64,644 Net loss (4,388,719) (4,388,719) ---------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1998 4,667,816 46,679 16,418,716 (2,396,741) 14,068,654 Common stock issued 53,300 533 147,905 148,438 Stock warrants issued, net of issuance costs 206,011 206,011 Stock options and warrants exercised 52,249 522 36,610 37,132 Net loss (814,112) (814,112) ---------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1999 4,773,365 $ 46,226 $16,029,049 $1,991,978 - $18,067,253 ==========47,734 $16,809,242 $(3,210,853) $13,646,123 ========== =========== ========== ======== ======================== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements -30--36- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $1,004,834 $ 481,220(814,112) $(4,388,719) $ 102,9901,004,834 Adjustments to reconcile net (loss) income to net cash (used in) provided by (used in) operating activities: Depreciation and amortization 1,578,731 1,280,049 858,434 600,495 441,356 Provision for doubtful accounts 96,661 154,335 174,925 247,080 181,084 Deferred rent and other (264,549) 117,911 (71,381) (87,152) (45,792) Deferred income taxes (447,420) (528,676) 2,391 (155,495) (61,765) Tax benefit of stock options exercised -- 64,644 290,361 - 1,350Acquired research and development -- 4,230,812 -- Changes in operating assets and liabilities: Accounts receivable (456,286) (675,171) (1,907,413) (587,204) (997,112) Note receivableOther assets -- -- (13,930) Inventories (228,148) (786,947) (640,301) Prepaid expenses and other assets (13,930) 14,188 (61,343) Inventories (640,301) (503,483) (67,335) Prepaid expenses135,630 (144,199) 2,546 14,249 (98,082) Accounts payable 182,773 105,122 797,690 246,623 (42,190) Accrued compensation and other expenses 250,490 (86,054) (102,199) 883,063 94,126 Deferred revenue (690,760) (558,264) 330,855 306,076 523,401----------- ----------- ----------- Net cash (used in) provided by operating activities (656,990) (1,215,157) 726,812 ----------- ----------- ----------- CASH FLOWS FOR INVESTING ACTIVITIES: Acquired research and development -- (850,000) -- Payments for additions to property and equipment (2,727,816) (2,929,568) (2,612,697) Purchase of intangible assets -- (3,470) (39,625) Return of deposits and other (2,724) 27,731 -- Purchase of long term investment -- -- (750,000) Acquisitions, net of cash aquired -- (1,706,540) (1,993,722) ----------- ----------- ----------- Net cash used in investing activities (2,730,540) (5,461,847) (5,396,044) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 3,175,427 3,977,351 -- Repayments of long-term debt (11,533) (14,878) (1,123,526) Proceeds from issuance of common stock and stock warrants 391,581 89,149 482,476 ----------- ----------- ----------- Net cash provided by (used in) operating activities 726,812 1,459,660 (29,312) ----------- ----------- ----------- CASH FLOWS FOR INVESTING ACTIVITIES: Payments for additions to property and equipment (2,612,697) (669,154) (1,316,217) Purchase of intangible assets (39,625) (9,999) (4,000) Purchase of long term investment (750,000) (732,500) - Net assets of acquisition, net of cash acquired (1,993,722) - - ----------- ----------- ----------- Net cash used in investing activities (5,396,044) (1,411,653) (1,320,217) ----------- ----------- ----------- CASH FLOWS FOR FINANCING ACTIVITIES: Proceeds from long term debt - 226,300 1,517,867 Repayments of long-term debt (1,123,526) (4,803,042) (277,789) Proceeds of common stock issued 482,476 13,581,315 175,785 Offering costs associated with common stock issued - (981,401) - Purchase of treasury stock - - (144,000) ----------- ----------- ----------- Net cash (used in) provided by financing activities 3,555,475 4,051,622 (641,050) 8,023,172 1,271,863 ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: 167,945 (2,625,382) (5,310,282) 8,071,179 (77,666) Cash and cash equivalents, beginning of year 146,978 2,772,360 8,082,642 11,463 89,129 ----------- ----------- ----------- Cash and cash equivalents, end of year $2,772,360 $8,082,642 $ 11,463314,923 $ 146,978 $ 2,772,360 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Conversion of note payable to common stock - $ 21,500 $ 9,600 Noncash exercise of warrants to stockholder - $ 180,650 - SUPPLEMENTAL INFORMATION: Income taxes paid $ 662,30433,391 $ 85,460113,287 $ 168,994662,304 Interest paid $ 414,297 $ 72,755 $ 5,731 Long-term investment included in acquisition $ 300,587 $ 331,4951,482,500
The accompanying notes are an integral part of these consolidated financial statements -31--37- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business and Significant Accounting Policies Boston Biomedica, Inc. ("BBI") and Subsidiaries (together, the "Company") provide infectious disease diagnostic products, clinicallaboratory instrumentation, contract research and specialty infectious disease testing services to the in-vitro diagnostic industry, government agencies, blood banks, hospitals and other health care providers worldwide. The Company also invests in new technologies related to infectious diseases. The Company is subject to risks common to companies in the Biotechnology industry,biotechnology, medical device and diagnostic industries, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA governmentgovernmental regulations. 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, BBI Biotech Research Laboratories, Inc. ("BBI Biotech"), BBI Clinical Laboratories, Inc. ("BBICL"), and BBI Source Scientific, Inc. ("BBI Source"), and BBI BioSeq, Inc. ("BBI BioSeq"). BBI consists primarily of the Diagnostic Products segment as well as executive corporate officers. During the year, the Company incorporated Panacos Pharmaceuticals, Inc., ("Panacos"). Effective January 2000, Panacos will be accounted for as an additional consolidated subsidiary of the Company. All significant intercompany accounts and transactions have been eliminated in the consolidation. Certain amounts included in the prior year's financial statements may have been reclassified to conform to the current presentation. (ii) Use of Estimates To prepare the financial statements in conformity with generally accepted accounting principles, management is required to make significant 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, the value and realizability of intangible assets, as well as the net realizable value of its inventory. The valuation methodology applied to the acquisition of BioSeq, Inc. (see Note 2) was based on estimated discounted future cash flows. The purchase price accounting is based on this valuation. Significant assumptions include gross and operating profit margins, and future tax, discount, and royalty rates. Actual results could differ from the estimates and assumptions used by management. (iii) Revenue Recognition Product revenues arerevenue is 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, firm commitment and transfer to the customers of all risks and rewards of ownership. Accounts receivable as of December 31, 1997 and 1996 includeTotal revenue related to bill and hold receivables of $31,000transactions was approximately $1,998,000, $1,388,000, and $23,000, respectively. The Company periodically enters into barter transactions whereby the Company exchanges inventory for testing services. Revenue on these transactions are recognized when both the products have been shipped and the testing services have been completed and are recorded at the estimated fair market value of the inventory based upon standard Company prices. The revenue recognized on these transactions$459,000 for the years ended December 31, 1997, 19961999, 1998, and 1995 was $261,000, $244,000, and $213,000,1997, respectively. Services are recognized as revenue upon completion of tests for specialty laboratory services. Revenue from service contracts and research and development contracts for the Company's laboratory instrumentation business is recognized as the service and research and development activities are performed under the terms of the contracts. Revenue under long-term contracts, generally lasting from one to five years, including funded research and development contracts, is recorded when costs to perform such research and development activities are incurred. Billing under the percentage of completion method, whereinlong-term contracts are generally at cost plus a predetermined profit. Billing occurs as costs plus profit is recorded as service revenueassociated with time and materials are incurred. Customers are obligated to pay for such services, when billed, monthly as the work is performed. Certainand payments are non-refundable. On occasion certain customers make advance payments that are deferred until revenue recognition is appropriate. Unbilled amounts for fee retainage are included in accounts receivable at December 31, 1997 and 1996, and are immaterial. When the current contract estimates indicate a loss, provision is made for the total anticipated loss. The Company does not believe there are any material collectability issues associated with these receivables. Total revenue related to funded research and development contracts was approximately $1,737,000, $1,126,000, and $728,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Total contract costs associated with these agreements were approximately $1,438,000, $975,000 and $575,000 for the years ended December 1997, 1996 and 1995, respectively. -32--38- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business and Significant Accounting Policies -- (Continued) Total revenue related to long-term contracts was approximately $4,457,000, $4,175,000, and $3,125,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Total contract costs associated with these agreements were approximately $4,323,000, $3,950,000, and $2,782,000 for the years ended December 1999, 1998 and 1997, respectively. Included in the revenue recognized under long-term contracts are certain unbilled receivables representing additional indirect costs, which are allowed under the terms of the respective contracts. Unbilled receivables were less than $40,000 for all years presented. (iv) Cash and cash equivalents The Company's policy is to invest available cash in short-term, investment grade, interest bearing obligations, including money market funds, municipal notes, and bank and corporate debt instruments. Securities purchased with initial maturities of three months or less are valued at cost plus accrued interest, which approximates fair market value, and classified as cash equivalents. At December 31, 1997 the Company's cash equivalents consisted of $2,702,280 invested in a money market fund. At December 31, 1996 the Company's cash equivalents consisted of $6,001,259 invested in a money market fund and a banker's acceptance of $1,991,522. (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. (vii) Property and Equipment Property and equipment are stated at cost. For financial reporting purposes, depreciation is recognized using accelerated and straight-line methods, allocating the cost of the assets over their estimated useful lives ranging from five years to ten years for certain manufacturing and laboratory equipment, from three to five years for management information systems and office equipment, three years for automobiles and fifteenthirty years for the building. Leasehold improvements are amortized over the shorter of the life of the improvement or the remaining life of the leases, which range from four to ten years. Upon retirement or sale, the cost and related accumulated depreciation of the asset are removed from the books.accounting records. Any resulting gain or loss is credited or charged to income. In March of 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. SOP 98-1 is effective beginning January 1, 1999. The Company adopted this policy during 1999 as it implemented enterprise resource planning systems at two of its locations. See Footnote 4 for further information. (viii) Goodwill and Intangibles The Company has classified as goodwill, the cost in excess of fair value of the assets of the business acquired. Goodwill is being amortized on a straight linestraight-line basis over ten to fifteen years. Other intangibles primarily consist of patents, licenses, and intellectual property rights and are amortized over periods ranging from four to tensixteen years. (ix) Impairment of Long-Lived Assets The Company evaluates the potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. At the occurrence of a certain event or change in circumstances, the Company evaluates the potential impairment of an asset based on estimated future undiscounted cash flows. In the event impairment exists, the Company will measure the amount of such impairment based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Based on management's assessment as of December 31, 1999, the Company has determined that no impairment of long-lived assets exists. Upon the occurrence of a material circumstance, such as the failure of certain technology to demonstrate promise that it may gain commercial acceptance or the failure of a business segment to achieve certain performance objectives, management will reassess the value of associated assets and if appropriate at that time, will recognize an impairment charge. The realizability of the goodwill related to the -39- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business and Significant Accounting Policies (Continued) acquisition of BBI Source Scientific has been a specific area of focus by the Company. Management feels that although the business unit has realized operating losses since the acquisition in July 1997, the goodwill is not impaired as management believes the segment will be profitable by the end of 2001. (x) Income Taxes The Company utilizes the liability method of accounting for income taxes. Under the liabilitythis 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)At December 31, 1999, the Company's entire valuation allowance related to the net operating losses acquired in connection with the BioSeq acquisition. Management feels that no additional valuation allowance is required as its tax strategies and normal profitability levels will allow it to realize all of its tax assets, including federal and state net operating losses and tax credits. (xi) Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk are principally cash and cash equivalents, and accounts receivable. The Company places its cash in federally chartered banks, each of which is insured up to $100,000 by the Federal Deposit Insurance Corporation. The Company limits credit risk in cash equivalents by investing only in short term,short-term, investment grade securities including money market funds restricted to such securities. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales (see also Note 6). The Company does not require collateral from its customers. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. (xi)(xii) Deferred Revenue Deferred revenue consists of payments received from customers in advance of services performed. -33-(xiii) Computation of Earnings per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted average common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. For purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect. Options and warrants that were antidilutive were excluded from the calculation. (xiv) Segment Reporting The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," on December 31, 1998. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirements to report information about major customers. Disclosures required by this new standard are included in the notes to the consolidated financial statements under the caption "Segment Reporting and Related Information." (xv) Recent Accounting Standards Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133)is effective, as amended for quarters of fiscal years beginning after June 15, 2000. The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge -40- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business and Significant Accounting Policies -- (Continued) (xii) Recentaccounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The Company does not currently engage in derivative trading or hedging activity. In December 1999, the Staff of the Securities and Exchange Commission issued Staff Accounting Standards Comprehensive Income StatementBulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). This SAB summarizes certain of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130)the Staff's views in applying generally accepted accounting principles, in the United States, to revenue recognition in financial statements. SAB 101 is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements.Company's quarter ended June 30, 2000. The Company will adopt SFAS 130does not expect the provisions of SAB 101 to have a material impact on its financial statements (2) Acquisition of BioSeq, Inc. On September 30, 1998 the Company acquired the remaining common stock outstanding of BioSeq (approximately 81%) for $879,000 in fiscal year endedcash (net of cash acquired of $121,000), warrants to purchase 100,000 shares of the Company's stock at an exercise price of $2.50 per share, minimum long-term royalty payments of $424,000, debt and accrued interest owed by BioSeq at the time of acquisition of approximately $736,000, and other acquisition costs. The Company also exchanged BioSeq's stock options for 46,623 BBI stock options with an average exercise price of $2.74. Accordingly, the Company's aggregate cost of acquiring all of BioSeq's equity, including the original 19% investment under the 1996 Purchase Agreement of $1,482,000 (classified as long-term investment at December 31, 1998. Adoption1997 was approximately $4,226,000. The cash portion of this statement is not expected to have an impact on the Company'sacquisition was financed from a combination of debt and cash. The acquisition has been recorded using purchase accounting, and BioSeq's results are included in the consolidated financial position and results of operations. Segment Reporting Statementthe Company commencing October 1, 1998. BBI BioSeq is a development stage company with patent pending technology based on pressure cycling technology. The assets were capitalized by allocating the aggregate cost of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) is effective for financial statements for periods beginning after December 15, 1997. This statement will change$4,226,000 ratably to the way companies report annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company will adopt SFAS 131 in the fiscal year ended December 31, 1998. Adoption of this statement is not expected to have an impact on the Company's consolidated financial position and results of operations. (2) Purchaseindividual components of the Business and Net Assets of Source Scientific, Inc. In July 1997, the Company, through its wholly owned subsidiary BBI-Source Scientific, Inc., completed the acquisition of all$11,124,000 total estimated fair value of the assets acquired, based upon independent valuation of the assets acquired as performed by the Michel/Shaked Group, a division of Back Bay Management Company. Management believes that because of the Company's initial investment in BioSeq, and intimate knowledge of its technology and business, its understanding of the industry to which pressure cycling technology would be applied, and selected liabilitiesas a result of Source Scientific, Inc. ("Source").lengthy and intense negotiations, the Company was successful in reaching an extremely favorable purchase price for BioSeq compared to the fair value of the assets acquired. The assets acquired and their allocation are as follows
ESTIMATED ALLOCATED ITEM USEFUL LIFE FAIR VALUE PURCHASE PRICE - ----------------------- ------------- ---------- -------------- Acquired In-process Research & development - $ 8,764,000 $3,381,000 Patents 16 years 2,017,000 778,000 Other assets 3 to 10 years 343,000 67,000 Totals $11,124,000 $4,226,000
Allocated in-process research and development consists of two projects, that were on-going at the time of the acquisition: nucleic acid extraction and purification and pathogen inactivation. BioSeq had expended approximately $1.6 million prior to September 30, 1998 on these projects. Both of these projects have encouraging preliminary data demonstrating potential feasibility, but significant scientific, mechanical and design issues remain. The Company estimates that it will spend in excess of $4.8 million through the year 2002 to complete the development into commercially viable products and to begin generating revenue. Remaining development efforts are focused on feasibility studies to establish the key performance parameters and biological activities to be retained; designing and building a prototype instrument; further development of the prototype for the applications; scale-up of design; data generation and clinical trials; applying and obtaining Food and Drug Administration approval, where applicable, final design modifications; and transfer to manufacturing. In addition to the risk of the technology ultimately not working, failure to complete on a timely basis could allow new or existing competing technologies to be developed and commercially accepted. The valuation methodology was based on estimated discounted future cash payment of $1,894,000 to Source, the total purchase price was $1,994,000 including consulting, legal,flows. Significant assumptions include gross and operating profit margins, and future tax, discount, and royalty rates. Recent accounting guidelines on valuation methodologies for in-process research and other acquisition costs, net of cash acquired. The acquisition is treated as an asset purchase as of July 2, 1997development are still evolving and the resultsamount written off maybe subject to adjustment. -41- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) Acquisition of operations have been included since that date. The purchase price exceeded the fair market value of net assets acquired by approximately $2,202,000, which is recognized as goodwill and is being amortized on a straight line basis over fifteen years.BioSeq, Inc. (Continued) The following unaudited pro forma information combines the consolidated results of operations of the Company and SourceBioSeq as if the asset purchaseacquisition had occurred at the beginning of 1996,1997, after giving effect to certain adjustments, including amortization of the intangible assets, increased interest expense on the acquisition debt, and related income tax effects. The unaudited pro forma information is shown for comparative purposes only and does not reflect the synergies expected to result from the integrationis based on management's estimates of Source's business into the Company's business. Years Ended December 31, ---------------------------- Unauditedresearch and development expenditures.
Years Ended December 31, ---------------------------- 1998 1997 1996 - --------- ------------- ------------- Revenue $24,051,796 $20,489,296 Operating income (loss) 688,808 539,960 Net income (loss) 371,285 239,976 Pro Forma Pro Forma ---------- ---------- Revenues 26,081,077 22,299,337 Operating income (loss) (1,474,694) 191,952 Net income (loss) (989,327) 242,834 EPS (0.21) 0.05
The pro forma earnings per share, basic 0.08 0.08 Pro forma earnings per share, diluted 0.08 0.07 -34-information excludes acquired research and development of $4,231,000 (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 ControlQC Panels, Accurun(r)Accurun(R) Run Controls, and reagents ("Finished Goods"). Panels and reagents are unique to specific donors and/or collection periods, and require substantial time to characterize and manufacture due to stringent technical specifications. Panels play an important role in diagnostic test kit development, licensure and quality control. Panels are manufactured in quantities sufficient to meet expected user demand, which may exceed one year. Inventory also includes component parts used in the manufacture of laboratory instrumentation. Inventory balances at December 31, 19971999 and 1996 consist1998 consisted of the following: 1997 1996 ---------- ---------- Raw materials.............................. $2,033,040 $1,359,569 Work-in-process............................ 1,190,567 697,749 Finished goods............................. 2,679,214 2,123,016 ---------- ---------- $5,902,821 $4,180,334
1999 1998 ---------- ---------- Raw materials ........ $2,675,735 $2,407,154 Work-in-process ...... 1,845,778 1,788,399 Finished goods ....... 2,396,403 2,494,215 ---------- ---------- $6,917,916 $6,689,768 ========== ==========
(4) Property and Equipment Property and equipment at December 31, 19971999 and 1996 consist1998 consisted of the following: 1997 1996 ------------ ------------ Laboratory and manufacturing equipment........ $2,240,660 $1,751,737 Management information systems................ 1,693,939 1,247,190 Office equipment.............................. 686,608 394,957 Automobiles................................... 189,775 196,663 Leasehold improvements........................ 687,714 122,419 Land, building and improvements............... 2,160,932 956,386 ------------ ------------ 7,659,628 4,669,352 Less accumulated depreciation................. 2,679,464 1,970,194 ------------ ------------ Net book value................................ $4,980,164 $2,699,158 ============ ============ Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was approximately $731,000, $585,500, and $425,700 respectively. Included in 1997 land, building and improvements is approximately $920,000 of construction in progress. (5) Long Term Investment In October 1996, the Company entered into a License Agreement, Purchase Agreement, Stockholders' Agreement and Warrant Agreement with BioSeq, Inc. ("BioSeq") a privately held, technology based development stage company. The Company agreed to purchase convertible preferred stock equivalent to approximately 19% of the capital stock of BioSeq for an aggregate of $1,482,500 in three installments. Of the $1,482,500, $732,500 was invested in 1996. In April 1997, the Company exercised its option to purchase an additional 165,000 shares of BioSeq at an aggregate cost of $750,000, thereby increasing its ownership to 19%. The investment is carried at cost of $1,482,500 and classified as a long term investment. Under the operative documents, the Company has price anti-dilution protection, pre-emptive rights and the right to board representation. In addition, the Company was granted warrants to acquire additional shares of common stock of BioSeq for additional consideration under certain conditions, provided that this right is not exercisable to the extent it would cause the Company's ownership -35-
1999 1998 ----------- ----------- Laboratory and manufacturing equipment .. $ 3,456,410 $ 3,082,834 Management information systems .......... 3,691,338 2,556,193 Office equipment ........................ 1,051,673 821,538 Automobiles ............................. 318,242 206,693 Leasehold improvements .................. 2,177,236 1,610,260 Land, building and improvements 2,611,733 2,307,039 ----------- ----------- 13,306,632 10,584,557 Less accumulated depreciation ........... 5,011,608 3,659,134 ----------- ----------- Net book value .......................... $ 8,295,024 $ 6,925,423 =========== ===========
-42- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) Property and Equipment (Continued) Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was approximately $1,359,000, $1,096,000, and $731,000 respectively. Included in 1999, 1998 and 1997 land, building and improvements is approximately $203,000, $1,345,000 and $920,000, respectively, of construction in progress. In accordance with SOP 98-1, the Company capitalized approximately $448,000 of internal labor and related costs, in 1999, in connection with its ERP System Implementation. These costs are included in the Management Information Systems line item and are being depreciated over the same life as the system, 5 years. Depreciation expense, related to these capitalized costs was approximately $7,000 for the year ended December 31, 1999. (5) Long Term Investment (Continued)Intangible Assets Intangible assets at December 31, 1999 and 1998 consisted of the following:
1999 1998 ---------- ---------- Goodwill ............................. $2,293,045 $2,293,045 Patents .............................. 795,880 796,380 Licenses ............................. 37,752 37,752 ---------- ---------- 3,126,677 3,127,177 Less accumulated amortization ........ 537,367 317,352 ---------- ---------- Net book value ....................... $2,589,310 $2,809,825 ========== ==========
Amortization expense for the years ended December 31, 1999, 1998 and 1997 was approximately $220,000, $184,000, and $125,000 respectively. (6) Segment Reporting and Related Information (all dollar amounts in thousands) Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by senior management in deciding how to equal or exceed 20%.allocate resources and in assessing performance of each segment. The Company is accountingorganized along legal entity lines and senior management regularly reviews financial results for its investmentall entities, focusing primarily on revenue and operating income. The Company has five operating segments. The Diagnostics segment serves the worldwide in BioSeqvitro diagnostics industry, including users and regulators of their test kits, with quality control products, and test kit components. The BBI Biotech segment pursues third party contracts to help fund the development of products and services for the other segments, primarily with agencies of the United States Government. The Clinical Laboratory Services segment performs specialty infectious disease testing for hospitals, blood banks, doctors and other clinical laboratories, primarily in North America. The Laboratory Instrumentation segment sells diagnostic instruments primarily to the worldwide in vitro diagnostic industry on an OEM basis, and also performs in-house instrument servicing. "Other" consists of research and development in two areas: pressure cycling technology ("PCT") and drug discovery. The Company performs research in the development of PCT, with particular focus in the areas of nucleic acid purification and pathogen inactivation. The Company also conducts active research, together with Dr. K. H. Lee and collaborators at the School of Pharmacy, University of North Carolina at Chapel Hill ("UNC"), in the area of anti-HIV drug discovery, with exclusive focus on natural products and their synthetic derivatives. Finally, the "Other" segment's two R&D operations do not currently have any product or service revenue, and none is expected in the near future. Their revenue to date consists of both private and public (NIH) funding of segment research. Most of the expenditures by this segment are for R&D expenses, and general management expenses including patent costs. The Company continues to seek funding from both private and public sources to minimize the impact of their development costs on the cost-basisCompany's overall operating results. The Company's underlying accounting records are maintained on a legal entity basis for government and public reporting requirements, as well as for segment performance and internal management reporting. Inter-segment sales are recorded on a "third party best price" basis and are significant in measuring segment operating results. Throughout 1999, the cost of most corporate functions are included in the Diagnostic Products segment as the senior management group has dual responsibility to this segment as well as the Company. Pursuant to the August 1999 reorganization, many of the senior managers and a few other employees were segregated from the Diagnostics segment to form a Corporate operating unit, effective January 2000. The following segment -43- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Segment Reporting and Related Information (Continued) information has been prepared in accordance with the provisions of APB 18 since its cumulative investment is less than 20%internal accounting policies of the equity of BioSeq and the Company, does not exert significant influence or control. BioSeq needs to obtain additional financing in 1998 to continue operations and there can be no assurances that any such financing will be available upon acceptable terms. Due to the uncertainty of technology based development stage enterprises, the Company performs a periodic analysis of the investment to determine whether the carrying value of its investment in BioSeq has been other than temporarily impaired. In performing the analysis of its investment in BioSeqas described above. Operating segment revenue for the current year, management considered BioSeq's positive factors including its technology, patent positions, business prospects,years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997 ---------------------------------------- Diagnostics $ 11,837 $ 11,277 $ 10,655 BBI Biotech 6,297 5,355 4,188 Clinical Laboratory Services 9,842 7,187 6,024 Laboratory Instrumentation 2,923 3,929 2,608 Other 434 -- -- Eliminations (2,062) (1,667) (1,176) ---------------------------------------- Total Revenue $ 29,271 $ 26,081 $ 22,299 ========================================
Operating segment (loss) income for the possibility of raising capitalyears ended December 31, 1999, 1998 and achieving financial success;1997 were as wellfollows:
1999 1998 1997 ---------------------------------------- Diagnostics $ 784 $ 559 $ 1,357 BBI Biotech (152) 67 (95) Clinical Laboratory Services 656 134 403 Laboratory Instrumentation (832) (906) (189) Other (1,345) (525) (84) Acquired research & development -- (4,231) -- ---------------------------------------- Total (Loss) Income from Operations $ (889) $ (4,902) $ 1,392 ========================================
Operating segment depreciation and amortization expense for the years ended December 31, 1999, 1998 and 1997 were as its negative cash flowfollows:
1999 1998 1997 ---------------------------------------- Diagnostics $ 537 $ 408 $ 338 BBI Biotech 419 346 182 Clinical Laboratory Services 240 217 175 Laboratory Instrumentation 299 292 163 Other 84 17 -- ---------------------------------------- Total Depreciation and Amortization $ 1,579 $ 1,280 $ 858 ========================================
Identifiable operating segment assets are all located in the United States, and net worth, and limited cash and other resources, and failure to date to raise significant capital independent of the Company. Management has concluded that its investment has not been other than temporarily impaired, if at all. If it is subsequently determined to be impaired, the Company will adjust the carrying value of its investment by taking a charge to earnings which could amount to the full value of its $1,482,500 investment as of December 31, 1997. See also Note 14 relating to the Company's $600,000 purchase of certain technology rights from BioSeq. In accordance with the agreement, the Company was granted a worldwide right ("the License") to use the BioSeq technology relating to sequencing1999, 1998 and analysis services. The License will be exclusive until BioSeq commences selling on a commercial basis the equipment used in the DNA sequencing1997 were as follows:
1999 1998 1997 ---------------------------------------- Diagnostics $ 13,375 $ 12,122 $ 14,152 BBI Biotech 4,643 4,242 2,806 Clinical Laboratory Services 3,188 2,348 1,948 Laboratory Instrumentation 3,789 4,427 4,744 Other 1,167 943 -- ---------------------------------------- Total Assets $ 26,162 $ 24,082 $ 23,650 ========================================
-44- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Segment Reporting and analysis process, at which time the License will become non-exclusive. The License provides that the Company will pay BioSeq market royalties as a percentage of net revenues arising out of the services performed by the Company with the licensed technology. The Company will accountRelated Information (Continued) Operating segment capital expenditures for the royaltyyears ended December 31, 1999, 1998 and 1997 were as a costfollows:
1999 1998 1997 ---------------------------------------- Diagnostics $ 1,315 $ 1,468 $ 1,271 BBI Biotech 944 1,234 877 Clinical Laboratory Services 307 202 196 Laboratory Instrumentation 128 22 269 Other 34 4 -- ---------------------------------------- Total Capital Expenditures $ 2,728 $ 2,930 $ 2,613 ========================================
Revenue by geographic area for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---------------------------------------- United States $ 25,231 $ 21,978 $ 17,706 Europe 2,509 2,453 2,614 Pacific Rim 818 1,063 1,285 Total all others 713 587 694 ---------------------------------------- Total $ 29,271 $ 26,081 $ 22,299 ========================================
Revenue of Product and Service classes in excess of 10% of consolidated revenue (excludes inter-segment sales) for the years ended December 31, 1999, 1998 and 1997 were as thefollows:
1999 1998 1997 ---------------------------------------- Quality Control Products $ 9,445 $ 9,369 $ 8,220 Clinical Laboratory Testing 9,472 6,806 5,695 Government Contracts 4,530 3,535 2,638
The government contract revenues are earned. (See also Note 14.) (6) Revenue from Significant Customers and Export Sales The Company performs contract research and certain other services under contracts, subcontracts and grants from United States Government Agencies,government agencies, primarily the National Institutes of Health ("NIH"(NIH) and represent the only customer with revenue in excess of 10% of consolidated revenue. (7) Debt Effective June 30, 1999, the Company entered into an amended revolving line of credit agreement (the "Amended Line"). Revenue with its bank, increasing the facility to $10 million from such contracts, subcontracts$7.5 million. The Amended Line matures June 30, 2001; bears interest at the Company's option based on either the base rate plus 1/4% or LIBOR plus 2.75%; carries a facility fee of 1/4% per annum, payable quarterly; and grants wasis collateralized by substantially all of the assets of the Company, excluding real property. Borrowings under the Amended Line are limited to commercially standard percentages of accounts receivable, inventory and equipment. The Company had approximately $2,638,000 in 1997, $1,920,000 in 1996,$456,000 available under the Amended Line as of December 31, 1999. The Amended Line contains covenants regarding the Company's total liabilities to tangible net worth ratio, minimum debt service coverage ratio, and $1,628,000 in 1995. Export salesmaximum net loss. The Amended Line further provides for restrictions on the payment of dividends, incurring additional debt, and the amount of capital expenditures. As of December 31, 1999 the Company's debt payment requirements under its revolving line of credit were $0, $7,145,651, $0, $0 and $0 for the years ended December 31, 2000, 2001, 2002, 2003, and 2004, respectively. -45- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) Debt (Continued) The Company's outstanding debt includes an installment note payable with an interest rate of 9.75%, due August 2001. The note is collateralized by geographic areaoffice furniture and laboratory equipment. The Company also acquired two additional notes for automobile loans, which are approximately as follows: 1997 1996 1995 ---------- ---------- ---------- Europe $3,150,000 $2,844,000 $2,257,000 Pacific Rim 1,310,000 948,000 642,000 Others 694,000 534,000 531,000 ---------- ---------- ---------- Total $5,154,000 $4,326,000 $3,430,000 (7) Deferred Rentboth being carried at 0% financing and come due October 2002. The amounts outstanding, including the current portion, at December 31, 1999 and 1998 were $22,414 and $26,820, respectively. (8) Other Liabilities One of the facilityThe Company's California and Maryland facility's leases includesinclude scheduled base rent increases over the term of the lease. The amount of base rent payments is being charged to expense onusing the straight-line method over the term of the lease. As of December 31, 19971999 and 1996,1998, the Company has recorded a long-term liability of $189,867$326,184 and $53,900,$273,290, respectively ($361,413 and $308,519 including the current portion) 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 facility. The Company's outstanding debt consists of an installment note payable with an interest rate of 9.75%, due August 2001. The note is collateralized by office furnitureCalifornia and laboratory equipment. The amount outstanding on December 31, 1997 and 1996 was $40,948 and $53,768, respectively. The current amounts of such debtMaryland facilities. Included in long-term liabilities at December 31, 19971999 and 1996 was $14,8781998 are the present value of future minimum royalty payments of approximately $139,000 and $12,820, respectively. During 1996, convertible debt in$424,000 payable to the amountformer owners of $21,500 was converted into 14,333 sharesBioSeq, Inc. (See Note 2). (9) Accrued Compensation Accrued compensation consists of common stock at a pricethe following:
Year Ended December 31 1999 1998 ---------- ---------- Accrued payroll $ 253,594 $ 598,937 Accrued vacation 447,534 360,509 Accrued commissions 305,423 177,691 Other accrued compensation 182,589 147,025 ---------- ---------- 1,189,140 1,284,162 ---------- ----------
(10) Income Taxes The components of $1.50 per share. -36-the (benefit) provision for income taxes are as follows:
1999 1998 1997 --------- --------- --------- Current (benefit) provision: federal $(226,368) $ (63,868) $ 567,373 Current provision: state $ 85,575 $ 28,145 $ 100,125 --------- --------- --------- Total current (benefit) provision (140,793) (35,723) 667,498 Deferred (benefit) provision: federal (236,040) (417,315) (5,078) Deferred (benefit) provision: state (122,139) (111,361) 7,469 --------- --------- --------- Total deferred (benefit) provision (358,179) (528,676) 2,391 --------- --------- --------- Total (benefit) provision for income taxes $(498,972) $(564,399) $ 669,889 ========= ========= =========
-46- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) Deferred Rent and Other Liabilities (Continued) Effective March 28, 1997, the Company entered into a $7.5 million uncollateralized revolving line of credit (the "Line") with its bank. The Line matures on June 30, 1999; bears interest at the Company's option based on either base rate, LIBOR plus 1.75%, or overnight money market rate plus 1.75%; and carries a facility fee of .25% per annum, payable quarterly. The Line contains covenants regarding the Company's ratio of total liabilities-to-equity, minimum tangible net worth, and minimum debt service coverage ratio. The Line further provides for restrictions on the payment of dividends, and limitations on additional borrowings. The Company did not draw upon the Line during 1997. (8)(10) Income Taxes The Company's effective tax rate does not significantly differ from the federal and state income tax statutory rates. The components of the provision for income taxes are as follows: 1997 1996 1995 ---------- ---------- ---------- Current expense: federal and state $667,498 $476,206 $130,422 Deferred expense (benefit): federal and state 2,391 (155,495) (61,765) ---------- ---------- ---------- Total $669,889 $320,711 $68,657 ========== ========== ==========(Continued) Significant items making up deferred tax liabilities and deferred tax assets arewere as follows: 1997 1996 ---------- ---------- Current deferred taxes: Inventory $ 72,249 $ 87,158 Accounts receivable allowance 153,469 115,548 Other accruals 102,844 80,494 ---------- ---------- Total current deferred tax assets 328,562 283,200 Long term deferred taxes: Accelerated tax depreciation (217,029) (176,015)
1999 1998 ----------- ----------- Current deferred taxes: Inventory $ 174,338 $ 169,796 Accounts receivable allowance 298,271 224,240 Technology licensed 299,883 322,516 Other accruals 162,298 130,716 ----------- ----------- Total current deferred tax assets 934,790 847,268 Long term deferred taxes: Accelerated tax depreciation (335,880) (279,358) Goodwill and intangibles 19,961 17,729 Tax credits 252,589 60,000 Operating loss carryforwards 1,082,665 861,066 Less: valuation allowance (798,800) (798,800) ----------- ----------- Total long term deferred tax assets (liabilities), net 220,535 (139,363) ----------- ----------- Total net deferred tax assets $ 1,155,325 $ 707,905 =========== ===========
On December 31, 1999 and intangibles 15,176 13,551 State net1998, operating loss carryforwards 52,520 60,884 ---------- ---------- Total long term deferred tax liabilities, net (149,333) (101,580) ---------- ---------- Total net deferred tax assets $179,229 $181,620 ========== ========== Aswere partially offset by a valuation allowance of December 31, 1997,$798,800. This allowance is to reserve for the entire loss carryforward obtained through the acquisition of BioSeq, Inc. The Company establishes valuation allowances in accordance with the provisions of SFAS 109 "Accounting for Income Taxes". The Company continually reviews the adequacy of the valuation allowance. The state net operating loss carryforwards expire at various dates beginning in 2002 through 2019. As of December 31, 1999, the Company had approximately $47,000 of alternative minimum tax credits, which do not expire and approximately $205,000 of federal research credits, which expire from 2012 through 2007. -37-2020. The Company has determined that no additional valuation allowance is required. This conclusion is based on its ability and intent to discontinue its operating loss position, not only for the consolidated entity, but also for each of its operating segments. If circumstances occur that change managements view about its ability to return to profitability, and utilize the net operating losses and deferred tax assets, it will re-evaluate its position with respect to valuation allowances. The Company's effective income tax rate differs from the statutory federal income tax rate as follows:
1999 1998 1997 ---- ---- ---- Federal tax (benefit) provision rate (34%) (34%) 34% State tax (benefit) provision, net of federal benefit (6%) (1%) 6% Nondeductable writeoff of acquired research and development 23% -- Other items, net 2% 1% -- ---- ---- ---- Effective income tax (benefit) provision rate (38%) (11%) 40% ==== ==== ====
-47- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9)(11) Commitments and Contingencies The Company leases certain office space, laboratory, research and manufacturing facilities under operating leases with various terms through October 2007. All of the real estate leases include renewal options at either market or increasing levels of rent. Rent expense for the years ended December 31, 1999, 1998 and 1997 1996was approximately $1,218,000, $914,000, and 1995 was $506,300, $365,700, and $477,600,$506,000, respectively. At December 31, 1996,1999, the remaining fixed lease commitment was as follows: Year Ended Amount -------------------- ------------ 1998 $ 938,970
Year Ended Amount ------------------- ------------- 2000 1,168,617 2001 1,106,646 2002 846,256 2003 864,470 2004 889,687 2005 and thereafter 2,372,466 ------------- $7,248,142 -------------
In April 1999, 969,715 2000 971,993 2001 915,609 2002 578,326 2003 and thereafter 2,358,410 ------------ $6,733,023 Commencing in February 1995, the Company committed underincreased it's commitment to directly support a sponsored research agreement withdrug discovery program at UNC, in which a university to fund afull-time post-doctoral research scientist at a costand two doctoral students are working to develop synthetic derivatives of $13,125anti-HIV compounds that have been discovered pursuant to the Company's joint collaboration with UNC. The Company is committed to pay approximately $44,000 per quarter for three years whichyears. These costs are being charged to research and development expense. In return,Under this agreement , the Company has exclusivewill also have the rights to any new anti-HIV compounds orand derivatives developed in the course of this sponsored research, provided the Company obtains certain regulatory approvals from the FDA. (10)Effective January 2000, all rights and obligations under this agreement were transferred to Panacos Pharmaceuticals, Inc. (12) Retirement Plan In January 1993, the Company adopted a retirement savings plan for its employees, which has been qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the plan through payroll deductions within statutory limitations and subject to any limitations included in the plan. Company contributions are made at the discretion of management. To date, no such contributions have been made. During 1999, 1998 and 1997 the Company recognized administrative expense of approximately $30,000, $32,000, and $23,000, respectively in connection with the plan. (11)(13) Stockholders' Equity Common Stock On October 31, 1996,In July 1999, the Company commenced trading on the NASDAQ National Market as a result of the initial public offering of its common stock ("IPO"), raising net proceeds of $11,633,000 from the sale of 1,600,000 shares at $8.50 per share. On April 26, 1996, the Company entered into a Stock Purchase Agreement and Exclusive Distributor Agreement for five years with a foreign distributor. Pursuant to the Stock Purchase Agreement, the Company issued 117,647 shares of redeemable common stock at a price per share of $8.50, for which it received net proceeds of $898,503. Issuance costs were $101,497. Completion of the IPO terminated the redemption feature. The distributor was restricted from selling these securities for a one-year period after completion of the IPO. The Company issued 80,000 shares of Treasury Stock in connection with this transaction. On August 8, 1996 theCompany's Board of Directors approved a 1-for-2 reverse stock split and an increase in authorized common sharesthe 1999 Employee Stock Purchase Plan. The Company adopted this plan, which allows eligible employees to 20,000,000, and authorized 1,000,000purchase shares of preferredthe Company's stock (parat 85% of market value $.01), whichas determined at the beginning and the end of the offering period. A total of 250,000 shares have been reserved for this plan. As of December 31, 1999 no shares were approved by the stockholders on September 10, 1996. The stock split has been retroactively reflected in the accompanying financial statements and notes for all periods presented. -38- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) Stockholders' Equity-(Continued)issued under this plan. Options and Warrants The Company has a nonqualified stock option plan and an incentive stock option plan (1996 Employee Stock Option Plan) both of which are administered by a committee of the Board of Directors. In general,July 1999 the Company's Board of Directors approved the designation of an additional 1,250,000 shares to become available for distribution under the 1996 Employee Stock Option Plan. The Board of Directors also approved the 1999 Non- -48- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) Stockholders' Equity-(Continued) Qualified Stock Option Plan, and designated 500,000 shares for distribution under this plan. The exercise price of an option price shall not be less thangenerally equals the fair market value of the stock at the time the option is granted.grant date. 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 of affiliation.the grantee's affiliation with the Company terminates. At December 31, 1997, 775,8061999, 1,999,500 shares have beenwere reserved for non-qualifiedincentive stock options, of which 92,2501,328,624 are available for future grants. At December 31, 1997, 778,9251998, 749,500 shares have been reserved for incentive stock options, of which 348,587179,887 are available for future grants. At December 31, 1999, 1,098,680 shares were reserved under the nonqualified stock option plan of which 489,951 were available for future grants. As of December 31, 1998, 605,929 shares were reserved for the non-qualified stock option plan of which no shares were available for future grants. In August 1999, the Company sold 500,000 warrants to purchase the Company's stock to Paradigm Group, a private investment company. The private placement consisted of 400,000 common stock purchase warrants with a exercise price of $4.25 and 100,000 common stock purchase warrants with an exercise price of $5.25. Paradigm Group paid the Company $50,000 for the warrants. In addition, National Securities received 40,000 common stock purchase warrants with an exercise price of $4.25, 10,000 common stock purchase warrants with an exercise price of $5.25, and 25,000 common stock purchase warrants with an exercise price of $8.00, as transaction fee. In November 1999, the Company sold 29,153 equity units to MDBio, Inc., a Maryland not-for-profit corporation. Each equity unit consists of one share of common stock and one common stock purchase warrant with an exercise price of $10.00. MDBio paid the Company $175,000 for the equity units and has until September 2003 to exercise the warrants. On December 11, 1998, the Company's Board of Directors authorized the Company to offer a reduction of the stock option exercise price to $3.25 per share, which represented a premium over the market price of $2.56 on that day. Any option holder with outstanding stock options with an exercise price higher than $3.25 was eligible to participate in the repricing. A total of 411,417 options were repriced, which represents substantially all eligible options. The original vesting schedule, generally four years from date of grant, remained unchanged. However, all optionees accepting the offer agreed not to exercise vested, repriced options for a period of one year from the date of amendment. The previous weighted average exercise price of the options repriced was $6.72. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Pro forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value forof these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997. The minimum value option pricing model was used for all grants during, 1996 and 1995prior to, 1996 as they were granted prior to the Company's IPO. 1997 1996 1995 -------- -------- -------- Risk-free interest rate 5.72% 6.18% 5.33% Volatility factor .55 .001 .001 Weighted average expected life 5 years 5 years 5
1999 1998 1997 ------------- ------------- ------------- Risk-free interest rate 5.26% 4.69% 5.72% Volatility factor 76.68% 75.57% 55.00% Weighted average expected life 5.1 years 5.0 years 5.0 years Expected dividend yield 0 0 0
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, -49- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) Stockholders' Equity-(Continued) the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and pro forma net income per share is as follows: 1997 1996 1995 ---------- -------- -------- Net income-as reported $1,004,834 $481,220 $102,990 Net income-pro forma 851,408 424,921 80,196 Net income per share-as reported, basic .23 .17 .04 Net income per share-as reported, diluted .21 .14 .03 Net income per share-pro forma, basic .19 .14 .03 Net income per share-pro forma, diluted .17 .13 .03 -39- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) Stockholders' Equity-(Continued)
1999 1998 1997 -------------- -------------- -------------- Net (loss) income-as reported $(814,112) $(4,388,719) $1,004,834 Net (loss) income-pro forma $(1,394,564) $(4,776,812) 851,408 Net (loss) income per share-as reported, basic (.17) (.94) .23 Net (loss) income per share-as reported, diluted (.17) (.94) .21 Net (loss) income per share-pro forma, basic (.30) (1.03) .19 Net (loss) income per share-pro forma, diluted (.30) (1.03) .18
Because SFAS 123 provides for pro forma expense for options granted beginning in 1995, the pro forma expense will likely increase in future years as new option grants become subject to the pricing model. The average fair value of options granted during 1997, 19961999, 1998 and 19951997 is estimated as $2.63, $1.77 and $4.44, $1.86 and $1.40, respectively. In 1991 and 1993, the Company issued warrants in connection with certain debt financings. During 1997 all of those warrants were exercised.-50- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) Stockholders' Equity-(Continued) The Company has reserved shares of its authorized but unissued common stock for the following:
Stock Options Warrants -------------------------- -------------------------------------------------- Weighted Weighted Total Average price Average price Total -------------------------- Shares per share Shares per share Shares Exercisable ---------- --------- ------------- -------- --------------- --------- ----------- -------------------------- Balance outstanding, December 31, 1994 780,950 2.12 301,538 2.73 1,082,488 827,576 Granted 73,187 6.00 - - 73,187 Exercised (6,000) 1.88 (41,200) 2.58 (47,200) Expired (47,850) 2.64 - - (47,850) ---------- -------- ----------- Balance outstanding, December 31, 1995 800,287 2.45 260,338 2.85 1,060,625 879,038 Granted 140,600 7.27 - - 140,600 Exercised (1,500) 4.50 (84,260) 2.88 (85,760) Expired (21,500) 6.05 (56,078) 3.54 (77,578) ---------- -------- ----------- Balance outstanding, December 31, 1996 917,887 3.10 120,000 2.50 1,037,887280,000 7.63 1,197,887 839,272 Granted 263,050 7.42 - --- -- 263,050 Exercised (124,409) 1.44 (120,000) 2.50 (244,409) Expired (30,435) 7.36 - --- -- (30,435) ------------------- -------- -------------------- Balance outstanding, December 31, 1997 1,026,093 4.27 - - 1,026,093 672,231 ==========4.28 160,000 11.48 1,186,093 832,231 Granted 358,836 3.80 * 100,000 2.50 458,836 Exercised (45,250) 1.97 -- -- (45,250) Expired (165,013) 6.05 -- -- (165,013) --------- -------- --------- Balance outstanding, December 31, 1998 1,174,666 2.75 ** 260,000 8.34 1,434,666 829,434 Granted 260,500 3.91 579,153 4.73 839,653 Exercised (47,249) 0.52 (5,000) 2.50 (52,249) Expired (107,688) 3.56 -- -- (107,688) --------- -------- --------- Balance outstanding, December 31, 1999 1,280,229 3.00 834,153 5.80 2,114,382 1,591,795 ========= ======== ====================
* Includes 46,623 shares at $2.74 granted in connection with the BioSeq, Inc. acquisition. * Includes the effect of 411,417 options repriced in December 1998 from a weighted average price of $6.72 to $3.25 per share. The following table summarizes information concerning options outstanding and exercisable as of December 31, 1997:1999:
Options Outstanding Options Exercisable ------------------------- ----------------------Weighted -------------------------------- ------------------------------- Average Weighted Weighted Weighted Average Average Average Remaining Number of ExerciseAverage Number of ExerciseAverage Range of Exercise Prices Life Options Exercise Price Options Exercise Price - ------------------------ --------- ------------ ---------- --------- -------------- --------- -------------- $0.25 - $1.50 2.40 188,834 1.0975 188,834 1.0975 $1.65 - $3.00 4.60 342,767 2.3869 342,767 2.3869 $4.50 - $6.63 8.10 259,917 5.9231 104,798 5.0106 $7.00 - $8.50 8.60 234,575 7.7556 35,832 7.3645 ------------0.00-1.70 1.20 184,334 $ 1.5062 184,334 $ 1.5062 1.71-2.55 2.80 189,767 $ 2.5000 189,767 $ 2.5000 2.56-3.25 6.80 746,378 $ 3.2054 380,541 $ 3.1925 3.26-4.25 9.60 131,750 $ 4.2500 -- $ 0.0000 4.26-5.10 9.00 28,000 $ 4.6563 3,000 $ 4.5000 ----------- --------- 1,026,093 672,231 ============1,280,229 757,642 =========== =========
-40--51- BOSTON BIOMEDICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12)(14) Computation of Net Income per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board opinion No. 15. The following illustrates the computation of basic and diluted net income per share.
Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Shares, basic 4,669,717 4,654,609 4,437,801 Net effect of dilutive common stock equivalents-based on treasury stock method using average market price * 342,269 ----------- ----------- ----------- Shares, diluted 4,669,717 4,654,609 4,780,070 =========== =========== =========== Net (loss) income, basic and diluted $ (814,112) $(4,388,719) $ 1,004,834 =========== =========== =========== Net (loss) income per share-basic (0.17) (0.94) 0.23 Net (loss) income per share-diluted (0.17) (0.94) 0.21
* Potentially dilutive securities of 68,023 and 192,826 were not included in the computation of diluted earnings per share because to do so would have been antidilutive for twelve months ended December 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Shares, basic 4,437,801 2,915,522 2,569,641 Net effect of dilutive common stock equivalents-based on treasury stock method using average market price 342,269 424,714 470,547 ----------- ----------- ----------- Shares, diluted 4,780,070 3,340,236 3,040,188 =========== =========== =========== Net income, basic1999 and diluted $1,004,834 $ 481,220 $102,990 =========== =========== =========== Net income per share-basic 0.23 0.17 0.04 Net income per share-diluted 0.21 0.14 0.03 =========== =========== =========== (13)1998. (15) Selected Quarterly Financial Data (Unaudited) Unaudited (Amounts in thousands, except for per share data) 1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- Total revenue $4,209 $4,649 $6,140 $7,301 Gross profit 1,678 1,921 2,541 3,148 Net income 148 176 246 435 Net income per share, basic 0.03 0.04 0.06 0.10 Net income per share, diluted 0.03 0.04 0.05 0.09 1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- Total revenue $3,084 $3,844 $4,015 $4,566 Gross profit 1,051 1,621 1,752 1,976 Net (loss) income (97) 179 163 236 Net (loss) income per share, basic (0.04) 0.07 0.06 0.06 Net (loss) income per share, diluted (0.04) 0.06 0.05 0.06 (14) Subsequent Event On March 20, 1998 the Company completed a license agreement with BioSeq, Inc., a development stage biotech company
1999 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- Total revenue $ 6,845 $ 7,139 $ 7,480 $ 7,807 Gross profit 2,566 2,675 2,905 2,689 Net (loss) (237) (225) (257) (96) Net (loss) per share, basic (0.05) (0.05) (0.05) (0.02) Net (loss) per share, diluted (0.05) (0.05) (0.05) (0.02) 1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- Total revenue $ 6,273 $ 6,383 $ 6,181 $ 7,244 Gross profit 2,178 2,709 2,448 2,669 Net (loss) income (645) 134 (3,377) (502) Net (loss) income per share, basic (0.14) 0.03 (0.72) (0.11) Net (loss) income per share, diluted (0.14) 0.03 (0.72) (0.11)
-52- Report of which BBI owns 19% (see also Note 5). The license agreement provides the Company the sole and exclusive worldwide right to use BioSeq technical information, licensed processes and improvements to develop, manufacture, market and sell or sublicense products or services in the field of human in vitro immunodiagnostics. The Company paid an initial license fee in the amount of $600,000, to be capitalized with intangible assets. In accordance with the agreement, the Company will pay BioSeq an annual royalty based on net sales to customers and sublicensees. The agreement is effective March 20, 1998 and ends on the date that the last patent expires, which is approximately 16 years. -41- REPORT OF INDEPENDENT ACCOUNTANTSIndependent Accountants To the Board of Directors and Stockholders of BOSTON BIOMEDICA, INC.Boston Biomedica, Inc.: We have auditedIn our opinion, the consolidated financial statements listed in the accompanying consolidated balance sheetsindex present fairly, in all material respects, the financial position of Boston Biomedica, Inc. and Subsidiaries as ofits subsidiaries (the "Company") at December 31, 19971999 and 19961998, and the related consolidated statementsresults of income, changes in stockholders' equitytheir operations and their cash flows for each of the three years in the period ended December 31, 1997. These1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Ourmanagement; our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted auditing standards. Those standardsin the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In ourthe 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P.expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 24, 1998 except as to the information in Note 14, for which the date is March 20, 199829, 2000 -53- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item 10 is hereby incorporated by reference to the information under Part I, Item 1 - Business under the heading "Executive Officers of the Registrant" at page 14[18] of this Report,report, and to the information in the Registrant'sregistrant's definitive Proxy Statementproxy statement, which is expected to be filed by the Registrantregistrant within 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information calledfollowing summary compensation table sets forth the compensation of the Company's Chief Executive Officer and each of the Company's four most highly compensated other executive officers who were serving as executive officers of the Company at the end of fiscal year 1999 (collectively, the "Named Executive Officers"). Summary Compensation Table
Long Term Annual Compensation --------- ------------------- Compensation ------------ Fiscal Other Annual All Other Name and Year Salary Bonus Compensation Stock Options Compensation Principal Position Ended ($) ($) $ (#) ($) ------------------ ------ ------- ------- ------------ ------------- ------------ Richard T. Schumacher, 12/31/99 $229,010 -- $1,520(1) 25,000 $184,450(2)(4) Chief Executive Officer 12/31/98 200,002 $5,000 370(1) 15,000 420(2) and Chairman of the Board 12/31/97 194,616 -- 1,588(1) -- 420(2) Kevin W. Quinlan, 12/31/99 $168,075 -- -- 17,500 -- President , Chief 12/31/98 143,347 $4,000 -- 10,000 -- Operating Officer and 12/31/97 139,927 -- -- -- -- Director Barry M. Warren 12/31/99 $147,547 -- -- 10,000 -- Senior Vice President and 12/31/98 137,601 $3,000 -- 6,000 -- General Manager 12/31/97 129,367 -- -- -- -- Richard C. Tilton, Ph.D. 12/31/99 $135,203 -- $6,000(3) -- -- Senior Vice President, 12/31/98 127,019 $3,000 6,000(3) 6,000 -- Science and Technology 12/31/97 121,164 -- 6,000(3) -- -- Mark M. Manak, Ph.D. 12/31/99 $129,894 -- -- -- -- Senior Vice President and 12/31/98 118,510 $3,000 -- 6,000 -- General Manager 12/31/97 116,388 -- -- -- --
- -------------------- (1) Consists of personal usage of Company vehicle (2) Includes the value of premiums paid for by Item 11 is incorporated by referencea term life insurance policy. (3) Consists of automobile allowance (4) Consists of exercise of options -54- The following table shows stock options granted to the informationNamed Executive Officers in fiscal 1999: Options Granted in Fiscal Year 1999
Individual Grants Potential Realizable Value at ------------------------------------------------------------- Assumed Annual Rates of Stock Number of % of Total Price Appreciation Securities Options Exercise for Option Term at Year End Underlying Granted to ---------- ------------ -------------------------------- Options Employees in Price Expiration Name Granted 1999 ($/Sh.) Date 5% 10% ---- ------------- -------------- ---------- -- ------------ ------------- ------------------ Richard T. Schumacher 25,000 9.60% 4.675 07/27/09 56,195 158,710 Kevin W. Quinlan 17,500 6.72% 4.25 07/27/09 46,774 118,535 Barry M. Warren 10,000 3.84% 4.25 07/27/09 26,728 67,734 Richard C. Tilton, Ph.D. -- -- -- -- -- -- Mark M. Manak, Ph.D. -- -- -- -- -- --
The following table shows stock options exercised by the Registrant's definitive Proxy StatementNamed Executive Officers during fiscal 1999, including the aggregate value realized upon exercise. This represents the excess of the fair market value over the purchase price at the time of purchase. In addition, this table includes the number of shares underlying both "exerciseable" (i.e. vested) and "unexerciseable" (i.e. unvested) stock options as of December 31, 1999. Also reported are the values of "in-the-money" options, which reflect the positive spread between the exercise price of any such existing stock options and the closing year end per share price of the Common Stock of $2.875. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Securities Value of Unexercised Shares Underlying Unexercised In-the-Money Options Acquired Options at Year End at Year End on Value (1) ---------------------------- ---------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Richard T. Schumacher 40,000 $180,000 98,690 38,690 $103,827 $164 Kevin W. Quinlan, -- -- 71,250 26,250 $44,375 -- Barry M. Warren -- -- 33,375 20,125 -- -- Richard C. Tilton, Ph.D. -- -- 38,375 5,125 -- -- Mark M. Manak, Ph.D. -- -- 38,375 10,125 -- --
- ------------------- (1) Based upon the closing price of the Common Stock on the Nasdaq National Market on the date of exercise, minus the respective option exercise price. Compensation of Directors Directors of the Company do not receive cash compensation for their services. Each Director has been eligible to receive options to purchase Common Stock under the heading "ExecutiveCompany's 1987 Non-Qualified Stock Option Plan, which expired in December 1997, and the Company's 1999 Nonqualified Stock Option Plan. Compensation" which is expected to be filed Committee Interlocks and Insider Participation Decisions regarding executive compensation are made by the Registrant within 120 days afterBoard of Directors based on the closerecommendations of its fiscal year. -42-the Compensation Committee. The Compensation Committee of the Board of Directors is comprised of Richard T. Schumacher and Calvin A. Saravis, each of whom has received -55- options to purchase Common Stock. Mr. Schumacher serves as the Chief Executive Officer of the Company. Mr. Saravis is neither a former nor current officer or employee of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is hereby incorporated by reference to the information in the Registrant'sregistrant's definitive Proxy Statementproxy statement under the heading "Security Ownership of Directors, Officers and Certain Beneficial Owners," which is expected to be filed by the Registrantregistrant within 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Item 13 is hereby incorporated by reference to the information in the Registrant'sregistrant's definitive Proxy Statementproxy statement under the heading "Certain Relationships and Related Transactions," which is expected to be filed by the Registrantregistrant within 120 days after the close of its fiscal year. -43--56- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Index to Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996.........28 Consolidated Statements of Income for the three years ended December 31, 1997..............................................29 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1997..................................30 Consolidated Statements of Cash Flows for the three years ended December 31, 1997....................................................31 Notes to Consolidated Financial Statements...........................32 Report of Independent Accountants....................................42 (a) 2. Financial Statement Schedules: Schedule II-Valuation and Qualifying Accounts........................49 Report of Independent Accountants....................................50 (a) 1. Index to Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................31 Consolidated Statements of Income for the three years ended December 31, 1999......................32 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1999.....................................................................33 Consolidated Statements of Cash Flows for the three years ended December 31, 1999..................34 Notes to Consolidated Financial Statements.........................................................35 Report of Independent Accountants..................................................................50 (a) 2. Financial Statement Schedule: Schedule II-Valuation and Qualifying Accounts......................................................60
All supplemental schedules other than as set forth above are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements. (a)3. Exhibits: Exhibit No. ----------- 3.1 Amended and Restated Articles of Organization of the Company** 3.2 Amended and Restated Bylaws of the Company** 4.1 Specimen Certificate for Shares of the Company's Common Stock** 4.2 Description of Capital Stock (contained in the Restated Articles of Organization of the Company filed as Exhibit 3.1) ** 10.1 Agreement, dated January 17, 1994, between Roche Molecular Systems, Inc. and the Company** 10.2 Exclusive License Agreement, dated December 6, 1994, between the University of North Carolina at Chapel Hill and the Company** 10.3 Contract, dated September 30, 1995, between the National Institutes of Health and the Company (No. 1-AI55273) ** 10.4 Contract, dated September 30, 1995, between the National Institutes of Health and the Company (No. 1-AI-55277) ** 10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and the Company** 10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland Facility between Cambridge Biotech Corporation and the Company** 10.8 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut Facility between MB Associates and the Company*
Exhibit No. Reference ----------- --------- 3.1 Amended and Restated Articles of Organization of the Company A** 3.2 Amended and Restated Bylaws of the Company A** 4.1 Specimen Certificate for Shares of the Company's Common Stock A** 4.2 Description of Capital Stock (contained in the Restated Articles of A** Organization of the Company filed as Exhibit 3.1) 4.3 Form of warrants issued in connection with Paradigm Group H** 10.1 Agreement, dated January 17, 1994, between Roche Molecular Systems, Inc. and A** the Company 10.2 Exclusive License Agreement, dated April 28, 1999, between the University of Filed herewith North Carolina at Chapel Hill and the Company 10.3 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and the Company A** 10.4 Lease Agreement, dated July 28, 1995, for New Britain, Connecticut Facility A** between MB Associates and the Company 10.5 1987 Non-Qualified Stock Option Plan* A** 10.6 Employee Stock Option Plan* A** 10.7 1999 Non-Qualified Stock Option Plan* I** 10.8 1999 Employee Stock Purchase Plan* I** 10.9 Worcester County Institution for Savings Warrant dated December 1, 1995 (No. 1) ** 10.10 Worcester County Institution for Savings Warrant dated July 26, 1993 (No. 2) ** 10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G Diagnostics Limited Partnership I and the Company, as amended** -44- 10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa Medex Co., Ltd. And the Company** 10.15 1987 Non-Qualified Stock Option Plan**++ 10.16 Employee Stock Option Plan**++ 10.17 Underwriters Warrants, each dated November 4, 1996, between the Company and B** each of Oscar Gruss & Son Incorporated and Kaufman Bros., L.P. ** 10.20 Purchase Agreement, dated October 7, 1996, between BioSeq,
-57-
Exhibit No. Reference ----------- --------- 10.10 Commercial Loan Agreement, as of dated March 28, 1997, between The First C** National Bank of Boston and the Company 10.11 Contract, dated March 1, 1997, between National Cancer Institute and the Company D** 10.12 Lease Agreement, dated May 16, 1997, for Gaithersburg, Maryland facility E** between B.F. Saul Real Estate Investment Trust and the Company 10.13 Lease Agreement dated January 30, 1995 for Garden Grove, California facility F** between TR Brell, Cal Corp. and Source Scientific, Inc., and Assignment of Lease, dated July 2, 1997, for Garden Grove, California facility between Source Scientific, Inc. and BBI Source Scientific 10.14 Contract, dated July 1, 1998, between the National Institutes of Health and G** the Company (NO1-A1-85341) 10.15 Contract, dated July 1, 1998, between the National Heart Lung and Blood G** Institute and the Company (NO1-HB-87144) 10.16 Line of Credit Agreement with BankBoston dated June 30, 1999 H** 10.17 Agreement with Paradigm Group for the purchase of warrants dated August 18, 1999 H** 10.18 Agreement with MDBio for the purchase of common stock and common stock Filed herewith warrants, dated September 30, 1999 10.19 Lease Agreement dated September 30, 1999, for Frederick, Maryland facility, Filed herewith between MIE Properties, Inc., and the Company. 10.20 Sponsored Research Agreement with the University of North Filed herewith Carolina, Chapel Hill and the Company, dated, April 28, 1999 and the Company. 10.21 Repository Contract with National Institute of Allergy and Filed herewith Infectious Disease, Division of AIDS (NO1-A1-95381), dated August 16, 1999. 21.1 Subsidiaries of the registrant Filed herewith 23 Consent of PricewaterhouseCoopers LLP Filed herewith 27 Financial Data Schedule Filed herewith 99 Audited Financial Statements of BioSeq, Inc., for the years ended December 31, Filed herewith 1997, 1996 and for the period October 17, 1994 (Date of Inception) to December 31, 1997.
A Incorporated by reference to the Company** 10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. andregistrant's Registration Statement on Form S-1 (Registration No. 333-10759) (the "Registration Statement"). The number set forth herein is the Company** 10.22 Stockholders' Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company** 10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. and the Company** 10.24.1 Commercial Loan Agreement, dated as of March 28, 1997, between The First National Bank of Boston and the Company** 10.25 Asset Purchase Agreement, dated March 26, 1997 between Source Scientific, Inc. and the Company** 10.26 Contract, dated March 1, 1997, between National Cancer Institute and the Company** 10.27 Lease Agreement, dated May 16, 1997, for Gaithersberg, Maryland facility between B.F. Saul Real Estate Investment Trust and the Company 10.28 Lease Agreement, dated January 30, 1995 for Garden Grove, California facility between TR Brell, Cal Corp. and Source Scientific, Inc., and Assignment of Lease, dated July 2, 1997, for Garden Grove, California facility between Source Scientific, Inc. and BBI Source Scientific 11 Statement re: Computation of Per Share Earnings 21.1 Subsidiariesnumber of the Company 23.1 ConsentExhibit in said Registration Statement. B Incorporated by reference to Exhibit No. 10.17 of Coopers & Lybrand L.L.P. 27 Financial Data Schedule ________________________ ++the Registration Statement. C Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. D Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. E Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. -58- F Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. G Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. H Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999. I Incorporated by reference to the registrant's proxy statement, filed with the Securities and Exchange Commission on June 14, 1999. * Management contract or compensatory plan or arrangement. ** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. (b) Reports on Form 8-KREPORTS ON FORM 8-K. The Registrant did not file any Current Reports on Form 8-K during the quarter ended December 31, 1997. -45-1999. -59- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized..authorized. Date: March 30, 1998December 7, 2000 Boston Biomedica, Inc. By:/s/ /s/ Richard T. Schumacher --------------------------------- Richard T. Schumacher President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated.
SIGNATURES TITLES DATE ---------- ------ ---- /s/Director and Principal March 28, 2000 ----------------------------------- Executive Officer Richard T. Schumacher President, Chief ExecutiveDirector and Principal March 28, 2000 ----------------------------------- Accounting and Financial Officer March 30, 1998 -------------------------- and Chairman of the Board Richard T. Schumacher (Principal Executive Officer) /s/Kevin W. Quinlan Senior Vice President, Finance; March 30, 1998 -------------------------- Chief Financial Officer; Treasurer Kevin W. Quinlan and Director (Principal Accounting Officer) /s/Calvin A. Saravis Director March 30, 1998 -------------------------- Calvin A. Saravis /s/Henry A. Malkasian Sr. Director March 30, 1998 -------------------------- Henry A. Malkasian, Sr. /s/28, 2000 ----------------------------------- Francis E. Capitanio Director March 30, 1998 -------------------------- Francis E. Capitanio
-46- EXHIBIT INDEX - --------------
Exhibit No. Reference ----------- ----------- 3.1 Amended and Restated Articles of Organization of the Company A** 3.2 Amended and Restated Bylaws of the Company A** 4.1 Specimen Certificate for Shares of the Company's Common Stock A** 4.2 Description of Capital Stock (contained in the Restated A** Articles of Organization of the Company filed as Exhibit 3.1) 10.1 Agreement, dated January 17, 1994, between Roche Molecular A** Systems, Inc. and the Company 10.2 Exclusive License Agreement, dated December 6, 1994, between A** the University of North Carolina at Chapel Hill and the Company 10.3 Contract, dated September 30, 1995, between the National A** Institutes of Health and the Company (No. 1-AI55273) 10.4 Contract, dated September 30, 1995, between the National A** Institutes of Health and the Company (No. 1-AI-55277) 10.6 Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. A** and the Company 10.7 Lease Agreement, dated June 30, 1992, for Rockville, Maryland A** Facility between Cambridge Biotech Corporation and the Company 10.8 Lease Agreement, dated July 28, 1995, for New Britain, A** Connecticut Facility between MB Associates and the Company 10.9 Worcester County Institution for Savings Warrant dated A** December 1, 1995 (No. 1) 10.10 Worcester County Institution for Savings Warrant dated A** July 26, 1993 (No. 2) 10.11 Stock Purchase Agreement, dated June 5, 1990, between G&G A** Diagnostics Limited Partnership I and the Company, as amended 10.14 Stock Purchase Agreement, dated April 26, 1996, between Kyowa A** Medex Co., Ltd. and the Company 10.15 1987 Non-Qualified Stock Option Plan* A** 10.16 Employee Stock Option Plan* A** 10.17 Underwriters Warrants, each dated November 4, 1996, between B** the Company and each of Oscar Gruss & Son Incorporated and Kaufman Bros., L.P. 10.20 Purchase Agreement, dated October 7, 1996, between BioSeq, A** Inc. and the Company 10.21 Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. A** and the Company -47- 10.22 Stockholders' Agreement, dated October 7, 1996, between A** BioSeq, Inc. and the Company 10.23 License Agreement, dated October 7, 1996, between BioSeq, Inc. A** and the Company 10.24.1 Commercial Loan Agreement, as of datedTreasurer March 28, 1997, between C** The First National Bank of Boston and the Company 10.25 Asset Purchase Agreement, dated2000 ----------------------------------- Dr. William R. Prather, MD. Director March 26, 1997 between Source C** Scientific, Inc. and the Company 10.26 Contract, dated March 1, 1997, between National Cancer D** Institute and the Company 10.27 Lease Agreement, dated May 16, 1997, for Gaithersberg, Maryland E** facility between B.F. Saul Real Estate Investment Trust and the Company 10.28 Lease Agreement, dated January 30, 1995 for Garden Grove, Filed herewith California facility between TR Brell, Cal Corp. and Source Scientific, Inc., and Assignment of Lease, dated July 2, 1997, for Garden Grove, California facility between Source Scientific, Inc. and BBI Source Scientific 11 Statement re: Computation of Per Share Earnings Filed herewith 21.1 Subsidiaries of the Company Filed herewith 23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith 27 Financial Data Schedule Filed herewith28, 2000 ----------------------------------- Calvin A. Saravis, Ph.D.
________________________ A Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-10759)(the "Registration Statement"). The number set forth herein is the number of the Exhibit in said registration statement. B Incorporated by reference to the Registration Statement, where the Exhibit was filed as Exhibit No. 10.17 and contained in Exhibit 1.1. C Incorporated by reference to the Company's Annual Report on Form 10K for the fiscal year ended December 31, 1996. D Incorporated by reference to the Company's Quarterly Report on Form 10Q for the fiscal quarter ended March 31, 1997. E Incorporated by reference to the Company's Quarterly Report on Form 10Q for the fiscal quarter ended June 30, 1997. * Management contract or compensatory plan or arrangement. ** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. -48- SCHEDULE II BOSTON BIOMEDICA, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Recoveries Allowance for Balance at For Accounts Uncollectible Balance at Doubtful Beginning Additions to Previously Accounts End of Accounts of Period Allowance Written Off Written Off Period - -------------- ---------- ------------ ------------ ------------- ---------- 1997 $352,058 $395,272 $194,154 $(494,967) $446,517 1996 142,372 429,677 62,753 (282,744) 352,058 1995 94,723 181,084 - (133,435) 142,372 1994 43,956 102,099 - (51,332) 94,723
-49- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of BOSTON BIOMEDICA, INC.: In connection with our audits of the consolidated financial statements of Boston Biomedica, Inc. and Subsidiaries, as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, which financial statements are included in this Annual Report on Form 10-K, we have also audited the consolidated financial statement schedule listed in Item 14 herein. In our opinion, this consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 24, 1998 -50--60-